Roman poet Juvenal, in âThe Satires of Juvenalâ. The English equivalent for this cynical Latin quote "Who will guard the guards?" most pertinently describes the ...
CROSS LISTING OF STOCK EXCHANGES: STRENGTHENING SELF-REGULATION?
RAGHAV SHARMA & TARUN JAIN
I.
INTRODUCTION “Quis custodiet ipsos custodes?” Roman poet Juvenal, in „The Satires of Juvenal‟
The English equivalent for this cynical Latin quote "Who will guard the guards?" most pertinently describes the dilemma which must have haunted the Securities and Exchange Board of India (SEBI) while deciding to ponder over the idea of mandatory cross listing of the demutualized Bombay Stock Exchange. The debate is not new. First posed by Plato, in „The Republic‟, wherein while answering to Socrates that “who will guard the guardians?”, he presumes that they will guard themselves against themselves1, this issue still haunts the reasonable: where ultimate power should reside? Stock exchanges have been the fulcrum of the concept of „Self Regulatory Organizations‟ (SROs) wherein they have been entrusted with the role and responsibility of not only regulating the affairs of their members but also their own affairs. The rationale is consideration of these SROs as entities which would work towards securing not their own interests but interests of the governance, corporate governance that is. This aspect of the issue has been analysed later on in this paper but what is pertinent here is that certain Stock Exchange as a SRO is required to act beyond the frontiers of monetary gain. Self-listing, the common prescription for demutualized stock exchanges, has generated disquietude amongst many regulators of the capital markets. The experiments, therefore, have been to evolve a remedy against evils arising therefrom. It is in this line of thought that SEBI has proposed a novel solution: cross-listing.
A Latin expression which stands for “Who will guard the guardians themselves?” The line is from the nd sixth satire of Juvenal, a Roman satirical poet of the 2 century. Deliberating on the failings of women, he sardonically asked who would watch the guards whom the husbands hired to keep their wives faithful. The question has been asked more often in the context of ensuring honesty of public officials. 1
1
Electronic copy available at: http://ssrn.com/abstract=1111978
Having undergone the process of „Demutualization‟, the Bombay Stock Exchange (BSE) will now metamorphose into a for-profit company limited by shares.2 SEBI approved the Demutualization Plan submitted by BSE3 which requires 51% equity capital from outside by May 19, 2007 under the Securities Contracts (Regulation) (Manner of Increasing and Maintaining Public Shareholding in Recognized Stock Exchanges) Regulations, 2006. 4 It has been the prevailing notion hitherto that demutualization would be the panacea for all the maladies inflicting the existing mutual cooperative structure of the BSE and the Regional Stock Exchanges5 and the Securities Contract (Regulation) Act, 1956 (SCRA) has been amended through the Securities Law (Amendment) Act, 2004, to make the corporatization and demutualization of stock exchanges mandatory with effect from October 12, 2004. However, the change-for-good story can turn out to be sour if the prominently highlighted „conflict of interests‟ arising out of the demutualization process are not adequately addressed through effective means. One such conflict has seemingly resulted from BSE‟s decision to list itself on BSE circuit (self listing), thus forcing the SEBI to re-examine the issue which is proving to be the Achilles‟ heel in the course of BSE‟s demutualization.6 The very concept of self listing, while seeking to promote exchange‟s interest, is seemingly incompatible with the regulatory functions of Stock Exchanges carried out in public interest. While the market regulator tries to untie the Gordian knot of the perceived conflict, the present article seeks to specifically look at the issue of „self-listing‟ with its conflicts inherent therein and explore the viability of cross-listing as a key solution towards the purported exorcism of these evils.
2
An Introduction to BSE, Available at (Last visited on March 31, 2007). 3
Notified Order F. No. SEBI/MRD/40967/2005 and Scheme of Demutualization, May 20, 2005.
4
Regulation 4 and 11 of the SCRREG, 2006 [Stock exchanges may divest through a public offer, strategic investment, private placement or preferential allotment and individual investment, direct or indirect, has been capped at five per cent (Regulation 8)]. 5
Justice Kania Committee Report on Corporatization and Demutualization of Stock Exchanges.
6
N.K. Kurup, Self Listing: SEBI Looking at the ‘Conflict of Interest’, Hindu Business Line, February 4, 2007.
2
Electronic copy available at: http://ssrn.com/abstract=1111978
II.
