To 'List' or not to 'List'   

25 Jan, 2003

It may sound like Hamlet's dilemma or worse, Hobson's choice, but in many parts of the world, public companies are increasingly exhibiting some aversion towards new listing and public trading or maintaining their existing stocks. The disclosure norms and the regulatory requirements that they involve are estimated to cost as much as US$ 30 million per company in the mature markets. Naturally, they wonder whether this is worth the aggravation; especially as raising and nurturing private equity is not difficult at all, these days. It is certainly less onerous and the companies are able to deal with fewer 'informed' investors, whose levels of expectations / public scrutiny are on a lower threshold.

Much is made about the virtues of the 'so called' transparency and disclosure of financial and business activity information that 'listed' companies adhere to. Now, common in the U.S. and elsewhere are also quarterly outlook announcements. Public companies have obligations, often imposed by the stock exchanges, to prepare and file a considerable amount of information over and above what the ministries and the authorities expect them to publish by way of audited accounts and filings with the company registries.

While such transparency is useful to the financial analysts and the portfolio managers, shareholders (both the retail and the high net worth investors) hardly can have the time, inclination or even the competence to interpret complex and voluminous financial numbers.

Often, they could end up missing the wood for the trees, if massive quantity of data are thrown at the hapless shareholders, especially where the information pack does not contain the key summary highlights, the risk factors and the performance indicators, in an unbiased manner. Perhaps it should be imperative for the auditors (and not the Management) to present a factual picture in simple understandable language. Even if such information is presented and the critical trends are analysed for their benefit, the question often arises as to what minority shareholders can do? They do not often have Board representation and can hardly be expected to do anything, other than to vote with their feet i.e. sell the shares in the company. If the stocks are not liquid even if listed, it would not help. If there are no willing or able buyers at the right price and for a large quantity and no buyer at all at any price, then the value of listing to the shareholders, would be questionable.

The other issue is the quality of corporate governance. Unless there are effective ways of enforcing good governance, mere 'listing' (or de-listing by the authorities as penalty), is hardly likely to encourage healthy behaviour. Even where there are reputable auditors, we have seen that extensive financial "transparency / disclosure" may mean nothing; as is the case, when there is chicanery or when the chips are down - Enron comes to mind readily. There is an interesting study in the U.K., that most mutual funds, do not exercise their voting rights and often tear up the proxies sent to them. Because of their extensive holdings scattered around and requiring paper work, the mutual funds ignore the deluge at year ends. Thus effectively, a huge chunk of the shareholding via the mutual funds, does not get 'represented' at the annual general meetings. There is a rule that is being contemplated, to make mutual funds disclose details as to how they exercised their proxies.

Often, they are content to go along with the prevailing management of the companies. They are helpless to do anything better; even though they may have the analysts, the ability and the voting strength to make a decisive contribution, if they choose to raise the standards of corporate governance, in their investee companies.

The mutual funds themselves have shied away from listing on the stock markets in many instances in the emerging markets of the world because of the aggravations and the excessive scrutiny that the regulators are wont to impose, merely because they are publicly traded collective investment schemes and the regulators are so deeply concerned with the impact on retail shareholding.

Another key debate revolves around the regulatory costs of a public company. There was an interesting report that most of the multinational corporations (MNCs) such as Unilever, British Tobacco and the global pharmaceutical companies with subsidiaries in India, are intending to de-list and which move will remove a huge amount of market capitalization in one shot! . The MNCs have again cited the burden of employing an army of accountants for compliance purposes and the embarrassment and public notices that unintended lapses may cause. Some regulators have become as heavy-handed as their erstwhile bureaucrats. There is no effective appeal against any arbitrary or unjust rulings except to go through a laborious and lengthy litigation process. No business can operate in a conducive manner, by constantly engaging in confrontation with the regulators. In their enthusiasm for over-arching regulation, the zealots are trying to protect the 'common' investors, who neither seem to need nor want 'paper' protection of this nature. As long as there is no real effective deterrent or mitigant to corporate scandals or stock market scams involving listed companies, the rule book becomes stifling for all and add little value.

The cost of listing is another deterrent for the MNCs that want to de-list in India. The same would be true in a different context for instance, in the UAE. While the Abu Dhabi Stock Market (ADSM) has been flexible in this regard, listing bonds or shares or mutual funds, continues to be a costly proposition in a relative sense in relation to the tangible and proportionate benefits. In absolute terms, the cost may be insignificant for a large company but then again the cost coupled with the consequences in terms of compliance, can be seriously off-putting to a new company.

All in all, I believe that besides merely chanting, parrot-like, the merits of transparency, disclosure, corporate governance and robust regulatory environment and the like, there is need to make detailed analyses of what are the key elements that the listing and regulatory framework need to promote, preserve and enforce. Or else, this will degenerate like the enactment of excessive number of laws in the emerging markets. Whenever, there is a plethora of regulations, rules and laws on the statute book, they are unable to be enforced on the ground. Then, they become worthless, in terms of protection of the innocent and obstructive from the points of view of ease and convenience, to do business. Such burdens and baggages need to be shed. Regulators, like the rest of us, in the economic matrix, need to introspect, from time to time, with a view to improving the functioning milieu.

(The author (sureshk@emiratesbank.ae) is a General Manager in Emirates Bank Group. The views expressed in this article are not necessarily shared by the Bank.)

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