CROSS-LISTINGS

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 of Cross-Listing in the US & UK...........................................5
US Regulation................................................................................................................................5
Listing and Disclosure Requirements of OSHs and ADRs...............................................................6
UK Regulations..................................................................................................................................8
Conditions for Listing.....................................................................................................................8
Disclosure Requirements of Foreign Listing in the UK...................................................................8
ADVANTAGES OF CROSS-LISTINGS......................................................................................................11
DISADVANTAGES OF CROSS-LISTINGS.................................................................................................11
References...........................................................................................................................................13

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WHAT IS CROSS-LISTING?

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.

The term often applies to foreign-based companies that choose to list their shares on U.S.-based
exchanges like the New York Stock Exchange (NYSE). But firms based in the U.S. may choose to
cross-list on European or Asian exchanges, a strategy that may become more popular if the U.S.
dollar struggles against major foreign currencies for a lengthy period of time.
The adoption of Sarbanes-Oxley (SOX) requirements in 2002 made cross-listing on U.S. exchanges
more costly than in the past; the requirements put a heavy emphasis on corporate governance and
accountability. This, along with generally accepted accounting principles (GAAP) accounting, makes
for a challenging hurdle for many companies whose "home" exchange may have laxer 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
knowledgeable about this structure, varying potential benefits.

The Ordinary Listing

As per Moffett (2004), the process of global financing is successive with the ordinary listing abroad
as a last and most prestigious stage. The goal of this successive process is to be known enough in
each stage to attract foreign investors in the subsequent stage.
 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

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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
Receipts (ADR), Global Depositary Receipts (GDR) and European Depositary Receipts (EDR).The
choice is usually dictated by marketing considerations and by where the offering is to be made (as at
each market another name is common) and in which currency (Holická, 2004).The impact of the
Depositary Receipts on the development of domestic stock market is very important to analyse
nowadays, due to rapid grow of DRs also in many emerging markets. Current studies on effects of
DRs focus either on the benefits of cross listing stemming from a lower global costs of capital (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),
Levine and Schmukler (2003)). Some studies also focus on the impact of stock returns and valuation
of non-DRs firms (e.g. Lee (2002) or Melvin and Tonone (2003))
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.

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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 aims at improving internal control over financial reporting, which leads to better
accounting quality.
 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.

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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).
 The company that lists as OSHs should partially reconcile their financial statement to US
GAAP by filing Form 20-F (1934 Exchange Act), except in the case of listing for the first time
where the company needs to fully reconcile its financial statements to US GAAP.
 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.

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  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).

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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.
To be officially listed, a foreign firm should meet several conditions set by UKLA-
 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.
 Thirdly, its shares must exceed GBP 700,000. However, The UKLA can admit DRs with a
lower value if it is satisfied that there will be an adequate market for them.
 Fourthly, it must operate as an independent body.
 Fifthly, it must produce a prospectus that contains information about the firm (its nature,
type of business, shareholders, management, a plan for future investments, and so on).
 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.

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The latest audited financial statements should refer to a period no earlier than 12 months for
secondary listing and 6 months for primary listing prior to the listing date. However, the accounting
standards under which the firm’s accounts should be prepared vary with regards to the type of
listing. The issuer of foreign shares on the LSE must prepare, audit, and disclose their financial
information in accordance with US or UK GAAPs, or International Accounting Standards (IAS).
Nonetheless, income statements produced under the foreign firm’s home GAAP are permitted but
the issuer must contact the UKLA to ensure that the proposed standards are satisfactory.
In this case, the issuer must provide
 a consolidated financial statement for the whole firm
 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
to 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
disclosure” that governs the distribution of information after the admission, two underlying
principles have been stressed:
 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

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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.

Finally, it is worth noting that both the UKLA and LSE as a recognised investment exchange share the
same “ongoing requirements” for listed firms. The preceding discussion highlights an important
factor related to the condition of listing foreign share in the US or UK. While reconciliation to US
GAAP is crucial for foreign firms in order to be admitted for listing in the US, foreign firms seeking
LSE listing can report using other GAAPs

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.

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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.

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References

1. http://www.investopedia.com/terms/c/cross-listing.asp
2. Regulations and Reporting. Requirements of. Cross-Listing in the US and UK. LACPA,
Lecturer, Bath University. Management School, UK 2006
3. The Effects of Cross-listings on the Development of Emerging Markets: Romana
Nyvltova, 2006
4. Cross-Listing and Corporate Governance: Bonding or Avoiding? By Amir N. Licht

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