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Wednesday 13 January 2010
SGX’s IPO revamp: more can be done
Balancing the achievement of commercial objectives (i.e., making a profit) against the need to protect the public’s interest is always a tricky business, and it is one that the Singapore Exchange (SGX) has had to perform repeatedly over the years.
Balancing the achievement of commercial objectives (i.e., making a profit) against the need to protect the public’s interest is always a tricky business, and it is one that the Singapore Exchange (SGX) has had to perform repeatedly over the years.
For instance, earlier this month it proposed allowing the listing of special purpose acquisition companies, or Spacs for short, a move which would generate more business for the exchange. But because Spacs are cash shells with no firm business yet, the proposal has drawn criticism for the obvious governance issues associated with such entities.
To its credit though, SGX’s recent proposals were not all about raising revenue. Tied to the Spacs proposals were some that were aimed at raising the bar for mainboard entry, and could thus be construed as safeguarding investors’ interests - upping the minimum initial public offer (IPO) price of 20 cents to 50 cents and the introduction of a new minimum market capitalisation requirement of $150 million (compared to $80 million previously).
SGX may be reluctant to admit this, but if accepted, these changes would go some way to not only ensuring that investors have larger and presumably better-quality companies to choose from, but also to addressing the local market’s reputation for being predominantly one that is occupied by penny stocks.
A decent start then from the public interest standpoint but, as many industry observers have noted, more can be done in this regard.
Perhaps the most important change to consider is to stop new listings from placing out all their shares in an IPO and, instead, to compel a minimum, reasonably sizeable portion to be allotted to the public.
Note that from a commercial viewpoint, many smaller companies would baulk at such a proposal since it is in their interest to ensure their shares are given to sympathetic parties - which cynics might argue facilitates manipulation later when conditions are right.
Moreover, it is relatively simple to circumvent the need to have 500 shareholders by giving a large majority of the shares - say 95 per cent - to a few placement recipients and the small remaining fraction to a large number of investors, the latter via the broking distribution network.
As things stand then, from a public interest viewpoint, any new rule that raises the portion in the public’s hands can only be a step forward, for not only does it allow wider participation, it also affords the market greater liquidity. What exactly this portion should be can be debated, but a ballpark split of 70/30 private/public would not be unreasonable.
A second area worth considering is disclosure, specifically, of the use of IPO proceeds. Although more companies are now adopting a suggestion first made in this column some years ago - which was to express the use of IPO money in terms of $1 invested, thus making the reason for the IPO easily understandable to lay investors - none of them places this information on the first page, which is where it should be.
From a commercial standpoint, not wanting to highlight where the money goes is understandable since there are companies which seek public status for motives quite apart from business expansion. In addition to a vendor bailing out, other such motives would be for ‘working capital’ (which could mean anything or nothing) and debt repayment - both being uses of IPO funds which, although perfectly legitimate, are among those that some companies might be keen to downplay.
However, from the position of public interest, highlighting such information can only aid investors in making an informed decision since they have a right to be told, with minimum fuss, where their money is going.
Scrapping the 100 per cent placement route to an IPO, forcing new companies to allocate more shares to the public, and making it mandatory to disclose on the cover of IPO prospectuses the use of proceeds, expressed in terms of each dollar invested, would be a clear endorsement that when it comes to balancing commercial interests against those of the public, SGX will always lean towards the latter.
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SGX’s IPO revamp: more can be done
By R SIVANITHY
13 January 2010
Balancing the achievement of commercial objectives (i.e., making a profit) against the need to protect the public’s interest is always a tricky business, and it is one that the Singapore Exchange (SGX) has had to perform repeatedly over the years.
For instance, earlier this month it proposed allowing the listing of special purpose acquisition companies, or Spacs for short, a move which would generate more business for the exchange. But because Spacs are cash shells with no firm business yet, the proposal has drawn criticism for the obvious governance issues associated with such entities.
To its credit though, SGX’s recent proposals were not all about raising revenue. Tied to the Spacs proposals were some that were aimed at raising the bar for mainboard entry, and could thus be construed as safeguarding investors’ interests - upping the minimum initial public offer (IPO) price of 20 cents to 50 cents and the introduction of a new minimum market capitalisation requirement of $150 million (compared to $80 million previously).
SGX may be reluctant to admit this, but if accepted, these changes would go some way to not only ensuring that investors have larger and presumably better-quality companies to choose from, but also to addressing the local market’s reputation for being predominantly one that is occupied by penny stocks.
A decent start then from the public interest standpoint but, as many industry observers have noted, more can be done in this regard.
Perhaps the most important change to consider is to stop new listings from placing out all their shares in an IPO and, instead, to compel a minimum, reasonably sizeable portion to be allotted to the public.
Note that from a commercial viewpoint, many smaller companies would baulk at such a proposal since it is in their interest to ensure their shares are given to sympathetic parties - which cynics might argue facilitates manipulation later when conditions are right.
Moreover, it is relatively simple to circumvent the need to have 500 shareholders by giving a large majority of the shares - say 95 per cent - to a few placement recipients and the small remaining fraction to a large number of investors, the latter via the broking distribution network.
As things stand then, from a public interest viewpoint, any new rule that raises the portion in the public’s hands can only be a step forward, for not only does it allow wider participation, it also affords the market greater liquidity. What exactly this portion should be can be debated, but a ballpark split of 70/30 private/public would not be unreasonable.
A second area worth considering is disclosure, specifically, of the use of IPO proceeds. Although more companies are now adopting a suggestion first made in this column some years ago - which was to express the use of IPO money in terms of $1 invested, thus making the reason for the IPO easily understandable to lay investors - none of them places this information on the first page, which is where it should be.
From a commercial standpoint, not wanting to highlight where the money goes is understandable since there are companies which seek public status for motives quite apart from business expansion. In addition to a vendor bailing out, other such motives would be for ‘working capital’ (which could mean anything or nothing) and debt repayment - both being uses of IPO funds which, although perfectly legitimate, are among those that some companies might be keen to downplay.
However, from the position of public interest, highlighting such information can only aid investors in making an informed decision since they have a right to be told, with minimum fuss, where their money is going.
Scrapping the 100 per cent placement route to an IPO, forcing new companies to allocate more shares to the public, and making it mandatory to disclose on the cover of IPO prospectuses the use of proceeds, expressed in terms of each dollar invested, would be a clear endorsement that when it comes to balancing commercial interests against those of the public, SGX will always lean towards the latter.
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