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Cross Listing

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The listing of a company’s common shares on a different exchange than its primary and original stock exchange. In order to be approved for cross-listing, the company in question must meet the same requirements as any other listed member of the exchange, such as basic requirements for the share count, accounting policies, filing requirements for financial reports and company revenues. Types of Cross Listing

To accommodate a wide variety of firms, exchanges have designed several different listing categories, each with a different set of requirements and, to the extent that investors are knowledgeable about this structure, varying potential benefits. The Ordinary Listing

Domestic Capital Market Operations
International Bond Issue
Foreign Equity Listing
Foreign Equity Issue
Besides the ordinary listing abroad is very prestigious, it is also the one for which requirements are the most stringent. Companies seeking a listing overseas must satisfy several requirements to qualify for listing according to standards set for overseas companies by the exchanges. When approached by any firm for listing, the exchange conducts an investigation of the firm. The exchange requires the company to provide various pieces of information, to meet certain criteria such as minimum levels market capitalization and certain accounting variables (income, etc.) and also request the firm to recast its financial statements and other disclosures in the format prescribed by the exchange. The rigor of the investigation of the firm performed by the exchange prior to listing, and the accessibility to investors of the information contained in the various financial statements provided by the firm subsequent to listing depends on the listing standards set by the exchange (Chemmanur, 2001). Depositary Receipts

Firms wishing to list shares on the foreign market have also the option of participating in Depositary Receipts program. Depositary Receipts are negotiable bank-issued financial securities representing publicly traded security – equity (usually) or debt, of a company listed in one market which is traded on another market. Such a receipt therefore allows investors to hold shares in equity of other countries without need to go directly into the foreign markets. There are several types of depositary receipts, but the most common are the American Depositary It is usually expected that a DR listing improves liquidity of the company’s stock, as the potential investors’ base is extended, the visibility of the company both in DR and local markets is enhanced and crossborder trading is enabled. On the other hand, some studies argue, that trading in the stock shifts to the DR market and they worry about the impact on the overall liquidity of the local market. Also the price of underlying shares in the local market rarely remains unaffected by the DR issue. A company listing its equity internationally can gain from diversified shareholders’ base, increased demand or lower cost of capital. These are only some of the factors that may drive the share’s price up. Several studies have dealt with response of the underlying share’s price to the DR offering. The obtained results are, however, equivocal. CROSS LISTING PROCESS

Regulations & Reporting Requirements of Cross-Listing in the US & UK US Regulation
Two Acts govern the listing and trading of foreign securities in the US, 1933 Act and 1934 Act. The 1933 Securities Act requires foreign firms that wish to make a public offering in the US to register with the SEC. The registration statements are in two parts. Part 1 is the prospectus that consists of financial information distributed to potential investors to help them make informed investment decisions. Part 2 consists of other technical information that is not included in the prospectus, such as “the registrants’ expenses of issuing and distribution, indemnification of directors and officers, and recent sales of unregistered securities as well as undertakings and copies of material contracts”. The 1934 Exchange Act, on the other hand, is for firms that are traded on national US exchanges (regulated exchanges), and firms whose total assets exceed $10 million with a class of equity securities held by 500 or more persons. The Act requires foreign firms to reconcile, fully or partially depending on the level of ADRs, their financial statements to the US GAAP.

It is worth noting that in 1982, the SEC made the disclosure requirements under both Acts similar, thus it is possible for a foreign issuer to provide information using forms under the 1934 Act for the requirement under the 1933 Act. Recently, and after the crises of Enron in 2002, the SEC has adopted a new regulation called the “Sarbanes-Oxley Act of 2002”, effective 2003, aimed at protecting investors and restoring confidence in US accounting profession after the collapse of Enron in 2001. The Act consists of various rules related to disclosure, auditor independence, insider trading and the use of non-financial measures by foreign firms listed in the US. The Act also includes a set of enforcement rules that fight fraud and corruption. For example, the Act holds responsible not just the firm who engaged in fraud, but also other parties, including directors who may be responsible for the mismanagement.

Furthermore, the Act gives the US authorities to return funds to investors who have suffered losses rather than merely collect those funds for the government. Listing and Disclosure Requirements of OSHs and ADRs Like any other securities, OSHs are registered with the Security of Exchange Commission (SEC) under the 1933 Securities Act (filing Form F-6). However, since OSHs are treated as non-US securities, they attract fewer investors compared to ADRs. For example, OSHs represent 14% of total foreign listing on NYSE, if we exclude Canadian stock. As for the ADRs, the issuer of ADRs level 1 does not have to comply with US GAAPs, i.e. filing Form 20-F, since ADR level 1 stock is traded on OTC that is unregulated exchange The issuer is exempt under the Rule 12g3-2(b) from the 1934 Exchange Act. With this exemption, the issuer sends to the SEC an English summary of any public reporting documents released in its home market, including documents for regulatory agencies, stock exchanges, or direct shareholder communications.

