India permits unlisted companies to directly raise capital abroad
As per the Department of Industrial Policy and Promotion (DIPP), India’s FDI policy has been modified to allow unlisted firms to directly list on stock exchanges abroad to raise capital for acquisitions or retiring overseas debts. This step may help India in controlling high Current Account Deficit (CAD).
Unlisted companies are heretofore not allowed to directly list in overseas markets without prior or subsequent listing in Indian markets. But following the changes made in the ‘Consolidated FDI Policy’ in this regard, they would be allowed to do so.
As per revised FDI Policy:
- Unlisted firms are allowed to directly list abroad only on exchanges in International Organisation of Securities Commissions (IOSCO)/ Financial Action Task Force (FATF) compliant jurisdictions or those jurisdictions with which SEBI has signed bilateral agreements.
- The companies will be allowed to raise capital abroad and use the same for retiring outstanding overseas debt or for operations abroad including for acquisitions.
- If the funds raised are not utilised abroad, the company should repatriate the funds to India within 15 days and park it with a scheduled bank and may be used domestically.
- The listing companies raising funds overseas would have to be fully compliant with the FDI policy.
- The listing firms would also have to abide by the guidelines on downstream investment and the criteria of eligibility of who can raise funds through ADRs/GDRs would be as prescribed by the government.
- The scheme will be implemented on a pilot basis for a period of 2 years.
Why has the government allowed unlisted firms to raise capital abroad?
The government has set a target to slash the CAD to below $56 billion this fiscal (2013-14), as against $88.2 billion in the last financial year. The value of Rupee versus US dollar has declined drastically because of high CAD and other global factors. The government’s step to allow the unlisted companies to raise capital abroad would help in easing the pressure on CAD as the firms would not have to buy or borrow the foreign currency (mainly dollars) from domestic markets which puts strain on CAD. Besides, the step may also improve CAD if the unused capital is sent back home to a scheduled bank or utilized domestically.