SELF LISTING: NUANCES EXPLORED
A discussion on cross-listing of stock exchanges presupposes certain dimensions relatable to the conflict of interests arising out of self-listing and just like any other proffered normal solution its analysis has to be inevitably coloured by the pros and cons of background problems. Therefore it is indispensable to explore the nuances of selflisting first in order to better conceptualize our understanding of cross-listing. (A)
Demutualization leading to listing
Historically, most exchanges were „not-for-profit‟ organizations owned by their members viz. brokers and dealers who restricted access to outsiders and operated them like exclusive clubs with regional or even national monopoly situations.7 Today, domestic and international competition has galvanized exchanges into a phase of change where their exclusivity barriers are being made irrelevant through gradual transformation into full fledged public companies through the process of „demutualization‟. Statutorily understood, Section 2(ab) of SCRA defines demutualization as the segregation of ownership and management from the trading rights of the members of a recognized stock exchange in accordance with a scheme approved by the SEBI. Demutualization stricto sensu entails a change in legal status of the exchange from a mutual association with one vote per member into a company limited by shares, thereby segregating the ownership and trading rights.8 The Darwinian theory of survival of the fittest presupposes a „Struggle for Existence‟ which seems to be the propelling force behind the proposed change; increasing competition compelling the stock exchanges towards restructuring their hitherto ossified governance structures. This notion is further corroborated with the stock exchanges themselves stressing upon competition as the
7
Andreas M. Fleckner, Stock Exchanges at Crossroads, 74 Fordham L. Rev. 2541 (2006) [detailing the origin and operation of stock exchanges as mutual associations]; See also Dr Bandi Ram Prasad, BSE — From Banyan Tree To The Biggest Bourse, Hindu Business Line, April 27, 2004 [for an account on the story of BSE from a closed-member exchange to a demutualized entity]. 8
Technical Committee of the International Organization of Securities Commissions (IOSCO), Issues Paper on Exchange Demutualization (June, 2001), Available at (Last visited on March 31, 2007) [hereinafter „IOSCO on Exchange Demutualization‟].
3
very basis for their reorganization viz. NASDAQ Stock Market9, Australian Stock Exchange10, London Stock Exchange11 and the New Zealand Stock Exchange12 besides independent observers such as the International Organization of Securities Commissions.13 Thus demutualization acts as the major actuating force for the listing of stock exchanges. It may be noted that listing, as a decision separate from demutualization, is made for reasons similar to those of any company considering a listing and may yet be optional. However the international experience is witness to a nimble and commercially sound exercise of the listing option by the demutualized exchanges. For example, in case of Singapore Stock Exchange (SGX) the following was articulated as the reason for listing; “A listing will confirm our commitment to run the exchange on a commercial basis, providing a high-caliber service to the securities and derivatives markets of Singapore, the region, and the world. A listing also facilitates the forging of alliances with other exchanges around the world, as well as with entities in related industries such as information technology.”14
9
Press Release, NASDAQ, NASDAQ to Become a Public Company (April 26, 2001), Available at (Last visited on March 31, 2007). 10
Richard Humphry, ASX Demutualization: Cause and Effect Address, Available at (Last visited on March 31, 2007). 11
Alan Cowell, Old Exchange in London Tries a New Twist on Ownership, N.Y. Times, July 31, 1999 [describing the London Stock Exchange]. 12
Press Release 2001, Demutualization - Foundation for Development, Available (Last visited on March 31, 2007).
at
13
IOSCO on Exchange Demutualization (2001), Supra note 7; See also IOSCO Discussion Paper on Stock Exchange Demutualization (2000) (Last visited on March 31, 2007) [stating that "certain responses to competition, such as alliances and mergers between exchanges, may be facilitated by demutualization"]. 14
Chairman‟s Statement, SGX Annual Report, 2000, Available (Last visited on March 31, 2007).
at
4
(B)
Why Self-listing?
