In just a few decades, India will be one of the largest economies in the world. To reach that point, companies in India will have to invest colossal sums in developing their businesses. Much of that capital will come from overseas, and London’s capital markets will play a central role in financing future growth of Indian companies.

The London Stock Exchange is already the most international of any major equity market. The market value of international companies listed on the London Stock Exchange, $3.6 trillion at the end of 2004, exceeded the $2.7 trillion valuation of domestic listed companies. Turnover of international shares, at $4.6 trillion last year, also capped turnover in domestic shares. No other major market specialises to this extent in trading the shares of companies from all over the world.

London offers Indian issuers three key advantages that no other financial centre can combine in one market: access to all major institutional investors worldwide, a liquid and efficient trading platform for global depositary receipts (GDRs, the certificates representing shares that Indian companies must use overseas), and higher corporate governance standards than in any other financial market.

By raising capital on the London markets, Indian issuers get access to all European, Asian and US investors with an interest in their shares. US investors are able freely to purchase GDRs listed on the London Stock Exchange through exemptions to US securities laws covering professional investors. As a major hub for international investors, London is the world’s capital city for global investor relations and road shows.

Investors need the option of trading their securities on a liquid and transparent trading platform. The London Stock Exchange runs the only efficient platform for trading GDRs, with a total turnover of more than $100 billion in 2004, of which more than $6 billion was traded in Indian GDRs. This specialised trading platform, known as the International Order Book, is an order-driven system for efficient matching of buy and sell orders.

High and flexible standards of regulation and corporate governance are also important for overseas issuers in London. The UK is ranked by corporate governance surveys as having the highest standards worldwide – a record, incidentally, that is matched by India among emerging economies. Regulation in the London markets is driven by principles, not rules, in contrast to the complex rules-based approach in US financial markets. At the same time, UK regulators maintain the market’s strong reputation by careful review of disclosure documents.

There are now 20 Indian companies listed in London, ranging from large capitalisation companies such as GAIL and State Bank of India to smaller technology and services companies. Another 15 Indian companies have listed elsewhere in Europe but – in the absence of any trading in the location where they listed – have been admitted to trading on the London Stock Exchange.

When Indian companies first raised capital from international investors through the London Stock Exchange in the early 1990s, exchange controls in India meant that companies going overseas for capital were effectively accessing a separate market.

Today, liberalisation of foreign portfolio investment in Indian stock markets is already far advanced. The foreign institutional investors (FIIs) who are permitted to invest directly in Indian shares now account for a substantial part of the free float of many Indian blue chip and mid-cap companies. These investors are often the same investors who buy into GDR offerings by Indian companies on the London Stock Exchange. They can and do trade freely in Indian shares in the domestic market, just as they also trade significant volumes in the GDRs of the same companies on the London market. As India becomes more integrated into the international capital markets, the London Stock Exchange is effectively becoming - for Indian companies - an extension of the domestic Indian capital market.

Looking ahead, new needs of Indian companies overseas will be met by new types of financing on the London Stock Exchange. The pace at which the international businesses of many Indian companies are growing - in some cases, far outpacing growth in India – may mean for some companies that international operations can in future be financed more efficiently if they are capitalised separately from the parent company in India. Floating all or part of a company’s international operations on the London Stock Exchange could prove an attractive way of turbo-charging international growth while enabling the Indian parent company to retain control.

The London Stock Exchange has two markets for meeting the needs of Indian companies. The Main Market, where major international and UK domestic shares are traded, provides capital and liquidity for Indian companies issuing GDRs. All Indian companies whose GDRs are listed and traded on the London Stock Exchange belong to the Main Market. The most recent Indian companies to list and trade in London are UTI Bank, which raised over $250 million in March 2005, and Srei Infrastructure Finance, which came to the market with a $35 million offering in April 2005.

While Indian companies generally access international capital markets for follow-on offerings, to add to an established float in the domestic market, there are cases where the strategic and financial needs of an Indian company justify a primary listing in London. The largest Indian company to undertake a primary listing on the London Stock Exchange is Vedanta Resources, which raised $1 billion through an initial public offering in December 2003.

A number of smaller primary offerings by Indian companies are expected on the AIM market, the world’s most successful market for emerging growth companies. Approximately 1,200 companies from 32 different industry sectors are traded on AIM, including nearly 150 international companies. The first Indian compay joined AIM in March, when Platinum Mining Corporation of India raised $25 million to complete the evaluation of a mineral deposit in Orissa. Advisers in the UK and India are working actively to bring more Indian companies to AIM. Promising candidates include natural resource companies, and companies with significant activities in the UK and Europe that would benefit from capitalising these operations independently from the financing of the parent company in India.

Changing European regulations may open up another new route for Indian companies looking for finance overseas. From July 2005, a company making a public offer of shares or depositary receipts can market to investors in any country in Europe using only a single prospectus, provided the company meets new European disclosure standards. This opens up the potential for Indian issuers with equity stories attractive to private investors, particularly technology companies, to access retail as well as institutional investors.

The London Stock Exchange has responded to changes in European securities regulation, designed mainly to protect the individual investor, with new arrangements for non-European companies that will preserve the flexibility of London’s equity markets.

European regulations will require all listed companies, and all companies making a public offering of securities, to disclose financial information audited in accordance with International Financial Reporting Standards (IFRS) or an equivalent standard, such as US GAAP. Many Indian companies listed and traded in London will not want to switch to IFRS on the same timetable as European regulations. To allow issuers from outside Europe to continue to use their home-country accounting principles, the London Stock Exchange has created a “Professional Securities Market” segment of the Main Market. This creates an exemption from European rules. Indian companies listing with the UK authorities and raising capital through GDRs will therefore be able to continue to use Indian GAAP accounts indefinitely for their financial disclosure.