Despite that, and according to the BNY: Global Offering of Depositary Receipts (2000), the issuer of level 1 is still required, under the 1933 Exchange Act, to file Form F-6 and thus register with the SEC in order to establish the program. The maximum cost for issuing this type is $25000, and the maximum date to complete the issue is 10 weeks. The same is applied to R144a program, but the trader of R144a has to provide the US market (mainly the SEC) with any information released in the issuer’s home market. Furthermore, the SEC has exempted sales to “Qualified Institutional Brokers” from certain types of the disclosure and reporting requirements designed to protect individual investors, such as prospectus delivery and periodic financial reporting. The maximum period for completing the issue is 7 weeks, and the costs of placing R144a range between $250,000 to $500,000 in addition to the underwriter’s margin. Consequently, level 1 and R144a are regarded as unregulated securities that are more risky to US investors than levels 2 and 3.Level 2 requires a greater degree of SEC listing requirements than level 1 or R144A.

A foreign issuer listing as level 2 is required to file the Form F-6 along with the last three years’ financial statements reconciled to US GAAP (using Form 20-F [1934 Exchange Act]), and audited using US audit standards in order to establish the program. After the admission, the issuer must partially reconcile his financial statements to US GAAP, and thus submit the following on a regular timely basis to the SEC: (i) an annual report (Form 20-F), and (ii) an interim report (Form 6-K that is equivalent to Forms 10-Q or 8-K filed by US firms [1934 Exchange Act]), in order to maintain a public file that includes current financial information to be used by investors. Hence, the issuer has to prepare two sets of accounting reports prepared under two different GAAPs. Moreover, he must meet the listing requirements of stock exchanges where level 2 will be listed, and as a result there are more costs associated with establishing ADR level 2. The maximum period for completing the issue is 14 weeks and the cost of placing it ranges between $200,000 and $700,000.

Like level 2, establishing an ADR level 3 program also requires filing and submitting the Form F-6 registration statement to the SEC, as level 3 involves issuing new shares. However, unlike level 2, and because level 3 involves issuing new capital, the issuer of level 3 must also file and submit, under the Act 1933, the Form F-1 in order to register the securities underlying the ADRs that are offered publicly in the US. Also, he must fully reconcile his financial statements to US GAAP, and submit on a regular and timely basis Forms 20-F and 6-K to the SEC. All accounting reports must be audited by an independent auditor using the US audit standards. Alternatively, the issuer may file an optional Form 8-A with the SEC to cover registration under the 1934 Exchange Act.

In addition, the issuer must meet the foreign exchanges listing requirements. The maximum completion period is 14 weeks, and the issuing costs range between $500,000 and $2,000,000 plus the underwriter’s margin. Besides, the SEC has adopted a new regulation based on a condition for the use of financial measures under non-US GAAP, which is effective from 24/03/2003. The regulation requires foreign firms to post any disclosed non-financial information on its websites, along with the location and availability of such information. Moreover, the SEC encourages foreign issuers to keep an easy access to that information on their websites for at least 12 months (see the SEC: the 2002 Sarbanes-Oxley Act). UK Regulations

Conditions for Listing
On 4th July 1999, effective from 1st May 2000, the role of UK Listing Authority (UKLA) was transferred from LSE to the Financial Services Authority (FSA), which is an independent non-governmental body established on 20th May 1997, and given statutory powers by the Financial Services and Markets Act 2000. Before that, a foreign firm had to register with the LSE under the Financial Services Act of 1986 and comply with all LSE listing requirements, but since 2000 the foreign firm has to comply with all UKLAs requirements in order to be officially admitted for listing and trading on LSE. First, it must appoint a listing agent or sponsor (e.g. investment or merchant bank, broker, accountancy or law firm). Secondly, the firm must have at least three years of trading records. Fourthly, it must operate as an independent body.

