There has been recent media speculation around possible mutual recognition of stock exchange listing rules between the US and Australia. The Australian Financial Review has even suggested Australian Treasurer Peter Costello had received the approval of US authorities for this initiative.
One article stated: ‘The US SEC has proposed the immediate establishment of a committee to investigate ways in which Australian listings, now subject to the expensive double burden of Australian and US regulations, could go forward on the basis of Australian laws.’
Ending Mutual recognition of each nation’s listing rules would make it easier and less expensive for Australian companies to have a listing in the US. Under existing laws, Australian firms with an American depositary receipt (ADR) program must comply with both jurisdictions’ laws and regulations, producing two sets of accounts and paying two sets of listing fees.
At first glance, it appears two forces are at play. From the US perspective, the government wants to ensure the country remains the powerhouse of world financial markets and foreign companies continue to list ADRs on US stock exchanges. On the Australian side, Costello wants to promote US investment in Australian companies and ensure close ties between the two countries’ capital markets continue. But are plans to effect mutual recognition of both countries’ listing rules too little, too late?
The downside
Mutual recognition was first put on the table at the September 2005 Merrill Lynch Australian Investment Conference in New York. ‘If Australian regulation was recognized as trustworthy in the US and US regulation was recognized as trustworthy in Australia, companies could trade in each of the countries without duplicating the corporate requirements on both sides of the Pacific,’ Costello told the conference.
Even so, the Commonwealth Bank of Australia, National Australia Bank and manufacturer Amcor all recently announced they will no longer maintain an ADR program. The stimulus for this is new US rules that make it easier for foreign companies to de-list. The SEC previously made it difficult to de-list, to prevent foreign companies coming to the US market to raise funds, then scampering without first paying back their investors.
These new rules are only one catalyst for the firms’ decisions to terminate their ADR programs, however. Another major driver is a desire by Australian companies to reduce the cost and effort associated with maintaining a secondary listing. KPMG partner Paul Zammit says these companies have ‘weighed up the costs and the benefits – and there are lots of costs but few benefits. It’s not uncommon for [Australian companies with an ADR program] to double their accounting and legal teams, and this is before the cost of external lawyers and accountants is considered.’
He says companies that maintain an ADR program to access capital in the US need to look at whether they are achieving a cheaper cost of capital by sourcing funds there rather than in Australia or another jurisdiction. This is particularly so given strict Sarbanes-Oxley (SOX) requirements that are more prescriptive – and therefore more expensive from a compliance perspective – than Australian regulations.
Given the global nature of capital markets, companies are questioning whether a US listing is even necessary. ‘For Australian companies, the days of having a foreign listing to raise capital are largely over as most restrictions on investing directly in foreign stocks have been lifted and transaction costs have come down, making it cheaper for overseas-based fund managers to invest in a stock via its home exchange,’ comments Ian Matheson, CEO of the Australasian Investor Relations Association. Interestingly, Matheson adds that ‘the SOX issue gets overblown sometimes. Greater compliance costs are an issue, but they are not the only one.’
This is evidenced by National Australia Bank’s commitment to maintain its SOX compliance even after the termination of its US ADR program. Maintaining a US listing does offer benefits for some companies. ‘If an Australian company has the majority of its operations in the US [maintaining a US listing] might make sense,’ notes Ronn Bechler, group manager of investor relations at financial services house AXA Asia Pacific Holdings.
He adds that going to the US market could also be judicious ‘for technology or biotech companies because US investors more readily understand these sectors.’ It also makes sense for companies that have a large number of US investors – such as Telecom New Zealand (TCNZ) – to maintain a US listing. ‘TCNZ considers the US listing important for maintaining sufficient diversity within its shareholder base, given the lack of depth in the New Zealand market,’ explains Mark Flesher, IR manager at TCNZ. ‘Around 20 percent of our stock is held in ADR form.’
The flip side
But TCNZ is a special case. For most Australasian companies, gaining attention from US retail investors, not to mention analyst coverage, is a pipe dream. Mutual recognition of listing rules between Australia and the US would allow US investors to more easily access the Australian market. But would it prompt US fund managers to come into the Australian market in any big way? Probably not.
US investors are reluctant to take positions in all but the biggest Australian companies because many listed entities are tiny compared with their US equivalents. This makes it difficult for large US pension funds, in particular, to take meaningful stakes in most Australasian companies.
It also seems unlikely that Australian fund managers would significantly increase their exposure to US stocks. The lion’s share of investment funds in Australia are long-only Australian equities vehicles with no mandate to invest offshore (although this is slowly changing).
In fact, whether plans for mutual recognition of listing rules is anything more than rhetoric remains to be seen. A spokesperson for MP Chris Pearce, parliamentary secretary to the Australian Treasurer, tells IR magazine that, contrary to the media report referred to above, ‘the Treasury does not know what committee the article is referring to, and we are not aware of a proposal by the SEC for such a committee.’ A spokesperson for the SEC was also unaware of any US efforts to establish a committee for exploring mutual recognition of listing rules.
There are, however, a number of initiatives currently underway to make it easier for Australian and US investors to trade in each other’s markets, such as increasing acceptance by US investors of the IFRS rules under which Australian listed companies are required to report, and the harmonization of auditing standards between the two countries.
A review of Australia’s corporate governance regulations also included consideration of SOX, and there are already many similarities between the two countries’ regulations. For example, both countries require CEOs and CFOs to sign off company accounts.
With this in mind, perhaps mutual recognition of listings rules is an unnecessary step. On the other hand, any proposal to make it easier for companies in both markets to access capital can only be a good thing.
