Advantages And Disadvantages Of The Dual Listing Structure Finance Essay

This paper is an attempt to analyze the most important issue (dual listing) for the demise of the multibillion dollar dream of Bharti Airtel and MTN, which was not just legal, regulatory and commercial but also political. An in depth study has been made to explain dual listing of companies and also why India cannot adopt the regime as of today. An attempt has been made to explain how absence of full convertibility of Indian rupees has acted as a barrier and prevented the said deal. Focus has also been laid on the legal framework, structure and amendments needed in various laws to allow dual listing among Indian and other corporate. This paper has been concluded by drawing a balance of advantages and disadvantages of the dual listing structure.

BHARTI AIRTEL- MTN DEAL: IN SEARCH OF DUAL SIM SLOTS BUT ENDED UP WITH TWO MISS CALLS. [] 

May, 2008, Bharti announced that it had started exploratory discussions with MTN, and an in-principle agreement was subsequently reached and a term sheet was executed. However, the terms and conditions set in this merger proposal by Bharati were not accepted by MTN which later proposed a new structure envisaging Bharati as a subsidiary of MTN and any hopes for a deal saw its fate. However, a new proposal was offered in May 2009 exactly a year later, and as per the exploring agreement, MTN and its shareholders would acquire around 36 per cent economic interest in Bharti Airtel, while, Bharti Airtel would acquire 49 per cent stake in the South African telecom Giant MTN, but the said deal also fell through after tough negotiations lasting well over four months.

The Telecom Giants- A brief introduction

MTN

Launched in 1994, MTN Group is a multinational telecommunications provider, with its core operations in 21 countries in Africa and the Middle East. [] MTN Group Limited (the “Group”) carries on the business of investing in the telecommunications industry through its subsidiary companies, joint ventures and associate companies. [] In most of the countries in which the Group has a presence it has maintained and improved its market share with an approximate market share of 40 to 50% in each of the countries. [] 

Bharti Airtel

Formerly known as Bharti Tele-Ventures LTD (BTVL) is the largest cellular service provider in India. Airtel comes to you from Bharti Airtel Limited, one of Asia’s leading integrated telecom services providers with operations in India, Sri Lanka and Bangladesh. Bharti Airtel offers GSM mobile services in all the 23-telecom circles of India and is the largest mobile service provider in the country, based on the number of customers. [] The Company provides telephone services in top 95 cities in India.

The Deal as was Envisaged

â-ª MTN would acquire approximately a 25% post-transaction economic interest in Bharti for an effective consideration of approximately USD 2.9 billion in cash and newly issued shares of MTN equal to approximately 25% of the currently issued share capital of MTN.

â-ª Bharti would acquire approximately 36% of the currently issued share capital of MTN from MTN shareholders for a consideration of ZAR 86.00 in cash and 0.5 newly issued Bharti shares in the form of Global Depository Receipts (GDR’s) for every MTN share acquired which, in combination with MTN shares issued in part settlement of MTN’s acquisition of approximately a 25% post-transaction economic interest in Bharti, would take Bharti’s stake to 49% of the enlarged capital of MTN. Each GDR would be equivalent to one share in Bharti and would be listed on the securities exchange operated by JSE Limited.

â-ª Bharti would have substantial participatory and governance rights in MTN enabling it to fully consolidate the accounts of MTN

â-ª MTN’s economic interest in Bharti would be equity. [] 

Most Important aspect or issue in the Deal: Dual Listing

Dual listing is a listing process by which a company would be allowed to be listed and traded on the stock exchanges of two countries. In other words, it is a process that allows a company to be listed on the stock exchanges of two different countries. The shares of the company, which enjoy voting rights, can be traded on both the bourses. Where two companies in two different countries enter into an equity alliance without an outright merger, dual listing implies continued listing of the companies in both the countries. It facilitates the shareholders in buying and selling of shares of both companies on the bourses in the two countries.

Dual listing may be a viable method that can be used when two cross border companies decide to do business together, with or without a merger / acquisition.

