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CROSS-LISTINGS


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Table of Contents

WHAT IS CROSS-LISTING? ................................ ................................ ................................ .................. 3

TYPES OF CROSS LISTING ................................ ................................ ................................ ................... 3

The Ordinary Listing ................................ ................................ ................................ ....................... 3

Depositary Receipts ................................ ................................ ................................ ....................... 4

CROSS LISTING PROCESS ................................ ................................ ................................ .................... 5

Regulations & Reporting Requirements ofCross-Listing in the US & UK ................................ ......... 5

US Regulation ................................ ................................ ................................ ............................ 5

Listingand Disclosure Requirements ofOSHs and ADRs ................................ ............................. 6

UK Regulations................................ ................................ ................................ ............................... 8

Conditions for Listing ................................ ................................ ................................ ................. 8

Disclosure Requirements ofForeign Listing in the UK ................................ ................................ . 8

ADVANTAGES OF CROSS-LISTINGS ................................ ................................ ................................ ... 10

DISADVANTAGES OF CROSS-LISTINGS ................................ ................................ .............................. 11

References................................ ................................ ................................ ................................ ....... 12


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WHAT IS CROSS-LISTING?

The listing of a companys common shares on a different exchange than its primary and original

stockexchange. In order to beapproved for cross-listing, thecompany in question must meet the

same requirements as any other listed member oftheexchange, such as basic requirements for the

sharecount,accountingpolicies,filing requirements for financial reports and company revenues.

The termoften applies to foreign-based companies that choose to list their shares on U.S.-based

exchanges like the New York StockExchange (NYSE). But firms based in the U.S. may choose tocross-

list on European or Asian exchanges,a strategy that may become morepopular if the U.S. dollar

struggles against major foreign currencies for a lengthy period of time.

The adoption ofSarbanes-Oxley (SOX) requirements in 2002 made cross-listingon U.S. exchanges

morecostly than in thepast; the requirements put a heavy emphasis on corporategovernanceand

accountability. This, along with generally accepted accounting principles(GAAP)accounting, makes

for achallenging hurdlefor many companies whose "home" exchangemay havelaxer standards

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

knowledgeableabout this structure,varyingpotential benefits.

The Ordinary Listing

As per Moffett (2004), theprocess ofglobalfinancing is successivewith theordinary listingabroad

asa last and most prestigious stage. The goalof this successive process is to be known enough in

each stage toattract foreign investors in the subsequent stage.

Domestic Capital Market Operations International Bond Issue Foreign Equity Listing Foreign Equity Issue

Besides theordinary listingabroad is very prestigious, it is also theonefor which requirements are

themost stringent. Companies seekingalistingoverseas must satisfy several requirements toqualify

for listingaccording to standards set for overseas companies by theexchanges. When approached

by any firmfor listing, theexchangeconducts an investigation ofthefirm. Theexchange requires the

company toprovidevarious pieces ofinformation, tomeet certain criteria such as minimumlevels


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market capitalization and certain accounting variables (income, etc.) and also request the firm to

recast its financial statements and other disclosures in theformat prescribed by theexchange. The

rigor ofthe investigation ofthefirmperformed by theexchangeprior tolisting,and theaccessibility

to investors ofthe information contained in thevarious financial statements provided by the firm

subsequent tolisting depends on thelisting standards set by theexchange (Chemmanur, 2001).

Depositary Receipts

Firms wishing tolist shares on theforeign market havealso theoption ofparticipating in Depositary

Receipts program. Depositary Receipts are negotiable bank-issued financial securities representing

publicly traded security - equity (usually)or debt,ofacompany listed in onemarket which is traded

on another market. Such a receipt therefore allows investors to hold shares in equity of other

countries without need togo directly into theforeign markets.

Thereare several types ofdepositary receipts, but themost common are the American Depositary

Receipts (ADR), Global Depositary Receipts (GDR) and European Depositary Receipts (EDR).The

choice is usually dictated by marketingconsiderations and by where theoffering is to bemade (as at

each market another name is common) and in which currency (Holick, 2004).The impact of the

Depositary Receipts on the development of domestic stock market is very importantto analyse

nowadays, due to rapid growofDRs also in many emergingmarkets. Current studies on effects of

DRs focus either on the benefits ofcross listing stemmingfromalower globalcosts ofcapital (e.g.

