Regulatory compliance, costs could turn firms away from SGX

Singapore

SINGAPORE is a leading financial hub, ranking third globally just behind London and New York, but its stock market is another story.

In a world flush with liquidity, the Singapore Exchange (SGX) has to compete with new fundraising avenues on top of rival global exchanges, which raises questions on how it can reinvent itself to attract new listings and boost trading, as observers point to regulatory burden and cost as deterrents.

Song Seng Wun, CIMB economist, told The Business Times: "Everybody wants a more vibrant financial market. We are an important financial hub in the Asia-Pacific. It's only good that we also get a bit more 'oomph' out of the stock market."

He added: "It's a chicken-and-egg situation. You need to get more local participants on the retail side. There is the question of whether the regulators are overprotective of retail investors. To add more interest into the market, there must be a certain element of risk involved."

Based on the latest Global Financial Centres Index released in March, Singapore ranked third behind London and New York, which were ranked first and second respectively. Hong Kong was in fourth position.

SGX had a market capitalisation of about US$640 billion at end-2016, up 2.3 per cent from 2015. It trails far behind Hong Kong Exchanges' almost US$3.2 trillion, according to statistics from the World Federation of Exchanges. Other Asia countries like South Korea recorded a higher market capitalisation than Singapore at US$1.3 trillion while Shanghai Stock Exchange and Shenzhen Stock Exchange was US$4.1 trillion and US$3.2 trillion respectively.

According to an equity sales representative from Maybank Kim Eng Securities, Singapore needs a stronger stock market to attract more listings for small and mid-cap stocks which could be drawn to P2P lending and crowdfunding platforms to raise capital due to lower costs and less regulatory hurdles, although SGX would still be the preferred platform to raise larger amounts of capital and to gain recognition for growth.

"The existing upfront costs of listings are prohibitive and expensive. SGX may consider finding ways to lower these costs, else many of these companies may be drawn to other exchanges or other sources of funding."

The SGX website states that mainboard-listed equity securities are subject to a minimum initial listing fee of S$100,000 and a maximum fee of S$200,000. There will also be a fixed non-refundable processing fee of S$20,000. For Catalist, listed equity securities pay between S$30,000 and S$100,000 in initial listing fees. There is also a fixed, non-refundable administrative fee of S$2,000.

Rise of crowdfunding

A study, Crowdfunding: Financing Ventures in the Digital Era, by Srinivas K Reddy and Tan Yee Heng from the Singapore Management University, found that crowdfunding volume rose to US$34.4 billion in 2015, slightly surpassing the venture capitalist industry. This trend is expected to continue growing quickly.

"Certain projects may be unable to access traditional funding sources for various reasons - institutional investors may doubt a project's success, the size of the market may seem too small or the creators may not have an appropriate track record. In inviting communities to act as gatekeepers, crowdfunding effectively allows the free market to regulate project survival."

Crowdfunding, however, isn't a guaranteed success. On average, success rates for crowdfunding have been moderately low. The study said that Kickstarter, the most popular crowdfunding site, has a success rate of 35 per cent, with certain categories such as technology garnering only 20 per cent.

As alternative platforms give SGX a run for its money, it reignites questions on whether it should cut red tape and compliance costs for potential issuers.

In February this year, the Monetary Authority of Singapore announced that it had formed the Corporate Governance Council to review the Code of Corporate Governance (CG Code), which was last reviewed in 2012. The council will consider how the "comply-or-explain" regime under the CG Code can be made more effective. The revised code is expected to be released in the first quarter of next year.

On concerns over whether the revised code will add more requirements such as higher compliance costs that companies pay to external parties like lawyers and auditors, Joyce Koh, executive director, Singapore Institute of Directors, said that the review of the CG Code does not necessarily mean that this will happen. She added that the privatisation trend and the lack of listings from firms reflect the "rebalancing" of the capital markets, away from IPOs to private equity or even venture capitalists.

"Companies have a broader range of financing options for growth. This does not mean that the benefits of public listings have gone away. However, factors such as a low free float and trading value, lack of research coverage, access to cheap debt financing, and better valuations elsewhere have led companies to consider options other than public listing."

A corporate lawyer told BT that for a mainboard-listed company, audit fees are typically about a quarter of a million dollars. It could increase if the auditors take on additional tasks like helping with acquisitions. For lawyers to pen corporate governance write-ups, depending how in-depth the write-up is, the amount is about S$10,000 or S$20,000.

Mark Liew, chief operating officer, PrimePartners Corporate Finance, said that in terms of listing costs, it is cheaper for small and medium enterprises to list in Australia (less than S$1 million) but more expensive to list in Hong Kong (over S$4 million).

"Singapore is in between and closer to Australia in terms of cost. Listing costs are driven by regulatory and market requirements. To lower listing costs, it would be necessary to lower some regulatory requirements (such as) less disclosures and less detailed due diligence. Striking a balance is essential for capital market activities," he noted.

Weak investor base

So far, Singapore has done well in the last decade in building up a strong real estate investment trust (Reit) and trust market but it seems like there is a stagnation of fresh concepts that could boost SGX.

Choo Oi Yee, managing director, head of Singapore, UBS investment banking, said that Singapore's Reit and trust market is at a stage where it has "ran out of ideas", and SGX is looking at attracting overseas corporations to list here.

"There're very few new large Singapore companies that could (launch an) IPO. Reits are already quite mature, where Singapore corporates and properties are concerned, so the natural move is for SGX to consider other issuers outside of Singapore, like the Chinese as well as Europe and the US. Some of the Chinese Reits, for example, are considering listing here because Hong Kong Reits trade at a higher yield."

In her view, Singapore is struggling in the technology and biotech space, and attracting the right investors here is a challenge.

"I personally wish we had a much more vibrant tech space but the issue is that US investors understand growth and valuation better. For tech, the valuations don't make sense because investors here are still focused on earnings and cash flow. The investor base for tech doesn't exist here."

For some business owners like Nicholas Wong who runs a technology start-up, SGX is being too protective of investors. That affects liquidity, and there could be a lack of new homegrown businesses in the future due to limited access to funding.

"(SGX) should encourage more liquidity through more products, like exchange traded funds, to drive the trading volume up. It cannot always 'protect' the investors so much that companies are finding it a waste of time to list in Singapore as they feel that the regulatory (bodies) are always scrutinising them when the investors lose money like during the Asiasons and Blumont issue in 2013."