Cross Listing

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Acquiring a Secondary Listing, or Cross-Listing
by Meziane Lasfer

Executive Summary








Over the last three decades an increasing number of companies have sourced their equity capital in foreign countries by listing their stock abroad.
This strategy of parallel listing on both domestic and foreign stock exchanges, referred to as “crosslisting,” is used by companies from both developed and emerging markets. In 2008, for example, 121 companies from BRIC countries (Brazil (7), Russia (24), India (24), and China (66)) were listed on the London Stock Exchange Alternative Investment Market (LSE-AIM), an equivalent to NASDAQ in the United States.

Although the major stock markets for cross-listing are in the United States (NYSE and NASDAQ) and London (LSE and LSE-AIM), with a 43% market share in 2007, firms are also likely to cross-list in other markets of the world, such as the Singapore, Euronext, Hong Kong, and Mexico stock exchanges. According to the Bank of New York Mellon, during the first half of 2008 more than $2.4 trillion of depository receipts (DRs) traded on US and non-US markets and exchanges, up 85% from the previous year.

Introduction
Cross-listing is controversial and raises a number of academic and practitioner questions, particularly: Why and how does a firm cross-list, and does cross-listing create additional value for existing stockholders? The purpose of this article is to discuss the institutional framework of cross-listing, the classification of depository receipts (DRs), the types of DR available in the United States, the reasons why companies list abroad (by contrasting the advantages and disadvantages of raising equity capital in foreign markets), and the crosslisting process.

Institutional Background
Companies cross-list by issuing depository receipts. These are certificates that are first issued by the company to a bank in a foreign country, which in turn issues the certificates to investors in that country. Indirectly, DRs represent ownership of home market shares in the overseas corporation. The underlying shares remain in custody in the home country, and DRs effectively convey ownership of those shares. DRs are quoted and normally pay dividends in the foreign country’s currency (for example, US dollars or euros). DRs can be established either for existing shares that are already trading, or as part of a global offering of new shares. Each DR normally represents some multiple of the underlying share. This multiple allows the DR to possess a price per share that is appropriate for the foreign market, and the arbitrage normally keeps foreign and local prices of any given share the same after adjustment for transfer costs. DRs can be exchanged for the underlying foreign shares, and vice versa.

Classifications of Depository Receipts
There are a number of classifications of depository receipts, two of which are: •



Trading location: Global depositary receipts (GDRs) are certificates traded outside the United States; American depositary receipts (ADRs) are certificates traded in the United States and denominated in US dollars.

Sponsorship: A sponsored ADR is created at the request of a foreign firm that wants its shares to be traded in the United States. In this case, the firm applies to the Securities and Exchange Commission (SEC) and to a US bank for registration and issuance. In contrast, an unsponsored ADR occurs when a US security firm initiates the creation of an ADR. Such an ADR would be unsponsored, but the SEC still requires all new ADRs to be approved by the firm itself.

Acquiring a Secondary Listing, or Cross-Listing

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Types of Listing
In the United States there are four types of depositary receipt: Levels 1 and 2 apply to cases where the DR is created using existing equity; Levels 3 and 4 apply to cases where new equity is issued, such as an initial public offering (IPO).

Level 1 is the least costly, as the DRs are...
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