Corporate Finance : Eu’s Prospectus Rules Fail To Roil Gdr Market

Global Equity/DRs

On July 1, 2005, the European Union will implement the Prospectus Directive, a cornerstone in the creation of a single pan-European capital market.

The new legal framework, which applies to both EU and non-EU issuers, will introduce a single set of documents, or passport, for raising capital on a regulated market in any member country.

Once a prospectus is authorized in one member state, it can be used in all the others.

Lawyers warn that the harmonization of prospectus requirements will lead issuers to be exposed to liability for their prospectuses in all EU member states. This could make the preparation of a prospectus more costly and time-consuming, they say.


For equity securities, the Prospectus Directive, or PD, requirements are based on the disclosure standards for cross-border equity offerings issued by the International Organization of Securities Commissioners.

The main requirement is that the prospectus must contain all the information necessary for investors to make an informed assessment of the assets and liabilities, financial position, profit and losses and prospects of the issuer.

Although global depositary receipts are non-equity securities for purposes of the PD, the prospectus requires equity-style disclosure by the issuer.

The new EU regime has had little impact to date on the GDR market, says Mike Hughes, director and global product manager for equity products at Deutsche Bank in London.

Most issuers of GDRs will have no problem in meeting the prospectus requirements, which call for much of the same information to be disclosed as previously, but in a different format, he says.

Another EU directive, the Transparency Obligations Directive, or TOD, which isnt scheduled to go into effect until 2007, will have a much bigger impact on the GDR market, according to Hughes.

Non-EU issuers of GDRs will have until January 1, 2007, until they are required to prepare prospectuses that include accounts that follow International Financial Reporting Standards.

The IFRS is not an issue right now, but it may become a problem for smaller issuers, who may decide in some cases not to list on a regulated exchange within the EU when planning to issue equity in the international capital markets, Hughes says.

The TOD deals with the ongoing periodic disclosure obligations of issuers, including annual and half-yearly reports under IFRS or the equivalent.

A third directive, the Market Abuse Directive, to be implemented at a later date, will require immediate public disclosure of price-sensitive information by issuers that have securities admitted to an EU-regulated market.

The PD will require disclosure that is different in several respects to what is currently required, according to a report issued in February by London-based global capital market lawyers Linklaters.

A 2,500-word prospectus summary must be prepared that conveys the essential characteristics and risks associated with the issuer and the securities.

An operating and financial review also is required.

Considerable detail is required on sources and amounts of an issuers cash flows, funding structure, treasury policies and peak borrowing requirements.

Significant recent trends in production, sales and inventory, and costs are required, as are statements on conflicts of interest and corporate governance.

Existing issued GDRs will become subject to the TOD when it is implemented.

The net effect of these changes may lead existing issuers of GDRs to review whether to maintain a listing on an EU-regulated market, Linklaters says.

Both the London Stock Exchange and the Luxembourg Stock Exchange are creating new segments, known as exchange-regulated markets, which are not regulated markets for the purpose of the EU regime but will be regulated by the relevant exchange.

We believe that the significant number of existing GDR issuers who will be unable to comply with the TOD will need to move across to an exchange- regulated market, Linklaters says.

Gordon Platt