There was a time, not so long ago, when a New York Stock Exchange listing and full SEC registration were badges of honour for any emerging market company, indeed even for the largest developed world corporations seeking to re-rate their stock and distribute it broadly into the world’s largest capital market.
In the early 1990s, leading German companies unofficially clubbed together in an effort to face down the SEC over the onerous accounting standards and disclosure requirements that were a precondition for listing in the US. The SEC refused to compromise and the German companies blinked first. The prize of access to US capital was worth the pain and the ignominy of submitting to these higher regulatory standards.
Being passed fit by US financial market regulators allowed larger emerging market companies to slough off any home-country taint, step beyond country credit limits and present themselves as legitimate global companies that happened to be headquartered in emerging countries.
No longer. The World Bank, in its Global Development Finance Report 2006, notes a significant move away from American depositary receipts and back to local listings by large emerging market companies. Rapid domestic economic growth, greater corporate earnings as well as local stock market regulatory reform and policy efforts to boost domestic markets, local trading and capital formation, have coincided with a growing hostility to the extraterritorial claims of the US authorities.
New issues of ADRs on US exchanges by Latin American companies have fallen from 11 in 2000 to none in 2005, when, moreover, there were six delistings, the report notes. Foreign companies still want to attract US institutional investors but can do so easily through listing in London, a financial centre that recently demonstrated its own commitment to the highest standards of financial probity by allowing the listing of Rosneft.
In the US, concern at this relegation to the status of financial backwater is growing and crystallizing around calls to reform the Sarbanes-Oxley Act, which is also being blamed for the reluctance of US companies to raise new capital for investment.
It is therefore worth recalling that dislike of the US regulatory burden pre-dates that legislation’s passage. Repealing it might have a limited effect. US policymakers have been pressing emerging markets to develop their domestic capital markets along western lines at least since the Asian crisis of 1998. Their success appears to be having unintended consequences.
Should the US regret the loss of these foreign listings? Yes, it might give up some prestige as the status of pre-eminent global financial centre passes away from New York. But the true, great strength of the US capital market has been the depth and gradation of its private equity infrastructure, from angel capital to every strand of start-up, venture and growth capital that continues to sustain US companies.
The more obvious winner in all this, for now, appears to be London. Let’s just hope no terrible corporate governance scandals emerge at any of the exotic companies whose listings it has blessed recently to damn the City’s credibility.
