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Lion City's ECM market is struggling to roar

By Rashmi Kumar
28 Oct 2014

Singapore this month took what it must hope is a big step forward in livening up its ECM market by overhauling the Companies Act. The move is certainly positive, but the city-state is mistaken if it thinks allowing dual-class structures will be the answer to its troubles. They are far more deeply rooted than that.

Singapore certainly knows how to grab the attention of ECM watchers. This month it made some of the biggest changes to its Companies Act since it was enacted in 1967 — the most critical of which has been the removal of the one share, one vote structure.

This means that, for now, some 800 or so non-listed public companies can include different weights of voting rights in their structures. It will still be some time before the amendments start to also apply to new listings and for companies that are already listed. Although the Act has been tweaked, the rules still need the go-ahead from the Monetary Authority of Singapore and the Singapore Exchange before they officially kick in for listed names.

Singapore has the right idea with these amendments. After all, it has been consistently losing business to other stock exchanges, despite trying to position itself as the go-to place for international companies.

When Manchester United listed in the US two years ago, it was only after giving both Singapore and Hong Kong some serious consideration. But the fact that neither allowed for dual-class shares meant the football club opted instead for New York. Hong Kong still hasn't given the green light for multiple classes of shares, but has approached the industry for feedback on the idea.

Singapore has moved faster, but the problems facing its equity market are far from over. The authorities need to realise that these changes will do very little in actually drumming up new business.

For starters, Singapore is a very illiquid market, a big drawback for potential issuers looking for depth in the market. In September Singapore’s total trading volume stood at just S$21bn ($16.5bn). Hong Kong boasted volumes of HK$1.6tr ($206.3bn), Even Thailand's exchange outstripped Singapore, with Bt1.1tr ($33.9bn).

Singapore also has the issue of penny stocks to deal with, which have often clouded transparency in the market with too much speculation and potential for manipulation of share prices. It is, however, trying to fix that. It introduced new rules in August, one of which is a mandatory minimum trading price of S$0.20 for all shares listed on the mainboard. This will improve the overall performance of the market, but could also trigger companies to consolidate their shares – which will further tighten liquidity.

Not just that, but investors and market watchers have long called for more diversity in the Singapore market. Unfortunately, the exchange is still heavily focused on real estate investment trusts and business trusts, and to a lesser extent on offshore oil and gas names — sectors that investors already have far too much exposure to.

For Singapore to be looked at seriously by new issuers, the problems of diversity and liquidity need to be tackled. Allowing for dual class holdings will hold some appeal, but this is typically lower down on the priority list for most companies.

Also adding to Singapore’s woes is simply the lack of an obvious audience. Hong Kong, for instance, is the go-to place for Chinese companies. But the Lion City has had little success in wooing issuers from its southeast Asian neighbours, and now the growing appeal and strength of their own domestic markets is likely to keep them all the more rooted at home.

There is no one solution to Singapore’s problems. Boosting liquidity is key, but this can only happen if it is able to win more business. Building a strong retail base might also help, something that Thailand has managed. Nearly

50% of shares that change hands daily in the country are driven by local individuals. In Singapore it is far lower and should be something that it tries to develop.

Singapore has definitely taken steps to make its market a more attractive destination, but the perks are still limited. Unless the Lion City gets to the root of its problems, it is unlikely to become the king of the ECM jungle.

By Rashmi Kumar
28 Oct 2014