In an archetypal acquisition or merger, the merging companies become a single legal entity, with one business buying the other. On the other hand, “a dual-listed company or DLC is a corporate structure where two corporations function as a single operating business through a legal equalization agreement, but retain separate legal identities and stock exchange listings. Ideally all DLCs are cross-border, and have tax advantages for the corporations and their stockholders.” [] 

The South African government had demanded dual listing of MTN in order to protect the character of MTN as a South African entity. India could not have accepted the demand of the South African government for dual listing of shares in the absence of full convertibility of rupee. “As the Indian rupee is not fully convertible, it is not possible to go in for dual listing of shares which allows people to buy shares in the stock exchanges of one country and sell in the bourses of the other country.”

What is meant by full convertibility of rupees?

Indian currency is not fully convertible, i.e. absence of full capital account convertibility (CAC). CAC implies the abolition of limitations in the flow of capital from India to different countries. In other words, it means that irrespective of whether one is a resident or non-resident of India one’s assets and liabilities can be freely (i.e. without permission of any regulatory authority) denominated (or cashed) in any currency and easily interchanged between that currency and the Rupee. At present, the rupee is convertible on the current account, but capital account transactions are still subject to regulations. [] 

What are the concerns attached to CAC?

CAC is widely regarded as one of the hallmarks of a developed economy. In an attempt to attract foreign investment, many developing countries went in for CAC in the 1980s and failed to realize that free mobility of capital leaves countries open to both sudden and huge inflows as well as outflows, either of which can be potentially destabilising. More importantly, that unless there are institutions, particularly financial institutions, capable of dealing with such huge flows, countries may not be able to cope as was demonstrated by the East Asian crisis of the late nineties. Post the East Asian crisis, even the most fervent votaries of CAC in the World Bank and the IMF realised that the dangers of going in for CAC without adequate preparation could be catastrophic. Since then the collective wisdom has been to move slowly but cautiously towards CAC with priority being accorded to fiscal consolidation and financial sector reform above all else.

Why India couldn’t accept the DLC Structure?

To effectively implement the DLC structure, the Companies Act, 1956 would require significant changes to facilitate accounting disclosures, prospectus disclosures, financial formats, common board and common shareholder meetings as well as defining the implications of dissolution of one of the DLCs. Securities laws would also entail changes to the listing requirements and prospectus disclosures and exchange control regulations may need to be amended vis à vis trading of dual listed stock. A DLC cannot become a reality in India without incorporating the above mentioned amendments into our legal system.

The most fundamental amendment for implementing DLC would be to permit full CAC under the Foreign Exchange Management Act, 1999 (“FEMA”). As of today, FEMA does not permit CAC for residents and this proved to be the real deal breaker for Bharti Airtel – MTN.

In India, a three year road map was laid down by the Tarapore committee ending 1999 2000 for CAC. [] It is evident that India has been slow in achieving CAC but the regulators claim that it has been steady. Indian regulators including the Reserve Bank of India (“RBI”) do not want to commit any mistake by rushing into CAC. In the light of the Proposed Transaction, the Indian regulators have a common consensus that such a major financial decision with far reaching consequences will be taken only after due examination of the merits of the scheme and whether India has the capability to implement it.

When RBI Deputy Governor K C Chakrabarty was asked whether Bharti-MTN deal failure would quicken the process of complete convertibility, he replied, “Nothing will quicken the capital account convertibility”. [] According to rating agency CRISIL’s principal economist, ‘proper risk management needs to be in place for full capital account convertibility…suddenly having full convertibility does not make sense amid the global crisis’. [] 

Conclusion

In case dual listing is allowed, an Indian company’s shares can be sold on a foreign Stock Exchange and vice-versa, leaving apart the trading of private investors in foreign markets directly. Though some problems, for example, the shares may trade at a discount in one market and/or the shares may be less liquid in one market cannot be ruled out.

Dual listing may undoubtedly present challenges in terms of change in law and mindset, and requiring more disclosure and compliance. Nonetheless, the benefits of dual listing, like enhanced access to multiple capital markets, tax-efficient structures, a higher regulatory standard and better governance are hard to ignore.

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