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Three cheers for SGX dual-class move

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By John Loh
06 Sep 2016

The recent decision by the Singapore Exchange’s listings committee to give the green light to dual-class shares has received the usual jibes, with some contending that the move is coming far too late. But this is the big change that market participants have been calling for — even if they don’t know it yet.

The listing advisory committee, an independent body within the SGX, gave the thumbs up in its annual report last week to a proposal for firms in Singapore to use weighted voting rights. The decision is seen as a bid to recapture interest from the likes of football club Manchester United, which dropped its Singapore float in 2011 to list in the US under a dual-class structure.

The approval comes after regulators elsewhere, such as in Hong Kong, roundly rejected the idea of giving one group of shareholders more rights than others. Hong Kong famously lost out on the opportunity to have e-commerce giant Alibaba Group listed there in 2014 because it refused to budge on dual-class IPOs.

Singapore clearly does not want to make the same mistake. The committee’s dual-class move hands a symbolic victory to those who have called for the bourse to be more inclusive and forward thinking.

The problems faced by SGX are well known. Slumping volumes and liquidity have dented its reputation, and the bourse has been criticised for being out of touch. In addition, the exchange suffered its longest trading disruption in July after its backup system failed to kick in following a hardware failure.

Whether or not dual-class IPOs will turn SGX’s fortunes around is too early to say. But it certainly is a step in the right direction, and one that market players should get behind.

The exchange’s listing committee said in its report that Singapore does not have a “vast hinterland providing a continuous pipeline of IPO-ready applicants”, and that it understands the need for SGX to attract quality listings from both within and outside the country, including those with a dual-class share structure.

This is exactly right — Singapore is a small country, but it does play host to a growing entrepreneur class, having spent years nurturing technology start-ups with big ambitions. Some of these include the likes of internet and mobile platform company Garena Interactive Holding, which has reportedly said it is aiming for a US float in the next few years and a secondary listing in southeast Asia.

It is opportunities like this — from issuers in the technology space — that SGX could capture with dual-class shares.

Dual-class draw

Of course, there is the argument that SGX has missed the boat on the likes of Alibaba, and that Asian technology names would always choose the US for better valuations. 

Yet new economy companies such as Ant Financial, Lufax, Meitu and Zhong An Online P&C Insurance Co have all said they are looking at a Hong Kong IPO. If Singapore isn't a natural fit for these China-based firms, then at least its dual-class structure could be a draw.

Minority investors, meanwhile, don't have to worry just yet. It is true that dual-class structures have put small shareholders at a disadvantage in the past. This is especially crucial for Asia, where shareholder activism is not as prevalent. But viewed another way, it is a chance for the market and investors to increase in sophistication.

In any case, the committee has outlined a number of safeguards. And if history is a guide, then SGX will not let its governance standards slide. Moreover, the committee is maintaining one-share-one-vote as the default for new listings, and dual-class structures may only be used when there is a compelling reason to do so.

To be sure, there will be no shortage of logistical hurdles when it comes to implementing the structure. But if SGX keeps standing still, then it could start to lose its relevance. That is why the dual-class move, even though it seems radical, is necessary.

Maybe, as some argue, the next Manchester United is out of SGX’s grasp. Or maybe it is just within reach, and SGX has given itself a fighting chance to grab that opportunity when it arrives. 

By John Loh
06 Sep 2016