Also, prospectus must contain financial information and a declaration that the directors are responsible for all its information, and that the financial statements have been audited with the name and address of the auditors and any legal advisor. The last condition is related to DRs where they must be freely transferable, do not impose any types of restriction on the right of transfer, and be in public hands no later than the date of admission. The listing process (for all types of foreign listing) takes between 12 to 24 weeks, depending on the amount of work involved. Disclosure Requirements of Foreign Listing in the UK

A foreign firm seeking UK listing should include in its prospectus the most recent three years of its financial statements audited by qualified auditors. In the case of issuing Eurobonds including euro-denominated securities, but not convertibles eurobonds, the foreign firm should present independently audited financial information for the last two years. treat any amounts transferred to reserve as appropriations of profit, unless otherwise stated by law Supply sufficient information that gives a fair view of the value of the firm’s assets. On the other hand, cross-listing in the form of DRs or Eurobonds does not require foreign forms to comply with IAS, US GAAP or UK GAAP. The firms can report in accordance with their home GAAPs.

However, they must disclose a statement of the reporting strategy adopted, and an explanation of any material differences from IAS, US GAAP or UK GAAP. In the case of issuing DRs, the financial statements do not have to be consolidated. For example, if the foreign firm used to prepare two sets of accounts, its own accounts and annual consolidated accounts, it can report either on the basis that the omitted information from the accounts that will be submitted to the UKLA should have no significant value. Moreover, the firm does not have to submit a profit forecast unless it is required to do so by its home market’s regulations. In this case the firm must confirm in writing Timely distribution of all relevant information that affects the firm’s share price, and, Equal treatment of all shareholders.

According to the first principle, and in the case of dual listing, the foreign issuer must make public at the same time any information (that must not be misleading, false or deceptive, or incomplete) that is released at the exchanges where it is traded or listed. This can be done by notifying the Exchange’s Company Announcements Office (CAO), a division of the UKLA. Furthermore, the foreign firm must announce (also by notifying the CAO) any change in its activities, capital structure, interest in shares listed, and any potential distribution of or failure in distributing dividends. It must also produce annual and half-yearly financial reports in the case of OSHs and DRs, and only annual financial reports in the case of bonds. As for the second principle, the foreign firm must ensure that all shareholders of the same class have the same rights attached to their securities. ADVANTAGES OF CROSS-LISTINGS

Financial Gains. Cross-listings lower a firms’ cost of capital by enabling it to get more money from investors when they offer their stock to the public. Cross-listing brings foreign stocks closer to investors and offers several advantages that stem from lower transaction costs. Liquidity. Cross-listing contributes to share value by increasing stock liquidity. Enhanced inter-market competition might lower the spread. Narrower spreads following cross-listing generate improved liquidity, which increases share value and therefore improve liquidity. Increased Shareholder Base. By cross-listing its stocks, a firm could expand its potential investor base more easily than if it traded on a single market. As cross-listing brings foreign securities closer to potential investors, it increases investor awareness of the securities. Hence the firm is frequently mentioned in the financial press and its securities are closely monitored by securities analysts. In effect it increases the firm’s visibility. Product and labour consideration.

Provide improved information disclosures to potential customers and suppliers by accepting higher levels of disclosure standards by adopting standards like U.S. GAAP. Cross-listing also facilitates and enhances the attractiveness of employee stock ownership plans. Marketing Motivations. Using cross-listings for marketing reasons relates to the visibility rationale. According to this reasoning, foreign listing can boost corporate marketing efforts by broadening product identification among investors and consumers in the host country. The listing creates greater market demand for the firm’s products as well as its securities. Technical Issues. Effecting a securities transaction abroad, even where feasible, is still more complicated and expensive than affecting it domestically. Cross-listing can improve a firm’s ability to effect structural transactions abroad such as foreign mergers and acquisitions, stock swaps, and tender offers. DISADVANTAGES OF CROSS-LISTINGS

While there are benefits to going public, it also means additional obligations and reporting requirements on the companies and its directors: Increasing accountability to public shareholders

Need to observe and adhere strictly to the rules and regulations by governing bodies Increasing costs in complying with higher level of reporting requirements Relinquishing some control of the company following the public offering Additional scrutiny by analysts in advanced market economies Suffering a loss of privacy as a result of media interest As the owner or major shareholder of a private company, it is important to outweigh the benefits and costs of listing in the light of the plans and goals that have been set for the company. Discussions with lawyers, independent accountants and other professional advisors provide one with better considerations.


Regulations and Reporting. Requirements of. Cross-Listing in the US and UK. LACPA, Lecturer, Bath University. Management School, UK 2006 The Effects of Cross-listings on the Development of Emerging Markets: Romana Nyvltova, 2006 Cross-Listing and Corporate Governance: Bonding or Avoiding? By Amir N. Licht

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