The advantage or the reasons cited for proposing self-listing as the prominent option after the process of demutualization can be stated as thus; (i)
enhanced „visibility‟ and „liquidity‟ for the exchange;
(ii)
greater and easier access to market, both domestic and foreign, for garnering resources;
(iii)
stepped up investment in new technologies like trading platform eventually leading to substantial gains in terms of vivifying market quality, alluring more investors, cost saving in longer run, while also ensuring competitive edge;
(iv)
estimation of the stock exchange‟s correct market value15;
(v)
greater accountability, transparency and market discipline16;
(vi)
increased options to enter into restructuring arrangements via takeovers, mergers etc. route17;
(vii)
greater scrutiny of management actions by investors leading to efficiency in decision-making and improving exchange‟s value18;
(viii)
management of exchange on professional lines;
(ix)
freedom
to
determine
appropriate
business
strategies
and
trading
technology19 (x)
greater analyst coverage and increased institutional participation;
15
See G. Chesini, Changes in the Ownership structure of Stock Exchanges: From Demutualisation to Self-listing, Available at (Last visited on March 31, 2007). 16
IOSCO on Exchange Demutualization (2001), Supra note 7.
17
Chesini, note 14.
18
Issac Otchere, Stock Exchange Self Listing and Value Effects, Available at (Last visited on March 31, 2007). 19
See CEO‟s Message, SGX Annual Report 2001, Available at (Last visited on March 31, 2007); Exchange Demutualization in Emerging Markets, Report by the Emerging Markets Committee of the IOSCO, April 2005, Available at (Last visited on March 31, 2007) [hereinafter IOSCO Emerging Markets Committee Report].
5
Further, empirical studies have concluded that listed exchanges make more profits as compared to their non-listed counterparts with a diversification of their income base to derive significant revenues from non-traditional sources and have significantly outperformed the stock market indexes on an average thus confirming that listing unlocks growth potential and value for the publicly traded stock exchanges.20 Thus one may find various advantages being available to the stock exchange in case it opts for listing its shares on its index itself. However it is with this self-listing that various vices creep in, which may not, in the ultimate analysis, be beneficial for seeking the ends of enhanced corporate governance and investor protection. (C)
Conflict of Interest?
The consideration of stock exchanges as SROs further adds to this cause which prompts against self-listing for SRO as a concept envisages an inbuilt mechanism wherein the distortionary tendencies to reap undue advantages out of the system are mitigated. Towards the end of market regulation, where the regulator may not be able to monitor and examine the every-day functioning of the market players, it is highly desirable, and also for the attainment of corporate governance standards, that certain private entities be entrusted with a part of the regulatory mechanism. It is for this purpose that stock exchanges world-over are considered as SROs. For example, the US regulator of capital markets, Securities and Exchange Commission (SEC), delegates authority to NASDAQ and the other national stock exchanges to enforce certain industry standards and requirements related to securities trading and brokerage. The relevance of this concept of SRO lies in the fact that SRO is an entity which not only controls the activities of its members but is also responsible for ensuring that it conducts its own activities in the correct perspective i.e. in case of a stock exchange, not only the listed companies and securities but also its own activities as a stock exchange are to be correctly regulated. This, obviously, assumes that the SRO acts beyond self-interest and works towards development of an effective self-regulation 20
Otchere, Supra note 17; See also Alfredo Mendiola & Maureen O‟Hara, Taking Stock in Stock Markets: The Changing Governance of Exchanges, Available at (Last visited on March 31, 2007).
6
mechanism. The question of „conflict of interest‟ is therefore to be analysed from this perspective. At this juncture, the overarching legal rule of „nemo judex in re causa sua‟ or „no one should be a judge in his own cause‟ makes us appreciate the case in the correct perspective. It is an entrenched principle of fairness requiring one to desist from assuming a decision-making role in a situation where one‟s own interest is at stake. Demutualization poses the problem of self-regulation for a stock exchange. While an exchange in such a situation would be regulating all the securities listed on it, it would also be required to regulate its own securities which are listed in the exchange too like any other security. In such a case, how meaningful and effective the regulation would be, requires no detailed analysis. The natural presumption, and obviously true as well, would be of an inherent likelihood of bias and preferential treatment in so far as its own securities are concerned. Thus self-listing underscores the incompatibility of the for-profit objective and the public nature of the functions performed by stock exchanges. In the for-profit spirit where the exchange has to generate higher returns for its shareholders, this perception is writ large that the quality aspect of the public function would be compromised for it would have short-term orientation towards meeting profitability goals21 rather than focusing on qualitative governance. The process questions the integrity of exchange in complying with and enforcing the statutory duties as a co-regulator in view of the probability of „bending‟ of rules.22 The first stage where the perceived discrimination may work is at the time of listing itself wherein the admission procedure may be by-passed. The second stage involving regulatory functions such as infliction of fines, de-listing, prescription of norms for listed companies, etc. may also meet the same fate. The stock exchange may also not comply with the listing rules and allow its associates to list without initial compliance with
21
SEC, Speech by SEC Commissioner: Regulatory Role of Exchanges and International Implications of Demutualization, Available at (Last visited on March 31, 2007). 22
Chesini, Supra note 14.
