Hello international changes, now plug into manufacturing

New rules on listing on international exchanges – limited to those in Gujarat‘s GIFT City – will aid India in realising its vaulting manufacturing ambitions. The cross-listing premium on an international exchange can be considerable, and it improves with increased proximity to investors on Wall Street. The implied cost of equity capital is significantly lower, as are yield spreads in debt offerings. The regulatory environment also imposes its own costs on capital raising, and Indian companies eyeing a global footprint would try to avert the ‘country risk’ penalty for mainland firms. This segment of companies will also seek to improve valuations through institutional development available in the global capital market.

The first wave of overseas listing will most likely be led by sunrise industries like pharma and clean energy where companies have clear strategies for global expansion and are aligned with sustainability sensitivities of international investors. This cohort will need corporate controls of international standards to be able to draw improved valuations and enhance brand visibility. The startup ecosystem should also contribute going by the share of Indian unicorns that have incorporated themselves in overseas jurisdictions. But real benefits of cross-listing will have to await demand from Indian large caps wanting to bridge the structural gulf in capital costs between domestic and international markets. This would be a function of the pace of development of the Indian financial system. By one estimate, the combined market value of Chinese companies listed in New York in Q1 2019 was around 14% of the combined value of the Shenzhen-Shanghai-Hong Kong equity universe.

India is just about embarking on this journey with the expectation that local companies will eventually line up to cross-list. It is testing the waters with its own offshore exchanges, and valuation gains may not be quite as impressive as those enjoyed by mainland Chinese companies on Wall Street. But it creates a framework for Indian companies to think big, a necessary condition for the country to emerge as a global manufacturing base.