Dual Listing has been in the news in recent times due to the proposed alliance between Asia’s leading telecommunications provider Bharti Airtel and South Africa-based MTN Group that would help create the third largest mobile phone group in the world. This has created a buzz in the world of telecommunications. However, this alliance is dependent upon one important aspect or issue – it is of “Dual Listing”.
What is this 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.
We need to understand that ‘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. For example, Hero Honda is listed on BSE as well as NSE.
Dual listing may be thought of when two cross border companies decide to do business together, with or without a merger / acquisition.
In a typical merger or acquisition, the merging companies become a single legal entity, with one business buying the other. However, “a dual-listed company or DLC is a corporate structure in which two corporations function as a single operating business through a legal equalization agreement, but retain separate legal identities and stock exchange listings. Virtually all DLCs are cross-border, and have tax advantages for the corporations and their stockholders.”
The two companies agree to share all risks and rewards of the ownership of all their operating businesses in agreed proportion, through a contract called an “equalization agreement.”
In case of Bharti Airtel and MTN, dual listing will help Bharti Airtel shares to be traded on the stock exchange in Johannesburg and MTN shares to be traded on NSE and BSE. Currently, dual listing is not allowed in India. The Indian government could possibly allow it but, there are many legal hurdles like amendment of many laws, etc. and this could take some years.
Dual listing and ADRs / GDRs
ADR is an acronym for American Depositary Receipt and GDR is an acronym for Global Depositary Receipt. These were introduced to simplify the complications in buying and trading of shares in foreign countries, largely because of different prices and currency values. A US bank or brokerage buys a lot of shares from the company, groups them into different bundles and reissues them on the US stock exchanges like regular stocks. Investors buying ADRs can covert them into shares. However, it can be issued only within a country and traded only on domestic bourses. GDR is the acronym for Global Depository Receipt and is very similar to the ADR. Here, a foreign branch of an international bank holds the domestic shares and sells them through its branches across the world. The buyer is issued a certificate called GDR.
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. However, once converted into Indian shares they cannot be reconverted into ADRs/GDRs again without the permission of the government of India.
However GDRs, ADRs are not at all similar to Dual listing. Dual listing allows the shareholders of the companies to vote, whereas GDR / ADR holders do not have voting rights.
Indian Depository Receipts (IDR) however, is an avenue that may be looked at as an alternative to dual listing.
Popularity of Dual Listing
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.
Some major dual-listed companies are:
BHP Billiton (Australia/UK 2001)
Unilever (UK/Netherlands 1930)
Hewlett-Packard (HP), (NYSE and NASDAQ)
Royal Dutch Shell (UK.Netherlands)
Rio Tinto Group (Australia/UK).
Recently, shares of two media giants Thomson Reuters Corp & Thomson Reuters Plc. were dual listed in Canada and London.
Indian scenario in the backdrop of Bharti Airtel – MTN deal: Dual Listing of Indian companies, under existing law is not permitted. And this proved to be a major roadblock for the Bharti-MTN deal.
The deal required that Bharti Airtel, which is listed only in Indian stock exchanges, got listed on the stock exchange in Johannesburg and vice versa. This dual listing was insisted by MTN to help it retain its South African identity. It was to benefit MTN as it would have remained a separate entity that cannot be merged into Bharti, a concern for the South African government which owns MTN. Post-dual listing, the issue of merger would have become irrelevant.
The Bharti-MTN deal failed with non-allowance of dual listing as one of the reasons.
Why the need of Dual listing?
As seen in the case of Bharti-MTN where merger talks failed, the only way out for making the deal work out was dual listing.
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.
Why is dual listing not permitted in India?
The very first & 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).
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. Reserve Bank of India Governor, Dr D. Subbarao, recently said that the RBI 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.
Another bottleneck is that dual listing will need major amendments to key corporate laws of the country.
Currently Indian laws do not allow companies to maintain separate identity, post -merger.” The Companies Act (i.e. the soon to be introduced new Companies Law) 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.
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.
Besides, domestic trading in shares denominated in foreign currency cannot happen without the permission of the Reserve Bank of India – this need to be looked at. Also dual listed companies may need special corporate governance requirements. 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.
Advantages to Investors / Shareholders
As mentioned earlier, 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 apparent 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.
Impact on Stock Markets
If dual listing is allowed, an Indian company share can be sold on a foreign Stock Exchange and vice-versa, leaving a part the trading of private investors in foreign markets directly.
Some problems, for example, the shares may trade at a discount in one market and/or the shares may be less liquid in one market cannot be ruled out.
The complex legal aspects of the structure may add to bureaucracy.
However, is dual listing is allowed, Indian Stock Markets can truly compete with other foreign stock markets.
CONCLUSION: In a globalized world, India should allow dual listing. Full capital account convertibility is required, and feels that it is the need of the times. This will prove to be a major reform in the financial markets, one more step towards being global.
Indian regulators must allow Indian companies to grow and be globally competitive by allowing dual listing.
M.A Economics, MBA Finance, AMFI, DIT
Author | Information Expert