Siamese Twins: Can the cross-listing of foreign companies work in India?

It now seems that this is going to change, giving birth to Siamese Twins, i.e. cross-listings. SEBI is, considering the evolution and internationalisation of the capital markets, proposing to allow Indian companies to directly list their equity shares overseas and at the same time permit overseas companies to list their shares on the Indian stock exchanges.

This would mean that while the Indian company can access overseas investors, overseas companies can access Indian investors. Such a move will benefit Indian companies in emerging areas such as technology, digital, internet with global aspirations and scale, seeking access to low-cost capital.

The proposal is to allow cross listings in ten (10) countries (such as US, Japan, China, UK, Germany, Canada), which have high-quality capital infrastructure, know-your-customer requirements and investors who understand the new sectors. The listing of foreign securities on an Indian stock exchange may be governed by the Indian framework and the Companies Act of that jurisdiction.

India has ensured that these countries have treaty obligations to share information with India and are willing to cooperate with India for investigation, if any.

India has shied away from cross-listing of shares on concerns that if Indian companies list overseas, there will be flight of capital, the domestic market may be dampened, and companies could go out of their regulatory ambit. But the government has now realised that if it wants foreign companies to list in India, it must allow Indian companies to list in corresponding overseas jurisdiction.

If India does implement this proposal, it would be a massive exercise, which will call upon India to approach reciprocal jurisdictions for direct listing exercises requiring regulatory changes in those jurisdictions. When putting forth this proposal, India must ensure that it has an effective price discovery mechanism, flexible listing regulations and low cost IPO.

India must also ensure that it prohibits companies incorporated in certain jurisdictions from raising capital in India and ensure such company complies with the regulations of beneficial ownership.

As with any cross-border proposals and India taking a bold leap of faith in permitting foreign companies to list on the Indian stock exchange, let us reflect on the advantages and disadvantages of cross-listing of shares.

Advantages:

-increase fund-raising avenues;

-competitive markets;

-alternate source of capital;

-diversified investors;

-large pool of liquidity;

-enable country-based acquisitions;

-reach and awareness to Indian consumers;

-ease in targeting suppliers, customers and investors where it has a business presence;

-increased visibility to investor and consumers;

-enables a company to diversify its capital-raising activities, rather than being reliant only on domestic markets;

-facilitates Indian acquisitions and improves labour relations by introduction of employee stock option plans.

Disadvantages:

-issue new shares resulting in earnings dilution;

-shares may trade at a discount in the other market;

-shares may be less liquid in the other market;

-compliance with additional listing requirements;

-if the accounts are to be prepared under different sets of accounting rules, it may lead to reporting of different results in different markets;

-the stock price must be approximately the same in both jurisdictions, taking into account currencydifferences;

-variancesin listing requirements, different accounting rules and differences in the level of market regulation may cause disparities in trading prices;

-re-registration, which may create settlement risk if an investor wants to buy on one exchange and sell in another (especially where the currencies differ).

The Indian stock exchanges may have to establish a new platform to allow foreign companies to trade on its platform and the SEBI may have to set out eligibility criteria for a foreign company to be eligible to list on Indian stock exchanges. The Indian Companies Act may have to recognise foreign companies and make the Companies Act applicable to such foreign companies, which list on the Indian stock exchanges.

It remains to be seen whether SEBI and the Companies Act will afford the same treatment to these foreign companies as they would treat an Indian company or whether they will have a separate set of regulations and guidelines for these foreign companies.

This exercise of cross listing is prevalent in many countries around the globe, such as the US, China, Canada, etc. Australian and Canadian companies list their shares on European exchanges and gain substantial investor interest, because of paucity of local resource companies.

There is growing literature on "bonding" argument. Cross-listing in other jurisdictions acts as a bonding mechanism by companies incorporated in a jurisdiction with poor investor protection and enforcement systems, agreeing to commit themselves to higher standards of corporate governance.

Siemens, IBM and Royal Dutch Shell are examples where the same issue is traded in multiple markets. In Frankfurt and Paris, they are traded in EUR, London in GBP, and on NYSE in USD. Prices are subject to local market conditions, as well as exchange control fluctuations and are not kept in perfect parity between markets.

Today, compliance in India and with Indian regulations is as strict as it is in developed markets. The Indian Listing Regulations has been re-written to ensure strict compliance by companies and grant investor protection. If foreign companies are allowed to list in India, the Listing Regulations may just have to be tweaked to recognise foreign companies but foreign companies will have to comply with the Indian Listing Regulations, nevertheless. Likewise, the corporate governance norms for Indian companies are no less than the requirements of other jurisdictions and at times the Indian corporate governance norms have been compared to the Sarbanes-Oxley Act of the US.

The Government has identified countries which will be allowed to list on the Indian stock exchanges. The Government must now ensure that India has a double taxation treaty with these companies, so as to take care of taxation aspects between India and the other jurisdiction and ensure there is no double taxation in the hands of the investor or the Foreign company.

One more concern that the Government will have to address is the issue of round tripping, i.e. the Indian Government must ensure that the returns made by foreign companies in India must not be used to reroute those funds back to India.

We are going global and want to throw open our market to foreign investors and likewise, want to access foreign markets. This step of cross-listing is the first step in this direction and we are ready to birth "conjoined Siamese Twins".

The author is Senior Partner, Rajani Associates.