Vol. 5 Num 1079 Thu. June 14, 2007  

Delisting of Telenor from Nasdaq: Any lesson for Grameenphone?

The Norway-based telecommunications operator Telenor (parent company of local mobile phone giant Grameenphone) announced withdrawal and delisting of its American Depository Shares (ADS) from the National Association of Securities Dealers Automated Quotations (Nasdaq).

Telenor believes that the regulation and reporting obligations under the Securities and Exchange Commission (SEC) Act of 1934 were too expensive, onerous and outweigh the benefits of listing. However, Telenor reiterates that it will not reduce focus on its international markets or shareholders; instead it intends to continue strong focus on corporate governance, transparency and internal controls etc. Whatever the focus of Telenor be after the delisting, the big question remains unanswered Did Telenor fail to comply with the SEC rules and regulations?

Nasdaq is considered as the third largest security markets (after New York and Tokyo Stock Exchanges) in terms of listed firms, dollar volume, market capitalisation etc. Introduced in 1971, Nasdaq is also the world's largest electronic communication network (ECN) in terms of shares traded. One of the important features of Nasdaq is Small Order Execution System (also known as SuperSoes or SOES introduced after the market crash of 1987) that mitigates any liquidity problem. Big technology stocks like Microsoft, Intel, Dell, and Cisco among others are typically listed and traded on Nasdaq.

Under the reporting obligations of SEC's electronic data gathering, analysis, and retrieval (EDGAR) system, companies listed on Nasdaq are required to file reports on registration; corporate restructuring and changes; transaction and transition; statement of beneficial ownership of securities; sale of securities; and quarterly and annual reports indicating risks, employee stock purchase, savings, security holders and financial statements among others.

According to rules 12(g) and 12h-6(a) of the Securities Exchange Act of 1934, a foreign firm may deregister and terminate the registration of a class of securities from Nasdaq. Telenor will have to file form 15F (notice of termination of registration) as required under section 13(a) and 15(d) of the Exchange Act indicating when it ceases reporting obligations of its ADS to the SEC. Telenor's delisting from Nasdaq was supposed to be effective from June 11, 2007.

However, Telenor will continue its listing on the Oslo Stock Exchange. Telenor will also maintain its American Depository Receipts (ADR) facilities with the JPMorgan Chase Bank and its ADS will be traded on over-the-counter (OTC) markets after June 11, 2007. It is to be noted here that an organised exchange is an auction market whereas an OTC market is a broker-dealer network for non-listed securities and derivatives where brokers and dealers negotiate through wire networks such as computer, facsimile, phone etc. An OTC market is neither scrutinised nor regulated like an organised exchange. As such, small and risky companies mostly with poor credit records and unable to meet the reporting obligations and other listing requirements with the SEC are traded on OTC markets. Thus, OTC stocks suffer from non-synchronous trading and higher bid-ask spreads.

The introduction of Sarbanes-Oxley Act especially after the collapse of Enron and WorldCom made the corporate governance laws extremely tight in the USA. The Sarbanes-Oxley law outlines the functions of auditors, independence of board members, disclosures and internal audit procedures, disclosures of off-balance sheet transactions, corporate responsibilities and executive accountabilities, strong code of ethics, high monitoring and scrutiny by outside bodies such as the SEC etc. Delisting of US public companies tripled in 2003 after the introduction of the law in July 2002 because small and mid-cap companies found it costlier to comply with the reporting requirement under the law.

Both the academics and practitioners investigated the effects of Sarbanes-Oxley law on non-US companies (like Telenor) cross-listed in the US markets. Some argued that the law eventually displaced many foreign companies from Nasdaq. In a recent article published in the Journal of Corporate Finance Kate Litvak (2007) reported that stock prices of non-US companies under Sarbanes-Oxley law declined significantly as opposed to those of the non-US companies that are not regulated under the law. In particular, Litvak (2007) concludes that " investors expected the Sarbanes-Oxley Act to have a net negative effect on cross-listed foreign companies, with high-disclosing companies and low-growth suffering larger net costs, and faster-growing companies from poorly-governed countries suffering smaller costs."

It is well documented that both the domestic and foreign firms voluntarily delisted from Nasdaq especially after the introduction of Sarbanes-Oxley law had poor corporate governance systems. Arguably, it is hard to believe that Telenor should be an exception. It has been alleged that Telenor was also involved with the corruption, corporate fraud and poor governance system of VimpleCom (a joint-venture of Telenor in Russia) during 2004-05.

Telenor provides high quality data, tele and media communications services such as fixed and mobile telephone, internet, internet protocol based services, VoIP, satellite services, cable television networks, etc. in Austria, Bangladesh, Bulgaria, Denmark, Finland, Hungary, Malaysia, Montenegro, Norway, Pakistan, Poland, Russia, Serbia, Sweden, Thailand, Ukraine etc. with an equity capital that varies from more than 50% to 100%.

Grameenphone contributes to approximately 15% (12 out of 83 million) of Telenors' worldwide mobile phone subscribers. Currently, Telnor holds 62% of Grameenphone's equity capital even though it had 51% shares in 1996 when the Grameenphone was incepted. It has been alleged recently that Telenor violated its 1996 agreement with the Grameenphone. Telonor was supposed to relinquish its ownership over Grameenphone to 35% by 2002 but refused to do so even in 2007 on the ground that the agreement was a declaration of intent but not an obligation at all.

It is a million dollar question whether Grameenphone has any intention to float Initial Public Offerings (IPOs) in Bangladesh. The introduction of Grameenphones' IPOs will bring more local ownership and add double digit market capitalisation to the stock exchanges of Bangladesh. But it seems implausible especially after its recent debacle in Nasdaq and continuous domination over Grameenphone in terms of ownership.

Telenor argues that Grameenphone is one of its numerous projects, which should be considered as Socially Responsible Investment (SRI) because it invests in a developing country like Bangladesh and contributes to her economy. Ethical investment or SRI is also becoming popular in the Wall Street with combined assets of more than 2 trillion dollars. The Wall Street accommodates firms that invest in SRI in compliance with the SEC rules and regulations that may be appropriate for their typical shareholders and ethical operations. Unfortunately Telenor is neither listed on any of the two bourses nor has any physical shareholders in Bangladesh. Thus, the broader definition of SRI should not be applicable to Telenor.

Like other foreign-based mobile companies in Bangladesh, Telenor is believed to expatriate majority of profit that it generates through Grameenphone. However, Telenor claims that it couldn't recoup $87 million that it initially invested in Bangladesh. Instead, it reinvests a significant portion of $1.08 billion profit that it earned over the last decade. It is obvious that the delisting of Telenor from Nasdaq transmits a strong negative message that Telenor lacks an appropriate corporate governance system, which is indispensable for a transparent reporting responsibility to the SEC. It would undeniably be very interesting to see whether Grameenphone can initiate the so-called 'social businesses' of its proponent and founder Professor Yunus especially under its current legal set-up with Telenor.

The author is a financial economist and currently teaches at Weber State University, USA.