Foerster and Karolyi, 1999, 2000, Miller, 1999) or deal with the impact of trade diversion and

migration of order flowto foreign markets on the liquidity of DRs and non-DRs firms27 in the

domestic market (e.g. Hargis and Ramanlal (1998), Claessens, Klingebiel, and Schmukler (2002),

Levineand Schmukler (2003)). Some studies alsofocus on the impact ofstock returns and valuation

ofnon-DRs firms (e.g. Lee (2002)or Melvin and Tonone (2003))

It is usually expected that a DR listing improves liquidity ofthecompanys stock,as thepotential

investors base is extended, thevisibility ofthecompany both in DR and localmarkets is enhanced

and crossborder trading is enabled. On theother hand, some studies argue, that trading in the stock

shifts to the DR market and they worry about the impact on theoverallliquidity ofthelocalmarket.

Also thepriceofunderlying shares in thelocalmarket rarely remains unaffected by the DR issue. A

company listing its equity internationally can gain from diversified shareholders base, increased

demand or lower cost ofcapital. Theseareonly someofthefactors that may drive the shares price

up. Several studies have dealt with responseoftheunderlying shares price to the DR offering. The

obtained results are, however,equivocal.


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CROSS LISTING PROCESS

Regulations & Reporting Requirements of Cross-Listing in the US & UK

US Regulation

Two Acts govern thelistingand tradingofforeign 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 twoparts.

Part 1 is the prospectus that consists of financial information distributed to potentialinvestors to help themmake informed investment decisions.

Part 2 consists ofother technical information that is not included in theprospectus, such asthe registrants expenses of issuing and distribution, indemnification of directors and

officers, and recent sales of unregistered securities as well as undertakings and copies of

materialcontracts.

The 1934 Exchange Act,on theother 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 morepersons. The Act requires foreign firms to reconcile,fully or partially

dependingon thelevelofADRs, 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 toprovide information usingforms under the 1934 Act for the requirement under the

1933 Act.

Recently,and after thecrises 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 accountingprofession after thecollapseofEnron in 2001.

y The Act aims at improving internal controlover financial reporting, which leads to betteraccountingquality.

y The Act consists ofvarious rules related to disclosure,auditor independence, insider tradingand theuseofnon-financialmeasures by foreign firms listed in the US.

y The Act also includes a set of enforcement rules that fight fraud and corruption. Forexample, the Act holds responsible notjust the firmwhoengaged in fraud, but alsoother

parties, including directors whomay be responsiblefor themismanagement.

y Furthermore, the Act gives the US authorities to return funds to investors who have sufferedlosses rather than merely collect thosefunds for thegovernment.


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Listing andDisclosure Requirements of OSHs andADRs

Like any other securities, OSHs are registered with the Security of Exchange Commission(SEC)under the 1933 Securities Act (filing Form F-6).

The company that lists as OSHs should partially reconcile their financial statement to USGAAP by filing Form 20-F (1934 Exchange Act),except in thecaseoflistingfor thefirst time

where thecompany needs tofully reconcile its financial statements to US GAAP.

However, since OSHs are treated as non-US securities, they attract fewer investorscompared to ADRs. For example, OSHs represent 14% oftotalforeign listingon NYSE, ifwe

exclude Canadian stock. As for the ADRs, the issuer ofADRs level 1 does not have tocomply

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 thisexemption, the issuer sends to the SEC an English summary of any public reporting

documents released in its homemarket, including documents for regulatory agencies, stock

exchanges,or direct shareholder communications.

Despite that,and according to the BNY: Global OfferingofDepositary Receipts (2000), theissuer of level 1 is still required, under the 1933 Exchange Act, to file Form F-6 and thus

register with the SEC in order toestablish theprogram.

Themaximumcost for issuing this type is $25000,and themaximum date tocomplete theissue 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 issuers home

market.

Furthermore, the SEC has exempted sales to Qualified Institutional Brokers fromcertaintypes ofthe disclosureand reporting requirements designed toprotect individual investors,

such as prospectus delivery and periodic financial reporting. The maximum period for

completing the issue is 7 weeks,and thecosts ofplacing R144a range between $250,000 to

$500,000 in addition to theunderwriters margin.

Consequently,level 1 and R144aare regarded as unregulated securities that aremore riskyto 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 listingas level 2 is required to file the Form F-6 along with the last threeyears financial statements reconciled to US GAAP (using Form 20-F [1934 Exchange Act]),

and audited using US audit standards in order toestablish theprogram.