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the rules23 or may let its associates get away easily after non-compliance and at the same time inflict harsher penalties on its competitors which may be listed on it. Further, the exchange‟s close association with market and expertise will offer more opportunities for acts of insider trading and other malpractices24. This is accentuated by the low risk of detection for the exchange itself functions as co-regulator and thus might obstruct the detection and prevention of such practices. The exchanges as co-regulators will have greater insight into their competitor‟s business which may be affected by their circuits and the possibility of misuse of the confidential information revealed to listing departments of exchanges is real and apparent.25 Thus a reformed version of this listing exercise is considered essential to rule out such possibilities of abuse. (D)
International experience
An analysis of some of the experiences with the other self-listed stock exchanges of the world would reflect the issues that have arisen while dealing with these concerns and perceived conflicts. The Australian Stock Exchange (ASX) became (on October 14, 1998) the first stock exchange in the world to list on its own market. In order to discount the possible conflicts of interest that might arise from self listing and for ensuring the integrity of trading in its securities, the ASX was required to enter into a Memorandum of Understanding with the Australian regulator, Australian Securities and Investment Commission (ASIC), whereby the latter monitors and supervises ASX‟s compliance as a listed entity with the listing rules26 and exercises all powers regarding the admission or removal of ASX from the official list, and the granting, stopping or suspending of the 23
SEC, Release No. 34-53382, February 27, 2006, Available at (Last visited on March 31, 2007). 24
SEC Issues Report of Investigation Regarding NASDAQ, as Overseen by Its Parent, NASD, Arising Out of Investigation of Suspicious Trading Activity and Net Capital Violations by MarketXT, Available at (Last visited on March 31, 2007); SEC Sanctions Chicago Stock Exchange and Requires Improvement of Surveillance and Enforcement Programs, Available at (Last visited on March 31, 2007). 25
Final Report of the Technical Committee of the International Organization of Securities Commissions Regulatory Issues arising from Exchange Evolution, Available at (Last visited on March 31, 2007). 26
MOU between ASIC and ASX (September 23, 1998), Para 2.1.1.
8
quotation of ASX‟s securities, in a manner exactly similar to that which ASX would do in respect of other listed entities.27 Thus its own conduct is, to a large extent, governed by the market regulator and not its own administration. This demonstrates how the market regulator may have to be conferred with powers to manage potential conflicts and strict supervision may eliminate the bias element while ensuring growth prospects to the self-listed exchange. On similar lines is the case of London Stock Exchange (LSE) which went for self-listing in 2000. The authority to regulate its own stocks was ceded to the Financial Services Authority (FSA) under Sections 72-78 of the Financial Services and Markets Act, 2000. The Singapore and the Hong Kong Stock Exchanges have, besides bestowing these functions to the market regulator, constituted special Conflict Committees28 to oversee the regulatory and risk management issues and to address the perceived or actual conflicts of interest arising from the exchanges‟ regulatory and commercial functions. These arrangements provide a very comprehensive framework for fresh demarcation of regulatory functions between regulators and self-listed exchanges internationally. There is another model for such regulation. Like the case of the Singapore and Hong Kong exchanges, the issues arising from listing conflicts can be entrusted to a third entity, not necessarily the market regulator, which is vested with the responsibility to closely examine their activities as a listed entity and rule out the chances of abuse in conflict of interest situations. To this effect, New York Stock Exchange (NYSE) and National Association of Securities Dealers Automated Quotations (NASDAQ), the two prominent exchanges of US, have not evolved similar arrangements with the market regulator SEC which, while desisted from issuing its own rules on self-listing has subjected both of them to strict surveillance.29 Both these stock exchanges have adopted rules that require each to provide the SEC with (1) periodic reports of surveillance of the listing and trading of
27
Id. at Para 2.2.8
28
Deed of Understanding between SGX and MAS, Para 5; Memorandum of Understanding for the Listing of HKEx on SEHK between SFC, HKEx and the SEHK, August 22, 2001, Appendix 2. 29
Supra note 26, at pp. 19-20.
