The Hindu Business Line : Dual listing truths

At the very outset, it would be useful to disabuse the notion prevailing in some quarters that India already allows dual listing. The truth is it does not except, perhaps, in a circuitous way through depository receipts. We allow only cross-listing which is vastly different from dual listing both in form and effect.

Cross-listing means listing in more than one exchange whether in the same country or outside. For India, even cross-listing could have been a non-starter — because the rupee is not fully and freely convertible on capital account — but for the convenience of depository receipts that are designated in the currency of the country where listing is sought but whose underlying assets are one or more shares of the Indian company which has issued them denominated in rupees.

Thus, several Indian companies have attained cross-listings by issuing Global Depository Receipts (GDRs) or American Depository Receipts (ADRs). It is not as if depository receipts are resorted to by countries that haven’t embraced full capital account convertibility.

Even Japanese companies have resorted to depository receipts in the US to cater to the needs of investors in the US who are comfortable investing and trading in instruments denominated in the their home currency rather than in the Japanese yen. Furthermore, apart from investors’ convenience and choice, bourses too like quotations in a single currency lest comparisons and smooth trading are frustrated.

Equalisation pact

Dual listing, on the other hand, is not about shares of a company listed in more than one stock exchange. Instead, it is all about two companies whose shares are listed in stock exchanges of each other’s home countries and who have informally welded themselves together through equalisation agreement but who remain formally separated as hitherto for reasons of ego or tax considerations or whatever.

The term is doing rounds in financial circles now that Bharti Airtel and South Africa’s MTN are trying their best to fuse themselves together informally through the less time consuming process of dual listing till such time one of them is willing to swallow pride and agree to merge with the other.

Both MTN and Bharti Airtel take fierce pride in their pre-eminent positions in their respective home turfs and are thus loath to give up their individual identities, a precursor for a formal merger or amalgamation. Tax consideration might also have tilted the decision in favour of the loose arrangement because in India both the amalgamating company as well as its shareholders are exempt from capital gains tax only if the amalgamated company is an Indian company. And what is more, the Indian law also insists on shareholders getting shares alone in the amalgamated company, whereas substantial cash is supposed to sweeten and lubricate the deal between the two telecom giants. The equalisation agreement, among other things, provides for a common board of directors, common cash pool, proportionate economic and voting rights to the two sets of shareholders, etc.

Legal obstacles

Does India have a legal infrastructure in place to permit dual listing? Absence of specific enabling regimes in our capital market enactments as well as in FEMA is cited as obstacles in this regard. To be sure, we have not embraced capital account convertibility so much so that MTN shareholders would not be able to access the Indian bourses for dealing in MTN shares as well as in those of Bharti Airtel just as Bharti Airtel’s shareholders cannot access the South African bourses for dealing in Bharti Airtel’s as well as in MTN’s shares, a prerequisite for dual listing.

But it appears that this obstacle can be overcome for the nonce through depository receipts. Trading in South Africa can be done in the home currency rand for both the sets of shares with Bharti Airtel being traded in rand in the form of a depository receipt.

Likewise, in the Indian bourses, MTN can be listed through India Depository Receipts (IDRs) which then would facilitate quotation for MTN’s shares in rupees. In short, absence of capital account convertibility need not be a stumbling block to the informal Siamese twins agreement between the two companies. Perhaps, this would incidentally kick-start the comatose market for IDRs in India.

Global experience

The moot question however is the world experience. Shell seems to be disillusioned with the idea of dual listing after it embraced it wholeheartedly. Unilever however still remains enamoured of the idea. Of course, there are a few others who have found salvation in the informal arrangement of dual listing.

Purists may however cavil at it as being a loose relationship. But then, the idea does not seem to be morally repugnant or economically one-sided given the fact that shareholders of Bharti Airtel, for example, would get shares in MTN and vice-versa.

Exchange ratio

In a merger, exchange ratio is the key to fairness to the shareholders of both the companies. And exchange ratio would also be central to the idea of dual listing. If this can be thrashed out to mutual satisfaction, one could have no serious objection to dual listing, especially when fierce national pride or tax considerations come in the way of a formal merger.

There seems to be nothing immoral in such an arrangement given the wide berths given to each others’ shareholders in the two companies. There could however be doubts as to the possible step-motherly treatment to one company especially when two entities have been fused albeit informally on the basis of geography unless of course the board of directors gives equal representation to both the companies and the equalisation agreement forecloses the possibility of such step-motherly treatment.

(The author is a Delhi-based chartered accountant.)

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