American Depository Receipts (ADRs) are considered the best indicator of an Indian firm?s global reputation. To list in NASDAQ or NYSE gets you both funds and prestige. But ADRs have their problems and there are options other than ADRs when it comes to accessing global investors.
ADRs are of four types: first are the Level I Over the Counter (OTC) ADRs that trade on the ?Pink Sheets?, and are not listed on any US stock exchange. Next are the Level II and Level III ADRs, both of which are listed on either the NASDAQ or NYSE, the difference between the two is that only Level III can actually raise additional equity. The 144-A ADRs can also raise equity, but are only available as an option for targeting institutional investors via private placements. The London Stock Exchange (LSE) has also traditionally been an option for listings on either the Main Market, or increasingly, on the Alternative Investment Market (AIM), the now much coveted listing option for mid-cap and emerging businesses who are looking for opportunities to attract international investors but would likely not meet the stringent listing requirements that an NYSE or LSE would require.
Over the years, listed Level II and Level III ADRs on the NYSE or NASDAQ would traditionally have been ideal for many Indian corporates, along with the LSE, as a prestigious listing would go a long way in establishing the firm as a reputable and ethical concern. Since 2002-03 however, the concept of cost-benefit analysis, and difficulty of doing business have become primary concerns for many ADR programmes. Empirical studies show that over the last five years, many international firms have terminated their ADR programmes, delisted from American Stock Exchanges, and also, when possible, they have deregistered with the SEC, effectively terminating all reporting requirements as per the NYSE/NASDAQ or the SEC. The reason for this is a three- letter abbreviation that has struck terror in the hearts of untold CEOs, and no firm has been able to get past the pall it has created in the realm of Corporate Governance: SOX. SOX, formerly known as Sarbanes-Oxley, is the cornerstone of Corporate Governance, introduced in the wake of the Enron, Worldcom and Tyco debacles, making household names of Lay, Ebbers, and Kozlowski.
While debates on SOX are numerous, the relevance to Indian corporations lies in the simple fact that to list on the NASDAQ, or NYSE, and register the ADR programme with the SEC, the Level II and Level III ADRs will be subject to stringent reporting requirements, but above all else, each and every provision of SOX will be applicable to them, and they must remain compliant. SOX has been a headache for most US corporations, but for Indian firms, the change cannot be explained away by another three-letter word: sea, as in sea change. It is no secret that corporate governance hasn?t been India?s strong point thus far, and even though many of our firms are ethical and compliant with all our laws, compliance with the provisions of SOX, the SEC, and the NASDAQ/NYSE are likely too. Add to this the prohibitive costs of compliance which are rumoured to be in millions of dollars per year, and the cost-benefit analysis that takes into account whether to list an ADR programme in the US might not pass the road test for viability.
The overall financial costs and effort to comply may lead to Indian corporations which are looking for a way to cross-list, to question or debate the merits of listing on some other exchanges. Some studies have already shown that the LSE, which is extremely prestigious, has come under consideration for firms for whom SOX has had too much of an inhibitor effect. The AIM has already established itself as the one to beat when it comes to raising equity for mid-size and emerging firms globally. What is also interesting is that GDR programmes are being actively solicited by much younger stock exchanges eager to become world-players with secondary listings from Indian firms. Prominent among the cross-listing candidates today are the Singapore Stock Exchange (SGX) which has a GDR programme for institutional investors as well as a recently introduced SDR programme which could serve as a secondary listing on the main board; Luxembourg; and recently the Toronto Stock Exchange (TSE) has also thrown its hat into the mix (especially for commodities and mining).
These are all options that are significantly cheaper and far less stringent when it comes to reporting requirements and compliances. They also often grant exemptions to large corporations on a case by case basis whereby the home country listing requirements can fulfil the secondary listing requirements as well. This could be a huge attraction for a large Indian corporation as it proceeds towards effective compliances and governance along the European and US standards, but cannot make the transition overnight. Even, the SEC is trying to make it easier for the foreign private issuers to meet compliances (Rule 12-g-3-2-b), as well as to eventually deregister (12h-6 exemption), but it still can?t escape SOX and the associated costs and compliances.
Whether or not ADR programmes listed and registered in the US remain viable as options in the future remains to be seen, but what is a positive development is that the Indian corporations now have other options. Viable options at that, and this is what will help them target investors who are rapidly becoming acclimated and accustomed to the importance of having stocks from an Indian firm within their individual portfolios. DRs are a good option for Indian corporations, but the time has now come for them to look at options beyond the traditional and orthodox. They are finally in a position to hold auditions for where they want to list their securities, so they should make sure the eventual choice passes the screen test. Spoilt for choice, and dictating terms: a good place to be for Indian firms going global.
?The author is a sports and corporate attorney with J Sagar Associates. Views are personal