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Published : October 03, 2013 | Author : vishalcnlu
Category : Company Law | Total Views : 2401 | Rating :

LL.M from CNLU

Dual Listing of the Companies
There are 23 stock exchange in India, the first being the Bombay stock Exchange, which began formal trading in 1875, making it one of the oldest in Asia.

In most of the cross border merger / acquisition cases, one company “buys” the assets and operations of another company and pays the shareholders of the other company in terms of its own securities or cash or as happens most often, in a combination of the two. The constituent companies are of different nationality, often both listed. These are the real “mergers between equals”. The companies agree to combine their operations and cash flows, but retain separate shareholder registries and identities.

Dual listing is a process by which a company would be allowed to be listed and traded on the stock exchanges of two countries. Dual listing system precludes the need for a merger. In the case of two companies operating in two different countries entering into an equity alliance, the dual listing system would allow these companies to retain their separated legal identities and continue to be listed and traded on the stock exchanges of the two countries. Tata motors is India’s largest automobile company, is a dual listed company and traded on both the Bombay Stock Exchange, as well as on the New York Stock Exchange. Infosys is also listed on NASDAQ along with Bombay Stock Exchange (BSE). Wipro is a dual listed Indian technology giant on Bombay Stock Exchange and New York Stock Exchange and many more like Larsen and Turbo, ITC Limited.

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.

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: -

1. Tata Motors (India/US)

2. BHP Billiton (Australia/UK 2001)

3. Unilever (UK/Netherlands 1930)

4. Hewlett-Packard (HP), (NYSE and NASDAQ)

5. Royal Dutch Shell (UK.Netherlands)

6. Rio Tinto Group (Australia/UK)

Pros and cons of Dual listing
Dual listing also seems to increase the liquidity of the majority of the counters. First and foremost, the company should have robust business fundamentals. If not, it is unlikely to acquire a strong and sustainable support from institutional funds. As a result, even if the share price shows an upwards blip upon announcement of the dual listing intention, this appreciation is likely to be short term. Smart money is unlikely to stay in the counter for long if the company fundamentals are poor.

By seeking a listing in the country where it has significant business presence, it increases the ease in targeting suppliers, customers and investors. This is because they are likely to take assurance from the knowledge that the company that they are dealing with is a listed company on their stock exchange. However, this kind of benefit is likely to accrue over long term. Depending on the type of dual listing, companies may have to issue new shares which would result in earnings dilution.

There are several costs involved in doing a dual listing. Examples of such costs are legal costs, compliance costs and the potential opportunity costs as top management attention is diverted from their core businesses during the lengthy preparatory work for dual listing. These costs may have a significant impact to those companies with little profits.

In a nutshell, investors should weigh the pros and cons before jumping on the “buy the dual listing shares” bandwagon. Investors have to do their due diligence to pick out those companies whose business and valuation would improve by dual listing and these benefits should outweigh the costs involved in dual listing.

Impact on stock markets
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. 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.

Significance of dual listing
Dual listing generally refers to the concept of listing a company’s securities on more than one exchange for the purpose of adding liquidity to the shares and also allowing investors greater choice as to where they can trade their shares. Simply put, it is a process that enables a company to be listed on the exchanges of two different countries. The company’s shares that enjoy voting rights can be traded on both the bourses. Though dual listing is an effective option to improve the spread between the bids and ask prices, yet this technique is not a widely used one. Examples of dual listing are: Hewlett-Packard (HP), which is listed on both the NYSE and NASDAQ; the Royal Dutch Shell in the United Kingdom and the Netherlands; the BHP Billiton and the Rio Tinto Group both in Australia and the UK; and the Unilever in the UK and the Netherlands.

Dual listing of a company ensures that the company has two equal listings in two different markets. A dual listed company is also thus referred to as Siamese twins. An ownership structure of two holding companies are created, each of which is listed in a different market. Both companies continue to exist but each with a separate set of shareholders. An equalization agreement ensures that these two separate bodies agree to share all the risks and rewards of the ownership of the entire operating business in a fixed proportion. This equalization agreement also ensures equal treatment of the shareholders of both of these companies in voting and cash flow rights. Contracts are signed covering issues determining the distribution of legal and economic rights between the twin parents including the issues related to dividends, liquidation and corporate governance. Usually, the twins share a single board of directors and have an integrated management structure.

Dual listing is a process that precludes the need of a merger. In a situation where two companies in two countries enter into an equity alliance without a merger, dual listing would imply continued listing of the firms in both the countries. Through dual listing these companies would be able to retain their separate legal identities and continue to be listed and traded on the stock exchanges of the two countries. This serves in protecting the national identities of the companies too. However, dual listing is not a very common phenomenon on account of the numerable complexities associated with the process.

When tax considerations come in the way of a regular merger, dual listing company structure is adopted. In case of a merger, capital gains tax could be owed but no such tax consequence arises in case of dual listing. On the contrary, differences in tax regimes might just favour dual listing, based on the fact that cross-border dividend payments are minimized.

Dual listing might prove beneficial to companies that are already listed in their home country and are growing bigger. Such companies find it useful to have access to larger amounts of money they can raise in larger markets. In the interests of the existing shareholders in the home country, these companies need to retain their original listing.

Dual listed companies have special corporate governance requirements. The interests of the shareholders in each of the listed companies are in the similar lines. Guaranteeing equal rights in all respects ensures this. By equal rights we mean voting rights and dividends.

In spite of all measures there might arise certain complexities out of dual listing. There might be problems such as shares may trade at a discount in one of the markets or shares may be less liquid in one of the markets. Of late the importance of dual listing has diminished a bit as it has now become easier and cheaper for private investors to trade in foreign markets.

Advantages to investors/ shareholders
Advantages of dual listing
1. Poor liquidity and a low profile in one market can be offset by a better performance in another market. The share prices in each market will always be the same.

2. Companies gain access to a larger investor base with a larger pool of capital available for investment.

3. Visibility and profile can be increased by obtaining press coverage in two different countries.

Disadvantages of dual listing
1. The listing requirements of both markets must be complied with. Despite the apparent convergence of standards between markets, there will be greater expense and more compliance work involved.

2. It may be necessary to produce accounts under two different sets of accounting rules, possibly leading to the reporting of different results in different markets.

3. Domestic investors must have access to the same information as international investors. All published information could therefore need to be produced in two languages. Evidence of a company’s ability to attract overseas investors must therefore be sufficiently compelling to outweigh the burden that a dual listing brings.

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