SGX Introduces Dual-class Shares And Unveils Debt Issue Plans

Foreword from ShareInvestor

This article “SGX Introduces Dual-class Shares And Unveils Debt Issue Plans” by Cai HaoXiang and Angela Tan was first published in The Business Times on 20 Jan 2018 and is reproduced in this blog in its entirety.

SGX chief executive says the move cements Singapore’s efforts to transition into the ‘new economy’

As competition between exchanges for hot tech listings heats up, the Singapore Exchange (SGX) is gunning for growth.

It is allowing companies with controversial dual-class share structures to have their first, primary listing here. Meanwhile, SGX is also getting ready to raise funds for potential acquisitions.

At a results briefing on Friday evening, SGX chief executive officer Loh Boon Chye said the first listing of a company with a dual-class share structure could come soon after June.

“Singapore is making huge efforts to transition into the ‘new economy’ and we’re already recognised as the landing hub for startups,” he said.

“Some companies might need a capital structure that supports the rapid scaling up of their business. Dual-class shares are one way to do so, but not the only way.”

He also announced that SGX will get ready to borrow between S$1 billion and S$2 billion through a euro medium-term note programme.

This is to be used to acquire businesses in fixed income, foreign exchange and commodities, as well as around data platforms, market data and connectivity.

The potential borrowings will complement the S$200 million of unrestricted cash the exchange now has at its disposal, he said.

Mr Loh was speaking after the exchange announced financial results for the three months ended Dec 31, 2017.

The results missed some analyst expectations. Net profit was flat year-on-year at S$88.4 million, while revenue was up just 2.7 per cent to S$205 million.

Earnings per share was flat at 8.2 Singapore cents, while a dividend of 5 cents was maintained.

Higher revenue came from the derivatives segment, where volumes were higher but average fees per contract declined.

SGX expenses rose 5 per cent to S$102 million due to annual staff salary increments, provisions for variable staff costs, and technology-related costs.

The securities trading and clearing business was flat. Securities daily average traded value rose 4 per cent to S$1.14 billion.

More initial public offerings (IPO) could be in the pipeline around consumer, healthcare, and tech-related companies, said SGX executive vice-president Chew Sutat.

“We started to see the cycle turn a little bit, and have relistings coming to the market. Markets could be looking at a fairly exciting year,” he said.

On the securities back end, Mr Loh said that 20 out of 23 brokers have migrated to a new post trade system, with the remaining completing the move by the end of the quarter. The new system can allow brokers to offer additional information and insights to clients, based on their clients’ investment portfolios, he said.

As for dual-class shares, Tan Boon Gin, chief executive of SGX RegCo, the bourse’s regulatory unit, said that SGX will publish a response to a consultation on the matter, with the key features on the framework the exchange will adopt.

It will then consult the market on the rules that are needed to implement the framework.

“The majority of respondents to our consultation supported implementing a dual-class share structure, and the final shape of our framework will be driven by market feedback,” he said.

Mr Tan added that measures are being explored to protect minority investors, such as efforts to enhance the independence of independent directors.

“This will complement our proposals for dual-class shares, which include an enhanced voting process that gives non-controlling shareholders greater say in the appointment of independent directors.”

Singapore’s central bank, the Monetary Authority of Singapore (MAS), said on Friday evening that it supports SGX’s decision on dual-class shares. It noted that such structures are already permitted in established markets like in the US and Europe.

It also said the decision followed from the Committee on the Future Economy’s recommendation to introduce such share structures to support the growth of high-tech companies.

The dual-class share structure is favoured by technology stocks like Google and Facebook. It enables founders and certain shareholders to have higher voting rights or dividends than others.

But the structure has come under fierce criticism from fund managers and corporate governance activists here and abroad, who say it breaches of the “one share, one vote” principle and leaves minority shareholders vulnerable.

An MAS spokesman said the central bank noted the concerns raised by market participants.

“MAS will review the safeguards that SGX will be proposing to mitigate these risks, as well as SGX’s education initiatives to help investors better understand the unique risks of (the) structures.”

SGX’s move to allow the primary listings of dual-class shares comes just weeks after its regional rival, the Hong Kong Stock Exchange (HKEX), proposed revamping its listing rules to accommodate dual-class shareholding companies and biotech firms without strong records of profitability.

HKEX said that dual-class share firms must be worth at least HK$10 billion (S$1.7 billion) and have annual revenues of at least HK$1 billion.

Technology companies with market values of HK$10 billion or more which are already listed elsewhere will be eligible for a secondary listing in Hong Kong under their existing shareholding structure.

Biotech firms will be able to list if their expected minimum capitalisation tops HK$1.5 billion.

HKEX’s proposal came three years after tech giant Alibaba listed in New York after Hong Kong refused to accept its governance structure.

According to a HKEX discussion paper last June, just 3 per cent of Hong Kong listings in the past decade by market value have been from the so-called “new economy”; the figure in the New York Stock Exchange is 47 per cent.

Last July, SGX said that companies with dual-class share structures that are primary-listed in developed markets will be allowed to hold a secondary listing in Singapore. The secondary listing framework adopts the “developed” classification by index providers FTSE and MSCI, recognising 22 markets in that category.

Stefanie Yuen Thio, joint managing partner of TSMP Law Corporation, said she welcomed the SGX’s proposal to allow dual-class shares.

The proposal follows recent moves to relax the quarterly-reporting requirement and the corporate governance council’s proposal to focus more on substantive compliance and risk management, she noted.

“The message is clear: Singapore is open for business, and the authorities will strike a good balance between business-friendliness and robust regulation.”