9
its own or any affiliate's securities on its market, and (2) detailed notice of any noncompliance by such security with any listing standard along with plan of proposed action. Further, it is required that once a year, an independent accounting firm shall review the listing standards for the affiliates to ensure that the issuer is in compliance with the listing requirements and a copy of the report shall be forwarded promptly to SEC to ensure a degree of independent oversight on the regulation of these securities and mitigating the conflict of interests.30 The arrangements, thus, provide good precedents for devising rules for eliminating the concern of lenient treatment by the self-listed exchange of its own and its affiliates‟ securities. (III)
CROSS-LISTING: A SOLUTION?
Cross-listing as a concept envisages listing of securities on two or more exchanges. In the case of stock exchanges, it implies existence of two or more stock exchanges and listing of their securities of each other. It has been mulled 31 that making mandatory the cross-listing of stock exchanges would effectively counter the „conflict of interest‟ arising out of self-listing. Thus in the case of BSE, it would imply listing its shares on NSE or any other stock exchange. Let us explore this idea. (A)
Dimensions of cross-listing
Cross listing has certain inherent advantages in tackling the conflict of interest in many ways. For illustration, in a situation where the shares of exchange A are listed on exchange B, firstly, the listing of A‟s shares on B will counter A‟s tendency to manipulate the prices of its share on its own circuits as the trading on B will help in comparative valuation of prices. B would also ensure full and fair disclosures from A similar to another other company listed on B, which might not have been possible when A‟s share were listed on itself. Secondly, it would be beneficial to A as well as it would boost investor confidence in A‟s securities, being be supervised by an independent stock exchange. Thirdly, it will act as a double check on A‟s behaviour as a „for – profit‟ company and would also increase the efficiency of any supervisory arrangement put in 30
NASDAQ‟s Rule 4370; and Rule 497 of NYSE Rules.
31
Supra note 5.
10
place to govern its self listing. B‟s surveillance will also act as a deterrent to A using its position as self listed exchange to influence the market in its favour. Cross listing has been never been analysed for stock exchanges. Instead it has traditionally been associated with stocks and securities. In this respect, the conventional arguments for allowing cross-listing have been as follows; (a) Financial Gains: Crosslistings were originally thought of as a means for lowering firms' cost of capital i.e. for enabling firms to get more money from investors when they offer their stock to the public; (b) Liquidity: Cross-listing may contribute to share value by increasing stock liquidity; (c) Increased Shareholder Base: By cross-listing its stocks, a firm could expand its potential investor base more easily than if it traded on a single market. As crosslisting brings foreign securities closer to potential investors, it increases investor awareness of the securities; (d) Visibility: The putative benefits of increased visibility in the host country go well beyond the expected increase in shareholder base; and (e) Marketing Motivations: Using cross-listings for marketing reasons relates to the visibility rationale. According to this reasoning, cross listing can boost corporate marketing efforts by broadening product identification among investors and consumers in the host country. The listing, it is claimed, creates greater market demand for the firm's products as well as its securities. However, it may be seen that none of them are purely applicable in case of cross-listing of stock exchanges. The proposal of cross listing of stock exchanges as a conflict prevention mechanism in post demutualization phase has different connotations altogether. The aim is not to provide a financial benefit or to market the stock, as in case of stocks, but instead it is to expand the investor base so as to reduce the chances of manipulation. Another aspect to examine the proposition is the issue of competition. We have already witnessed the shift from traditionally closely controlled stock exchanges to present day demutualized exchanges having a wide subscription base. These changes have rendered the stock markets vulnerable to fraudulent information as commonly witnessed in the financial and securities markets. The unique characteristics of securities markets, i.e. sensitivity of information, abundance of asymmetric information and significant agency problems etc. have to be vouched safe in case of these exchanges as well and
11
