It took around 20 years of persistent hard work by Infosys founder Narayana Murthy to ensure its listing on the US stock exchange, in 1999, the first Indian company to get listed on Nasdaq. Back then, Infosys had to take the more tedious and stringent route of American Depository Receipts (ADRs) for the Nasdaq listing as there was no regulatory framework for direct listing ecosystem in India. The chairman of Vedanta, Anil Agarwal, had to cycle a hundred kilometers with his foreign investors to enable its listing on the London Stock Exchange (LSE) in 2003, again the first Indian company to list on the LSE.
Fortunately, for modern age entrepreneurs, global capital markets and investments are not that far away and are accessible in India only, thanks to the recent path breaking initiatives of the government, enabling the direct listing of equity shares Indian firms on the international stock exchanges, in the Gujarat International Finance Tec-City International Financial Service Centre (GIFT IFSC). India’s first IFSC in GIFT City, Gujarat, is not exactly a foreign destination but is a special economic zone (SEZ) that offers many incentives and benefits akin to a foreign jurisdiction.
As per the recently notified direct listing rules, both listed and unlisted Indian public companies —those that do not have negative net worth and are not accepting any public deposits—are eligible entities for direct listing of their equity shares in the international exchanges in GIFT IFSC. Such shares will be denominated in foreign currency. Amendments have also been made in the Foreign Exchange Management Act to provide that only non-resident Indians can buy or sell such directly listed shares on GIFT IFSC. This watershed moment of the evolution of the ‘direct listing’ ecosystem in GIFT IFSC in India, however, has its fair share of some intriguing income tax implications. The existing share valuation rules require the firms to issue their equity shares at a value not exceeding the Fair Market Value (FMV) of such shares. Such FMV is to be computed either as per the Net Asset Value (NAV) method or Discounting Cash Flow ((DCV) method. However, such valuation norms are not applicable to firms listed on recognized stock exchanges in the country.
Under the notified direct listing rules, the eligible public companies will be able to directly list their separate class of equity shares in the GIFT IFSC international stock exchange, available for investments only by non-residents. Simultaneously, these public companies can continue to issue a separate class of equity shares, which are not listed either on domestic Indian recognized stock exchanges or the GIFT IFSC International Stock Exchange.
That merits the question as to whether the valuation norms stipulated in the income tax Act would be applicable on such eligible Indian public companies going in for the direct listing on GIFT IFSC, or not. Another important aspect is the applicability of the tax on buyback of shares. Currently, both the listed as well as unlisted companies registered in India are liable to pay the buyback tax at 20% on the distributed income. So, going by the existing provisions, this tax will be applicable on the buyback of both classes of equity shares of the public company opting for the direct listing, viz. the domestic unlisted segment and the directly listed GIFT IFSC segment.
In the hands of non-resident shareholders, the capital gains on transfer of such directly listed equity shares in GIFT IFSC will be tax exempt, as any sale of foreign currency denominated-equity shares undertaken on recognized stock exchange located in IFSC is not considered as ‘transfer’. However, the dividend income, if any, arising in the hands of non-resident shareholders, will be taxable in India and the Indian public companies will be required to deduct withholding tax. If such shareholders wish to avail the double taxation avoidance treaty benefit of lower rate of withholding tax on this dividend income, they will be required to obtain an Indian PAN and also file their return of income in India.
Mayank Mohanka is the founder of TaxAaram India, and a partner at S M Mohanka & Associates.
Here’s your comprehensive 3-minute summary of all the things Finance Minister Nirmala Sitharaman said in her Budget speech: Click to download!
Download The Mint News App to get Daily Market Updates.
Published: 04 Feb 2024, 09:20 PM IST