After theadmission, the issuer must partially reconcile his financial statements to US GAAP,and thus submit thefollowingon a regular timely basis to the SEC: (i)an annual report (Form


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20-F),and (ii)an interim report (Form 6-K that is equivalent to Forms 10-Qor 8-K filed by US

firms [1934 Exchange Act]), in order tomaintain apublicfile that includes current financial

information to beused by investors.

Hence, the issuer has to prepare two sets of accounting reports prepared under twodifferent GAAPs.

Moreover, hemust meet thelisting requirements ofstockexchanges wherelevel 2 will belisted, 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.

Likelevel 2,establishingan ADR level 3 programalso requires filingand submitting the FormF-6 registration statement to the SEC,as level 3 involves issuing new shares.

However,unlikelevel 2,and becauselevel 3 involves issuing newcapital, the issuer oflevel 3must alsofileand submit,under the Act 1933, the Form F-1 in order to register the securitiesunderlying 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 auditstandards. 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 theforeign exchanges listing requirements. Themaximumcompletion period is 14 weeks, and the issuing costs range between $500,000 and$2,000,000 plus theunderwriters 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

effectivefrom 24/03/2003.

The regulation requires foreign firms topost any disclosed non-financial information on itswebsites, along with the location and availability of such information. Moreover, the SEC

encourages foreign issuers tokeepan easy access to that information on their websites for

at least 12 months (see the SEC: the 2002 Sarbanes-Oxley Act).


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UK Regulations

Conditions forListing

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,aforeign firm had to register with the LSEunder the

Financial Services Act of 1986 and comply with all LSE listing requirements, but since 2000 the

foreign firm has tocomply with all UKLAs requirements in order to beofficially admitted for listing

and tradingon LSE.

To beofficially listed,aforeign firm shouldmeet severalconditions set by UKLA-

y First, it must appoint alistingagent or sponsor (e.g. investment or merchant bank, broker,accountancy or lawfirm).

y Secondly, thefirmmust haveat least three years oftrading records.y Thirdly, its shares must exceed GBP 700,000. However, The UKLA can admit DRs with alower

value ifit is satisfied that therewill bean adequatemarket for them.

y Fourthly, it must operateas an independent body.y Fifthly, it must producea prospectus that contains information about the firm (its nature,

typeofbusiness, shareholders,management,aplan for future investments,and soon).

y Also,prospectus must contain financial information and a declaration that the directors areresponsiblefor all its information,and that thefinancial statements have been audited with

the nameand address oftheauditors and any legaladvisor.

y Thelast condition is related to DRs where they must befreely transferable, do not imposeany types ofrestriction on the right oftransfer,and be in public hands nolater than the date

ofadmission.

Thelistingprocess (for all types offoreign listing) takes between 12 to 24 weeks, dependingon the

amount ofwork involved.

Disclosure Requirements of ForeignListing in the UK

A foreign firm seeking UK listing should include in its prospectus themost recent three years ofits

financial statements audited by qualified auditors. In thecaseofissuingEurobonds includingeuro-

denominated securities, but not convertibles eurobonds, the foreign firm should present

independently audited financial information for thelast two years.


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The latest audited financial statements should refer to a period no earlier than 12 months for

secondary listingand 6 months for primary listingprior to thelisting date. However, theaccounting

standards under which thefirmsaccounts should beprepared vary with regards to the typeoflisting.

The issuer offoreign shares on the LSEmust prepare,audit,and disclose their financial information

inaccordance with US or UK GAAPs, or International Accounting Standards (IAS). Nonetheless,

income statements produced under theforeign firms home GAAParepermitted but the issuer must

contact the UKLA toensure that theproposed standards are satisfactory.

In this case,the issuer must provide

y aconsolidated financial statementfor thewholefirmy treat any amounts transferred to reserve as appropriations of profit, unless otherwise

stated by law

y Supply sufficient information that gives afair viewofthevalueofthefirms assets.On theother hand,cross-listing in theformofDRs or Eurobonds does not requireforeign forms to

comply with IAS, US GAAPor UK GAAP. Thefirms can report in accordancewith their home GAAPs.

