WHETHER INDIA IS READY FOR DUAL LISTING? – MAJOR HINDRANCES
LLB., FCS., FICWA
Practicing Company Secretary
kpcrao.india@gmail.com
What is Dual Listing?
Dual listing is a listing process by which a company would be allowed to be listed and traded on the stock exchanges of two countries. Put simply, it is a process that allows a company to be listed on the stock exchanges of two different countries. The company’s shares, which enjoy voting rights, can be traded on both the bourses. When two companies in two countries enter into an equity alliance without an outright merger, dual listing means continued listing of the firms in both the countries. The key point is that the shareholders can buy and sell shares of both the companies on bourses in the two countries.
The most common reason for companies to opt for dual listing is the need to list in two different countries. This may happen because of a merger of companies listed in different countries or a new listing to gain access to capital from a larger market. The second is, typically companies that are already listed in their home country which, as they get bigger, find it useful to have access to the larger amounts of money they can raise in larger markets. In the interests of their existing (home country) shareholders they need to retain their original listing.
The ‘dual listing’ and ‘multiple/cross listing’ are two different things. Dual-listed companies should not be confused with cross listed companies. In cross / multiple listing, a company’s securities are listed on more than one stock exchange within the same country.
Advantages of dual listing
The major advantage is that the shareholders can buy and sell shares of both the companies on bourses in the two countries. That means, when a company's securities are listed on more than one exchange for the purpose of adding liquidity to the shares and allowing investors greater choice in where they can trade their shares. Dual listing contributes to the liquidity of the shares listed. This enables investors to have a greater choice as to where and when they can trade their shares. A significant advantage of a dual-listed structure for companies is the benefit of scale and access to foreign capital.
Dual listing is not a widely used technique, although it is thought to improve the spread between the ‘bid and ask’ price which helps investors obtain a better price for their securities. A dual listing structure would also remove the time-consuming requirement for the companies to take regulatory approvals from the various countries in which they operate should they go in for a conventional merger.
If dual listing is allowed, an Indian company share can be sold on a foreign Stock Exchange and vice-versa, leaving apart the trading of private investors in foreign markets directly. However, if dual listing is allowed, Indian Stock Markets can truly compete with other foreign stock markets.
Dual listing and ADRs / GDRs
Depository Receipt (DR) is a negotiable instrument evidencing a fixed number of equity shares of the issuing company generally denominated in US dollars. Depository receipts are commonly used by those companies which sell their securities in international market and expand their shareholdings abroad. These securities are listed and traded in international stock exchanges. These can be either American Depository Receipts (ADRs) or Global Depository Receipts (GDRs). ADRs are issued only in case the funds are raised through retail market in United States. In case of GDR issue, the invitation to participate in the issue cannot be extended to recall US investors but under Rule 144A of Securities Act, 1933 of USA, Qualified Institutional Buyers (QIBs) can participate in such a deal. QIBs are the institutional investors who have at least USD 100 million under their portfolio to invest.
While DRs denominated in any convertible foreign currency, generally in US dollar, are issued by the depository in the international market. The underlying shares denominated in Indian Rupees are issued in the domestic market by the issuing company. In case of ADRs/GDRs, the companies deposit their equity shares with a Custodian, say a bank, which in turn issues depository receipts to the investors. These receipts have all the rights, barring voting rights. Investors can convert ADRs/GDRs into underlying shares, which can be issued only within India and traded only on domestic bourses.
Currently, India permits the listing of DRs (depository receipts) of companies in foreign countries. For instance, banks / brokerages in a foreign country called custodians can buy the shares of Indian companies, and list them on their stock exchanges after converting them to GDRs / ADRs. However, only on the express permission of the custodians can someone convert the bought GDRs/ADRs into shares traded in India.
Major dual-listed companies
Dual listing does not have widespread global support, due to legal complexities. However, there have been cases to show that dual listing works quite efficiently and has been resorted to by some globally like:
BHP Billiton (Australia/UK)
Unilever (UK/Netherlands)
Hewlett-Packard (HP), (NYSE and NASDAQ)
Royal Dutch Shell (UK. Netherlands)
Rio Tinto Group (Australia/UK).
Thomson Reuters Corp & Thomson Reuters Plc (Canada and London).
What is holding back us in allowing Dual Listing in India?
Capital Account Convertibility(CAC)
The prime reason why dual listing is not seen in India is that Indian currency is not fully convertible, i.e., absence of full ‘Capital Account Convertibility’.
CAC is a monetary policy that centers around the ability to conduct transactions of local financial assets into foreign financial assets freely and at market determined exchange rates. It is sometimes referred to as Capital Asset Liberation. In Indian context, CAC refers to the abolition of limitations in the movement of capital from India to different countries. Simply put, it means that irrespective of whether one is a resident or non-resident of India one's assets and liabilities can be freely (i.e. without permission of any regulatory authority) denominated (or cashed) in any currency and easily interchanged between that currency and the Rupee.
