Comment

The MTN-Bharti deal has brought the ‘dual listing’ concept into the limelight. Although the concept is not new, it is not very common as well due to the legal and operational complexities involved.

Dual listing is not permitted in India at present and amendments to various Indian regulations such as the Foreign Exchange Maintenance Act are needed before it can be allowed.

Currently, shares of Indian companies can be traded on foreign stock exchanges only through American depositary receipts (ADRs) and global depository receipts (GDRs). These instruments carry the economic benefits and rights of the local shareholders, save for voting rights.

A deliberation on the overall implications of dual listing for the Indian capital markets, beyond the Bharti-MTN deal, may be in order. Some significant implications are as follows:

l Greater flexibility
Currently, only FIIs and NRIs are allowed to invest in equity of a listed Indian company. The other option for the foreign investors to invest in listed Indian companies is to invest through ADRs/ GDRs.

However, the dual listing would provide the foreign investors tremendous flexibility in investing, wherein the foreign investors can gain the voting rights without registering with Indian authorities. This flexibility would undoubtedly encourage more and more foreign investors to invest in Indian companies and in turn help Indian companies raise more funds.

l Possibility of more economic benefits to the investors
To reap the maximum economic benefit, foreign investors can choose the stock exchange to invest in and sell depending on the prevalent transaction and tax costs.

In the present scenario, Indian investors would prefer selling shares on the Indian stock exchanges, given the concessional tax treatment. Currently, long-term capital gains arising from sale of listed equity shares are exempt from tax and short-term capital gains are taxed at a concessional rate of 16.995%.

Similarly, FIIs might prefer to trade in shares on Indian stock exchanges, in spite of dual listing, given the favourable tax treaties and concessional tax regime.

However, this scenario might change post enactment of the new Direct Tax Code, which does not provide for this concessional tax treatment for trading in listed shares of Indian companies. In that case, investors would prefer trading in shares through the foreign stock exchanges to optimise tax costs.

l Impact on stock markets
The primary market for shares of Indian companies would undoubtedly benefit from dual listing as more and more foreign investors would be able to invest in Indian companies without legal complexities and operational barriers.

The secondary markets, however, need to be made more competitive in terms of transaction costs and operational efficiencies to maintain trading volumes as competition from foreign stock exchanges would be stiff.

To conclude, permitting dual listing would be a difficult task considering the legal and operational difficulties. However dual listing would be a boon for the capital-starved growing Indian companies and investors.