thus transparency is called for in the operations of these exchanges. This element of transparency assumes vital dimension when competition is sought to be maintained by the market players, which being the stock exchanges, would definitely compete to govern the trade for, “in a competitive environment only the most efficient exchanges that come up with the most innovative and competitive financial instruments should survive.”32 On these lines it is argued that “in the absence of regulatory protection, a simple form of anti-competitive behaviour by exchanges may be made possible by a combination of alliances or by internal disciplinary measure” 33, leading to the elimination of rival exchanges. However the authors fail to come out with an efficient normative model holding that proper regulatory mechanism is the only solution to this proposition ensuring competition amongst the stock exchanges. Since the moot point of discussion is the cross listing of stock exchanges, it may not necessarily be confined to listing on a competing national stock exchange alone. They may as well be cross listed on a foreign stock exchange. What considerations apply then, are also to be considered. In a seminal analysis, John Coffee34 had extended the argument better known as „the bonding hypothesis‟, wherein he attempts to theorize why firms opt for cross listing in foreign markets. His hypothesis states that firms list on foreign stock exchanges in order to bond their insiders (i.e. stock-holders) to better standards and practices as being followed in the exchanges so chosen. Widely commented upon, this theory also fails to apply unequivocally to the case of stock exchanges for the reason that (i) it is limited in its scope to cross-border listings; (ii) the purpose behind providing cross-listing for stock exchanges is a concomitant of demutualization and thus considerations different from 32
S. Lutz 'The Revival of the Nation-States? Stock Exchange Regulation in an Era of Internationalized Financial Markets', MPIFG Discussion Papers 96/9, 1996, Available at (Last visited on March 31, 2007). 33
Mahmood Bagheri & Chizu Nakajima, Competition and Integration among Stock Exchanges: The Dilemma of Conflicting Regulatory Objectives and Strategies, 24 Oxford Journal of Legal Studies 69 (2004). 34
John C. Coffee, The Future as History: The Prospects for Global Convergence in Corporate Governance and its Implications, 93 Nw. U. L. Rev. 641 (1999); See also John C. Coffee, Racing towards the top?: The impact of Cross-listings and Stock Market Competition on International Corporate Governance, 102 Columbia Law Review 1757 (2002).
12
purely business decisions, as in case of stock, apply in the case of stock exchanges, and (iii) where the desire to cross-list, as Coffee argues for stocks, is to improve corporate governance standards, this may exactly be the opposite in the case of stock exchanges where the aim would be to minimize regulatory hassles arising from the listing exchange. Making an analysis upon the proposition as to whether cross-listing on a foreign stock market can serve as a bonding mechanism for corporate insiders to commit credibly to a better governance regime,35 a scholar comes to a conclusion that there is no direct nexus between cross-listing and improvement of corporate governance standards. Stressing upon the „road to the bottom‟ arguments, it is opined that “cross-listing is no quick fix.”36 Moreover, financial economists have shown that the price formation process for firms cross-listed on foreign stock exchanges is dominated by activity on the home country exchange, even when the foreign exchange is the superior exchange in terms of depth and liquidity.37 Thus even if correctness of prices of the self-listed stocks is at issue, cross-border listing would not be of much avail, as empirical evidence shows. (B)
SEBI’s advocacy for cross-listing
The BSE‟s demutualization plan has kick-started and it has already entered into strategic alliances with the German Stock Exchange group, Deutsche Börse AG 38 and the Singapore Exchange Ltd. (SGX)39 both acquiring 5% stake each in the BSE for 189 crores. The permission to self-list has been sought with reference to BSE‟s Initial Public Offer seeking to increase the public shareholding to 51%. The exchange has been buoyed up in its proposal by the international experience of exchanges‟ primarily exercising self listing option and the views of SEBI Committee, headed by Justice 35
Amir N. Licht, Cross-Listing and Corporate Governance: Bonding or Avoiding?, 4 Chicago Journal of International Law 141 (2003) 36
Ibid.
37
Kenneth A. Froot & Emil Dabora, How Are Stock Prices Affected by the Location of Trade?, 53 J. FIN. ECON. 189 (1999) 38
Deutsche Börse picks up 5% stake in BSE for 189 crores, Hindu Business Line, February 15, 2007.
39
Singapore Exchange Buys 5% in BSE, Hindu Business Line, March 8, 2006.
