Cross-border listing is becoming more attractive for firms seeking new markets, with an aim to reap more profits and as a diversification strategy. But the problem is that different markets over the world have their own peculiar listing rules. Which regulatory approach should govern listing rules in the global market – competition or harmonisation? This report suggests that harmonisation would result in more efficient financial markets.
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The first part of this report provides a brief description of the issue of cross-border listing, regulatory bodies and their roles. Part 2 presents the question ‘competition or regulation?’ and addresses the importance of regulatory approach towards disclosure rules from an issuer, investor and regulator perspective. It also explores the theories of regulatory competition and harmonisation. Part 3 focuses on the limitations of regulatory competition and calls for harmonisation. Issues like the cost of information, lack of mobility, market power, managerial opportunism and the ‘race to the bottom’ effect are advanced as solid limitations in the current system. Only harmonisation is a panacea for these problems associated with regulatory competition.
Finally, Part 4 explains why harmonisation is the most efficient approach to the regulation of disclosure rules for cross-border listing. The world’s securities markets have changed considerably due to internationalisation. This dramatic change has occurred due to economic forces, technology innovations and the deregulation of major capital markets. Liberalisation of capital flows has lowered barriers to international trade. Capital raising and investment has expanded due to the increasing number of companies becoming international, be it for trade in goods or services.
In the last two decades, sourcing capital through public markets via issuance of securities, particularly equity, gained momentum. Today investors look beyond the limits of their domestic markets. The volume of foreign equity transactions has increased dramatically and international diversification is one of the major reasons for the increased demand for foreign equity. Investors have been given the boosting freedom and convenience of accessing and investing in international capital markets whilst companies in need of capital have been given the opportunity of raising or borrowing capital in international markets of their choice. This movement of capital across borders has allowed developing countries to develop their own capital markets as well as to venture into more developed markets. Therefore, the large number of participants and the massive amount involved in international activities make it vital to determine which regulatory regime can govern these activities more efficiently.
Almost all countries worldwide are engaged in international trade, there needs to be regulations, or else there would be chaos. This same situation exists for financial transactions. Regulatory barriers have long been an obstacle to international securities trading. However, the desire of many nations to ensure the competitiveness of their domestic markets with the rest of the world has driven them to change their domestic regulations in order to facilitate capital mobility. Hence, to keep their economies competitive and to increase the efficiency of cross border activities, countries recognise the need for their securities market regulators to arrive at a consensus with regard to a universally acceptable uniform set of disclosures and rules.
However, finding the best means of balancing these objectives can be defined as both the challenge and goal of international regulation. Thus, internationalisation of capital markets brings about various challenges to policy makers and regulators. 1.2 Why companies go for Cross border listing? Cross-border listing has gained in importance over the last few decades since many companies have chosen to become more international in their orientation. It arises as a result of more and more companies going international, technological progress, liberalisation of capital flows, which in turn create much competition among global stock markets.
Cross-border listing basically occurs when a firm lists its shares for trading on more than one stock market other than the company’s home capital market and still being subject to local law. It must be noted that the firm will usually sell existing shares on the foreign stock market in order to be listed on the foreign market.
Although there are several benefits for firms to cross list their securities, companies resorting to this scheme can face a number of problems. The main barrier to cross listing may be the requirement of full disclosure. Other drawbacks associated to this policy are high transaction costs, the risk of a foreign takeover and problems associated with differences in disclosure requirements between the home stock market and the foreign ones, registration costs with regulatory authorities and listing fees (Karolyi, 1998).
The role of Regulators
The main role of regulators is to make the best use of information and resources available to better deal with uncertainty and help to have a proper functioning of their financial system. Their key objective is to assist investors in their investment decision-making by providing them with all the available information necessary to choose the best decision.
In order to reduce problems due to disparities in disclosure requirements between local and foreign markets and to help these regulators to perform their job in a proper way that will satisfy the needs of each and every investor and company that wish to be listed on a particular stock exchange, the International Organisation of Securities Commissions (IOSCO) have put forward a core set of disclosure requirements (International Disclosure of Standards) which must be contained in the documents presented by companies offering their securities to the public.
1.4 The International Organisation of Securities Commissions (IOSCO) IOSCO is a worldwide forum for securities regulators that promotes co-operation and high standards of regulation so as to uphold fair, efficient, and sound markets. It is the worldwide association of national securities regulatory commissions, such as the Securities and Exchange Commission in the United States, the Financial Services Authority in the United Kingdom, and about 100 other similar bodies. The Financial Services Commission, which is the regulating body for the stock market of Mauritius, is also a member of that international organisation.
In fact, the main functions of the IOSCO in assisting its members are: 1. To promote high and efficient standards of regulation to maintain a stable world financial environment. 2. To provide a forum for its members to share and discuss about their experiences so as to enhance the performance of their domestic markets. 3. To gather ideas to establish new standards for the proper functioning of international securities transactions. 4. To provide mutual assistance to encourage adherence to the standards and to enforce the laws against any offences.
The main aim of the International Disclosure of Standards is to facilitate cross border listings by specifying clearly the minimum amount of information that companies, issuing securities abroad, need to disclose. Thus, costs involved in analysing listing rules of foreign markets are reduced. Furthermore, these standards provide a framework for Stock Exchanges worldwide from which they can enhance their listing rules. Another advantage resulting from these standards is that since these standards will act as a benchmark from which harmonisation of listing rules will occur and this will prevent regulators from lowering the severity of the rules of their markets.