Jan 8, 2010
Listing overhaul: Good move, but be cautious
THERE is much to commend in the Singapore Exchange's (SGX) effort to overhaul its listing criteria. After all, it is one of the more exclusive clubs here, so membership should embody the highest of standards.
A place on the SGX confers a mark of respectability on a company, usually making it easier to raise funds - whether through rights issues or private share placements - or secure bank loans.
But some investors have complained in recent years that the SGX's aura of exclusivity has diminished, eroded by scandals, petty corporate bust-ups and the emergence of rival regional stock exchanges.
Unlike the golden era of the 1980s and 1990s when corporate titans like Singapore Airlines and SingTel beat a path to the SGX's door, the bourse looked in danger of turning into a Mickey Mouse market when it cut its minimum offer price for an initial public offering (IPO) to just 20 cents.
As any upmarket retailer will attest, there is considerable goodwill attached to a cherished brand, enabling it to command a big premium in prices. Buyers may simply be turned off if the brand is displayed alongside more pedestrian wares.
In the same way, local blue chips could command a far higher valuation if the mainboard offers them greater exclusivity.
So it is fitting that the SGX should start the new decade by trying to slay that cheap and cheerful perception, by raising the minimum share price for a new mainboard listing from 20 cents to 50 cents.
It is also making a complete break from the traditional mindset that in order to get listed, a firm must have a profit track record - a rule that has been around for about 40 years - so that it can pay dividends.
Instead, it will now require an IPO hopeful to have a market value of $150 million or more if it has been in business for at least three years and was profitable in its latest financial year.
Otherwise, the firm must have operating revenues in its latest financial year and have a market value of at least $300 million after listing.
Going by these new SGX yardsticks, more than half of the mainboard-listed firms would have failed to make the cut, as they are worth less than $150 million each.
It might sound harsh, but this is just as well. The listing criteria will act as a sieve to ensure that only the most attractive firms find their way to the mainboard.
In turn, the mainboard will act as Singapore's showcase to attract other similarly sexy companies to list here.
However, traders have expressed reservations about one proposal - to make the bourse more alluring to global fund managers by allowing special purpose acquisition companies to list.
Such vehicles - described by the SGX as cash pools seeking to acquire viable businesses through public funding - are already available in financial centres such as New York and London.
Offering the same attraction will put the SGX on an equal footing and reinforce Singapore's standing as a leading Asian financial centre. A proposal to list another type of cash shells - 'blind pool' funds - was raised last July.
But a word of caution is needed. Is the local market ready for it? Has the financial infrastructure - the investment bankers, accountants and lawyers - reached the same level of sophistication to make such listings a success?
The consultation paper spells out details - they cover six pages - on the safeguards that must be met.
These range from the track record of the management team to how the money raised is to be invested and the investment timeframe.
But the key concern is whether retail investors here will be able to understand these businesses and the risks associated with such investments.
Sure, these companies will make the local bourse more exciting, but the risks involved may also be considerably higher once high-wire firms from high-growth sectors like the life sciences come to list.
Another question is whether it is wise to follow New York and London down such a path.
The financial trauma of the past two years led a chastened former US Federal Reserve chairman Alan Greenspan to admit that he was wrong in believing that financial institutions act in their own self-interest to avoid potentially fatal mistakes.
It is a cautionary tale and one more factor to ponder as the SGX faces down the challenges of the new decade.
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