The proposed $23-billion merger between Bharti and MTN has now raised the issue of dual listing. The first point to recognise is that the South African government?s proposal for dual listing of the two companies is, at the least, partially a bargaining counter for MTN, which has a strong national identity in that country. The second point is that policy-wise, dual listing raises a lot of questions. It calls for a policy change on full capital account convertibility (CAC). CAC is a good thing. But this is not the reason for it. Dual listing also requires changes in the Foreign Exchange Management Act and domestic trading in shares denominated in foreign currency cannot take place without the permission of RBI. An amendment to the current regulations will also require an agreement among various regulatory agencies, like RBI, Sebi and finance and corporate affairs ministries. Currently, India allows only foreign firms to issue Indian Depository Receipts, while Indian companies can issue ADRs and GDRs. But these are consequential changes. The main issue is the optimality of dual listing. This involves merger between two companies in which they agree to combine their operations and cash flows, but retain separate shareholder registries and identities. Dual listing structures have a long history with Royal Dutch Petroleum and Shell way back in 1903 and Unilever in 1930. From 1980 to 2000, there were seven dual listing companies, but six of them were disbanded because of the lack of investor interest, as they failed to understand the complex structure. Investor interest in dual listings has also diminished over the years, as it has become easier and cheaper for them to trade in foreign markets.
Global experience suggests that companies at times choose the dual listing structure to avoid capital gains tax that results from a conventional merger. Many a time, complicated cross-border mergers require various forms of official approvals, and dual listing can preserve the existence of each company. Dual listed companies also require special corporate governance requirements. Often, management of the two companies believes that the merged company will have better access to capital if it maintains listings in each market, as local investors are already familiar with their respective companies. However, the fact that most cross-border mergers do not take the dual listing route suggests that the existence of two separate companies may result in less equity market liquidity than would have been if there were a single larger company. The existing contractual arrangements of the companies may cause various kinds of rights, like options in debt contracts and rights of other companies involved in joint ventures. The dual listing schedule also means that the two companies follow the accounting standards of two different countries. So, in terms of corporate optimality, dual listing poses some serious questions. Any company must start with considerable sceptcism when assessing this option.