At present, the rupee is convertible on the current account, but capital account transactions are still subject to regulations. India is moving slowly towards achieving full capital account convertibility. According to RBI, it is re-working the roadmap for achieving fuller capital account convertibility or – the full float of Indian rupee. Only if this is done Indian rupee will be made fully convertible, and then it will enable the investors to buy shares of a dual listed company in one country and sell it in an overseas market. Once India allows full convertibility of Rupee, dual listing will be a boon to the shareholders of both the companies, since shareholders will be able to realise full value of rupee in terms of dollars and vice-versa.
Corporate Laws- Major Amendments to be made
Second bottleneck is that dual listing will need major amendments to key corporate laws, which includes changes would be required to the Companies Act, Securities Contracts (Regulation) Act, takeover regulations and the listing agreement to enable dual listings. Primarily, this would necessitate a foreign company being listed on the Indian bourses, which is currently disallowed. Foreign companies can be listed in India, but only in the form of Indian Depository Receipts (IDRs) and not their underlying shares. Although the legal regime relating to IDRs has been in place for the last few years, this route is not very popular and no company except Standard Chartered Bank (SCB) has availed so far.
SCB has created history in the Indian Capital Market by becoming the first foreign company to come up with an IDR issue. Standard Chartered Bank (SCB) took about 18 months of planning before coming out with its Indian depository receipt (IDR) issue and creating history in the Indian capital markets on May 25, 2010. SCB had to work out a number of issues in terms of establishing the regulatory framework around the issue and obtaining the necessary clearances from the Securities and Exchange Board of India and the Reserve Bank of India. The biggest challenge was to explain to investors how IDR works and how to make investors think about it as an investment proposition. In this case, Standard Chartered Bank, Mumbai was the domestic depository, and it has appointed Bank of New York, Mellon as its overseas depository
Apart from corporate law, dual listings would require liberalisation of the Foreign Exchange Management Act and various regulations thereunder towards full capital account convertibility as it may require foreign shareholders to trade in domestic shares and Indian shareholders to trade in foreign shares (in either case denominated in the currency of the shareholders).
Amendments to Companies Act, 1956
Currently, Indian laws do not allow companies to maintain separate identity, post -merger.” The Companies Bill,2009 (is pending before the Indian Parliament) would need to be amended so as to incorporate a definition under Section 2 and provide recognition for a ‘Dual Listed Company’ as a separate legal corporate identity. Also amendments would be required in the provisions relating to Board of Directors, Meetings, Auditors, Shareholder voting rights, and so on.
Amendments to FEMA
The provisions in the Foreign Exchange Management Act (FEMA) too would need to be amended so as to allow full capital account convertibility of rupee. Under FEMA, currently ‘full current account convertibility of rupee’ is allowed.
Listing formalities / Corporate Governance requirements
Permission would be needed for trading of shares denominated or expressed in a foreign currency by the Reserve Bank of India. Considering the importance and strong need for corporate governance, if dual listing is allowed, India may need to formulate special corporate governance requirements. Also, the listing agreement and the takeover code would need to be re-defined to protect the rights of shareholders.
CAC - Calibrated Approach of Government
Minister of State for Finance Namo Narain Meena told the Lok Sabha on 12th August, 2011 in a written reply regarding CAC that:
"India is following a calibrated approach to capital account convertibility. The capital account is being liberalised in stages, in line with developmental requirements, keeping in view domestic and global economic situation. Premature introduction of full capital account convertibility could expose the economy to increased surge and reversal of capital flows that would have implications for exchange rates, stock and real estate markets and price stability".
Besides, he said that liberalisation of external commercial borrowing policy could increase external debt burden that would strain balance of payment and could expose Indian corporates to balance sheet pressures during financial crisis.
Hastening the process of CAC therefore would have macroeconomic and financial stability implications, he said.
In separate reply, Meena said several steps have been taken to prevent dirty money or black money from flowing into the stock markets. For instance, the payments for transactions in the stock markets are made through banking channel, he said, adding banks and other financial intermediaries are also required to ensure compliance with the customer due diligence norms as required under Prevention of Money Laundering Act 2002.
SEBI registered intermediaries such as Mutual Funds, Depository Participants, Stock Brokers etc follow the Know Your Client (KYC) guidelines laid down by SEBI when customers are registered, he said.
Conclusion
Global experience suggests that companies at times choose the dual listing structure to avoid capital gains tax that results from a conventional merger. Many a time, complicated cross-border mergers require various forms of official approvals, and dual listing can preserve the existence of each company. Dual listed companies also require special corporate governance requirements. Often, management of the two companies believes that the merged company will have better access to capital if it maintains listings in each market, as local investors are already familiar with their respective companies. However, the fact that most cross-border mergers do not take the dual listing route suggests that the existence of two separate companies may result in less equity market liquidity than would have been if there was a single larger company. The existing contractual arrangements of the companies may cause various kinds of rights, like options in debt contracts and rights of other companies involved in joint ventures. The dual listing schedule also means that the two companies follow the accounting standards of two different countries. So, in terms of corporate optimality, dual listing poses some serious questions. Any company must start with considerable sceptcism when assessing this option.
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