13
Kania, in favour of permitting self listing of Regional Stock Exchanges on international models. However, SEBI has tried to approach the issue with utmost caution in case of BSE which is virtually the national economy‟s backbone and has thus appointed a special Group to examine the proposal. The issue of mandatory cross-listing for BSE has been advocated at a joint meeting of SEBI's Primary and Secondary Market Advisory Committees on February 2, 2007 where the said Group was constituted.40 Thus, the market regulator is trying to tread on the safest route by not blindly imitating the international experience and limiting the terms of reference of the Group to working out modalities for self listing; but has rather expanded them to a fresh alternative of cross listing. However, inside the market regulator itself the opinion seems to be divided as within the SEBI Advisory Committee itself a view is held that, from the corporate governance point of view, it would be advisable to list the exchange in as many exchanges as possible, but it may not be desirable to make it mandatory i.e. the exchange as an entity should have the freedom to list its shares on any exchange.41 Secondly, it must be kept in mind that a mandatory cross listing will increase the compliance cost for the exchanges burdening them with greater disclosure and other allied requirements which will affect the higher liquidity attainment goals. Cross listing, from BSE‟s perspective may also engender a fear of BSE being more stringently supervised by its competitor NSE being the fact that the listing is not on an independent body but on a competitor stock exchange. (C)
Making cross listing mandatory: How far viable?
Before dwelling into the issue of making cross-listing mandatory and analyzing the implications, it should be understood that cross listing is simply a business decision for any Stock Exchange functioning as a public listed company after demutualization. Multiple listings are driven by (a) the quest of a public listed companies for higher liquidity; (b) access to a larger pool of potential investors to lower cost of capital and a
40
Supra note 5.
41
Ibid
14
higher price, in the stock42; (c) a desire to imitate business rivals listed on better markets43 and to obtain more analyst coverage, thereby potentially increasing interest and market valuation of their securities44; etc. This orientation reduces cross listing to a simple business decision for the exchange to pursue its goals as a for-profit association. However, all these variables may not be applicable in case of a stock exchange. Cross-listing may be argued as being beneficial to the interests of the stake-holders as the possibility of abuse of the special position arising out of self-listing of stocks is minimized. However what is consequential is that sufficient commercial freedom is taken away from the stock exchange in operating efficiently. Rival exchanges and severity of competition amongst them may result into conflicts, having implications manifold. Thus the risk-benefit analysis goes against adopting cross-listing as a mandatory option for exchanges. It may also be argued that if a proper supervisory arrangement is put in place for self listing through the market regulator‟s supervision, the need for cross listing may as well become superfluous. Similar arrangements have worked well in other countries and there is no reason to take a pessimistic view and experiment further by curtailing the business decision making of BSE‟s management. (IV)
CONCLUSION
The above discussion significantly foregrounds the issues and prospects facing crosslisting. Beginning with stocks and securities, cross-listing has come to be examined as an option for stock exchanges. Since the purpose and the applicability are entirely different, we have already seen that the conditionalities facing the cross-listing of stocks may not be entirely applicable in case of cross-listing of exchanges. Thus acute 42
Michael R. King and Dan Segal, The Long-Term Effects of Cross-Listing, Investor Recognition, and Ownership Structure on Valuation, Available at (Last visited on March 31, 2007); Professor Stuart R. Cohn, Confidence Building In Sub-Saharan Stock Markets, Available at (Last visited on March 31, 2007). 43
Marco Pagano, What Makes Stock Exchanges Succeed? Evidence from Cross-Listing Decisions, Available at (Last visited on March 31, 2007). 44
Steven S. Crawford, What’s Driving Cross-listing Effects? An Analysis of Analyst Coverage Surrounding International Cross Listings, Available at (Last visited on March 31, 2007).
15
caution is required to be taken and no further step should be taken without further theorization. Self-listing is an indispensable result of the demutualization process and cannot be avoided. Self listing has been recommended for the regional stock exchanges postdemutualization based on international experience and successful models of Australia, Singapore etc. The excellent results from the working of the Australian Stock Exchange, its efficient working, increasing expansion, diversification and better customer focus after the arrangement implementation etc. serve as a reminder against opting out of self-listing scheme for demutualized stock exchanges. There is no reason as to why BSE should be an exception to the same. SEBI would also serve its part well in formulating an arrangement for clear demarcation of roles and responsibilities between SEBI as a supervisory body and BSE as both a supervised entity and a co-regulator. Such a delineated framework is pivotal for ensuring clarity and accountability to the investors. It is therefore suggested that cross listing should be left as a freedom for the exchange to decide and the market regulator should work out appropriate arrangements in area of self listing itself in accordance with successful international practices so as to strike a balance between the entrenched principle of fairness viz. „nemo judex in re causa sua‟ and the principle of „Freedom of Enterprise‟ while the exchange operates as a for-profit company. Thus in any case cross listing on a competitor stock exchange must not be a substitute for self listing. It should only be viewed as an addition to self listing.
16