However, they must disclosea statement ofthe reporting strategy adopted,and an explanation of

any material differences from IAS, US GAAP or UK GAAP. In thecase of issuing DRs, the financial

statements do not have to beconsolidated. For example, iftheforeign firmused toprepare two sets

of accounts, its own accounts and annual consolidated accounts, it can report either on the basis

that theomitted information from theaccounts that will be submitted to the UKLA should have no

significant value. Moreover, thefirm does not have to submit aprofit forecast unless it is required to

do so by its homemarkets regulations. In this case thefirmmust confirm in writingto the UKLA that the forecast has been prepared after careful inquiries and according to the

accounting policies used by the firm. Recently, and under the rule of general obligation of

disclosurethat governs the distribution of information after the admission, two underlying

principles have been stressed:

Timely distribution ofall relevant information that affects thefirms shareprice,and, Equal treatment ofall shareholders.

According to thefirst principle,and in thecaseofduallisting, theforeign issuer must makepublicat

the same timeany information (that must not bemisleading,falseor deceptive,or incomplete) thatis released at theexchanges where it is traded or listed. This can be done by notifying theExchanges

Company Announcements Office (CAO),a division ofthe UKLA. Furthermore, theforeign firmmust

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


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reports in the case of bonds. As for the second principle, the foreign firm must ensure that all

shareholders ofthe sameclass have the same rights attached to their securities.

Finally, it is worth noting that both the UKLA and LSEas a recognised investment exchange share the

same ongoing requirements for listed firms. The preceding discussion highlights an important

factorrelated to the condition of listing foreign share in the USor UK. While reconciliation to US

GAAP is crucialfor foreignfirms in order to beadmitted for listing in the US,foreignfirms seeking LSE

listingcan report usingother GAAPs

ADVANTAGES OF CROSS-LISTINGS

y Financial Gains. Cross-listings lower afirms cost ofcapital by enabling it toget moremoneyfrom investors when they offer their stock to thepublic. Cross-listing brings foreign stocks

closer to investors and offers severaladvantages that stemfromlower transaction costs.

y Liquidity. Cross-listing contributes to share value by increasing stock liquidity. Enhancedinter-market competition might lower the spread. Narrower spreads followingcross-listing

generate improved liquidity,which increases sharevalueand therefore improveliquidity.

y Increased Shareholder Base. By cross-listing its stocks, a firm could expand its potentialinvestor basemoreeasily than ifit traded on a singlemarket. As cross-listing brings foreign

securities closer to potential investors, it increases investor awareness of the securities.

Hence the firm is frequently mentioned in thefinancialpress and its securities areclosely

monitored by securities analysts. In effect it increases thefirms visibility.

y Product and labour consideration. Provide improved information disclosures to potentialcustomers 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 stockownershipplans.

y Marketing Motivations. Using cross-listings for marketing reasons relates to the visibilityrationale. According to this reasoning,foreign listingcan boost corporatemarketingefforts

by broadeningproduct identification among investors and consumers in the host country.

Thelistingcreates greater market demand for thefirms products as wellas its securities.

y TechnicalIssues. Effectinga securities transaction abroad,even wherefeasible, is stillmorecomplicated and expensive than affecting it domestically. Cross-listingcan improveafirms

ability to effect structural transactions abroad such as foreign mergers and acquisitions,

stock swaps,and tender offers.


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DISADVANTAGES OF CROSS-LISTINGS

While thereare benefits togoingpublic, it alsomeans additionalobligations and reporting

requirements on thecompanies and its directors:

yIncreasingaccountability topublic shareholders

y Need toobserveand adhere strictly to the rules and regulations by governing bodiesy Increasingcosts in complyingwith higher levelofreporting requirementsy Relinquishing somecontrolofthecompany following thepublicofferingy Additional scrutiny by analysts in advanced market economiesy Sufferingaloss ofprivacy as a result ofmedia interest

As theowner or major shareholder ofaprivatecompany, it is important tooutweigh the

benefits and costs oflisting in thelight oftheplans and goals that have been set for the

company. Discussions with lawyers, independent accountants and other professional

advisors provideonewith better considerations.


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References

1. http://www.investopedia.com/terms/c/cross-listing.asp2. Regulations and Reporting . Requirements of. Cross-Listing in the US and UK. LACPA,

Lecturer, Bath University. Management School, UK 2006

3. TheEffects ofCross-listings on the Development ofEmerging Markets:RomanaNyvltova, 2006

4. Cross-Listingand Corporate Governance: Bondingor Avoiding? By Amir N. Licht

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