Reverse Cross-Listings: Foreign Companies Accessing the Indian Capital Markets

Corporate and
capital markets laws in India have allowed foreign companies to list in India
in the form of Indian depository receipts (IDRs). While this facility was allowed
with much fanfare, it has been accessed so far by only one company, i.e.
Standard Chartered Bank. However, more companies might likely follow in the
A new paper titled
Cross-Listings — The Coming Race to List in Emerging Markets and an Enhanced
Understanding of Classical Bonding
” authored by Professors Nicholas Howson
and Vikramaditya Khanna analyzes the reasons for why companies domiciled in the
developed world may access the capital markets in emerging economies like India
and China. Its abstract is as follows:
This paper examines the implications for the
traditional “legal bonding” hypothesis arising from future
“reverse” cross-listings, meaning the cross-listing by issuers from
jurisdictions with stronger investor protections into capital markets and on
exchanges where investor protections are deemed less robust. We use as examples
the first “Indian Depositary Receipt” or IDR IPO in May 2010, and
IPOs we believe will complete on a future Shanghai Stock Exchange
“international board”. This analysis serves to dilute one of the
long-standing negative implications of the traditional legal bonding account —
that reverse cross-listings by issuers from jurisdictions with stronger
investor protections into weaker investor protection markets exhibit abnormal
negative price effects, allegedly because of market expectations that the
foreign listing will facilitate conduct impermissible in the home market. More
importantly, this analysis allows for a more nuanced understanding of the
bonding hypothesis along either vector, and why firms cross-list into foreign
jurisdictions, regardless of the receiving legal and regulatory environment.
Those other factors include: the simple quest for capital, the possibility of
higher initial valuations in capital controls-segmented markets and eventually
higher secondary market values with the easing of such controls and thus
enhanced global liquidity, the reduced cost ensured by listing in a less
burdensome regulatory and enforcement environment, and a cluster of reasons
which we describe as “consumer-commercial markets bonding”, distinct
from the legal and regulatory system bonding that has featured so long in the
traditional legal bonding hypothesis. This “consumer-commercial markets
bonding” includes the advertising of goods, services and corporate
identity into a given consumer market, identification of the issuer as a global
firm but with local identity and ownership, demonstrated commitment to key
markets and the customers and regulators connected with those markets, a
tipping of the hat to the sovereign legal-regulatory establishment of the
receiving jurisdiction, and appeals to the receiving market’s regulators for the
provision of franchise or licensing benefits.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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