A little over a year ago, a new standalone category was established on the Official List for companies with a primary listing on a non-UK market and/or those incorporated outside the UK. The ‘equity shares (international commercial companies secondary listing)’ category is designed to appeal to overseas businesses that might find it difficult to meet certain requirements applying to the main category due to regulatory restrictions in the issuer’s primary listing locale.
Some caveats should be noted: a UK-incorporated company with a primary listing abroad cannot seek a secondary listing within the international category. The category imposes a regulatory framework that is similar to the listing rules as applied to issuers on the standard segment. And there are minimum requirements linked to market capitalisation and free floats.
The introduction of the category formed part of the Financial Conduct Authority’s strategy to reinvigorate capital markets in the UK, undoubtedly a work in progress judging by subsequent listing volumes.
The challenge is that regulators have to walk a fine line, as they are required to implement frameworks that ensure equitable primary and secondary markets without stifling incentives for companies to go public. It would be easy enough to adopt a more laissez-faire approach to public markets, but if regulators play too fast and loose, it can increase the risk of market manipulation, while undermining price discovery in the process.
The difficulties they face are borne out by recent news from the US, where Nasdaq has submitted proposed rule changes to the US Securities and Exchange Commission (SEC). Its beefed-up listing standards include a higher minimum public float for certain new listings and a faster process to suspend and de-list companies with illiquid secondary markets, along with the introduction of a $25mn (£18.5mn) minimum initial capital raise for companies whose operations are based primarily in China.
The SEC has previously highlighted some potential disclosure issues linked to Chinese ‘microcaps’ listing in the US, a genuine growth category in recent times. The rationale for the proposals centres on jurisdictions where laws prevent adequate access to company information – the so-called “restrictive markets”.
It’s tempting to think that there might be a political dimension to the SEC submission given the ongoing trade spat between Washington and Beijing. But there is little point in Nasdaq taking on reputational risk for the sake of additional listing fees, nor would there be much point in the London Stock Exchange taking up the slack if it were offered in relation to illiquid stocks.
On a related note, when we recently covered Uniphar’s (UPR) interim figures, the subject of arbitrage in dual-listed companies was to the fore. From the get-go it should be pointed out that it’s usually the preserve of institutional and/or high-frequency traders, yet the concept is straightforward enough.
A dual-listed company involves two separate entities structured as one, while a cross-listed company has its own shares trading on multiple exchanges. The trade itself involves the purchasing and selling of the same security simultaneously in different markets to take advantage of any price differential. Naturally, exchange rate movements are central to arbitrage opportunities, along with demand and supply for the security in question, hence the need to closely monitor deal volumes.
The risks associated with this type of trade, while hardly complex, underline why it’s often best left to professional trading desks, many of which utilise advanced algorithms to get ahead of the field. You’re essentially dealing in slivers, rather than glaring mispricing, so you need to gauge whether your estimated profit from the transaction isn’t cancelled out by the associated costs. Chances are, any such trade demands a hefty capital commitment.
Timing is also a key consideration, too, because if the arbitrage transaction is not carried out in a timely manner, you may well be saddled with a loss. Therefore it’s vital to have a clear insight into the settlement terms of any markets relating to the trade.
There is no shortage of companies with dual-listing structures; the likes of Rio Tinto (RIO), Investec (INVP) and Prudential (PRU) readily spring to mind. And it’s conceivable that we could witness an uptick in this regard. A recent report published by the Confederation of British Industry posited that the best chance of a revival in the UK equities market could rest on the London Stock Exchange offering a “complementary venue” for additional listings, especially for Asian companies that have grown weary of the President Donald Trump administration’s combative trade policies.