Raising the bar to 20¢ - boon or doom?

MACRO-ECONOMIC issues, economic pressures, constrained financial resources, shifting investor demands, the emergence of new risks and a host of other factors in different geographies have dampened appetite in the global capital market.

With the major US and European capital markets suffering sneezing spells, the Singapore capital market has caught a cold, with lacklustre interest and market values withered. The market capitalisation of SGX-listed companies has fallen in line with decreasing share values. From the start of this year up to end May, the Singapore Exchange has seen only three initial public offerings (IPOs), raising S$45 million, the lowest in the last six years.

Following a joint review which gave assurance that the securities market structure and practices are fundamentally sound and robust, the Monetary Authority of Singapore (MAS) and SGX issued a joint consultation paper in February 2014, seeking public opinion on proposals to enhance Singapore's securities market.

Among the recommendations was the proposed introduction of a minimum trading price (MTP). This was considered necessary to elevate the overall quality of stocks listed on the SGX mainboard lest it suffers the stigma of being labelled a penny stock market, especially after the debacle involving Asiasons Capital, Blumont and LionGold in October 2013 that wiped a combined market value of S$8 billion off their market capitalisations in just three days of trading.

The SGX asserts that lower-priced securities are considered to be "more susceptible to market misconduct and abuses". Low-price securities generally face the risk of high volatility, as a small absolute change in their share prices could potentially lead to a high percentage of gains or losses. Due to lower liquidity in these securities, the relative cost impact to investors is generally higher in low-price securities compared to higher-price securities.

Hence, the MTP rule of 20 Singapore cents was introduced in March this year as an additional continuing listing requirement for companies listed on the SGX mainboard. This rule will take effect from March 2016, giving affected companies a 12-month "transition period" to undertake appropriate corporate action to meet this new requirement.

Thereafter, companies that fall short of this requirement will be placed on the SGX watch-list for a "cure period" of three years, during which their shares will not be eligible for investment under the Central Provident Fund Investment Scheme. In short, affected companies will be given a total of 48 months (a 12-month "transition period" plus a 36-month "cure period" on the watch-list).

If their MTP does not rise above 20 Singapore cents during this three-year watch-list period, the companies face compulsory delisting, the earliest starting after March 2019.

SGX will conduct quarterly reviews - on the first market days of March, June, September and December - to determine if mainboard- listed companies are in compliance with the MTP requirement. Companies that record volume-weighted average prices (VWAP) of less than 20 Singapore cents in the preceding six months will be placed on SGX's watch-list.

This means that mainboard companies trading at lower prices have less than two months to take appropriate corporate action, beginning this September, lest they be placed on SGX's watch-list in March 2016.

UPHILL STRUGGLE

Companies placed on the SGX watch-list are usually stigmatised as poor performers that are at risk of being delisted. A delisted company will not only have its doors to easier fund-raising closed, it will face an uphill struggle to stay afloat as its credit rating falls to rock bottom with nervous creditors calling in loans and banks pulling credit lines. Growth becomes a dream as companies' over-riding priority under these circumstances is to fight for basic survival.

Investors of delisted privatised companies will no longer have our disclosure-based regulatory protection and a comfortable assurance of minimum corporate governance standards and corporate transparency.

Companies should start reviewing their corporate options now, and not wait until March 2016.

Affected companies can undertake various corporate actions, including a share consolidation exercise, to achieve the MTP of more than 20 Singapore cents. To facilitate this, the SGX even provided a carrot in the form of a waiver of all fees related to the share consolidation exercise.

As at the end of May, in the three months since the introduction of MTP in March, 26 mainboard companies had consolidated their shares to achieve a higher share price of above 20 Singapore cents. Notwithstanding this, as at the same date, there were still 214 mainboard-listed companies trading at below 20 Singapore cents. This represents 35 per cent of the entire universe of 610 mainboard- listed companies.

Interestingly, not all the 26 companies that consolidated their shares to meet the MTP rule saw their share values appreciating or holding at their post-consolidation theoretical prices.

From the dates of their share consolidation to end May 2015, five companies' share values remained unchanged. Only 10 companies registered higher share values of between 1.14 per cent and 89.71 per cent, with ADV Integrated Manufacturing enjoying the highest premium.

Unfortunately, 11 companies registered price falls, with eight of them suffering double-digit declines and Fuxing China Group recording the sharpest 58.23 per cent decrease.

This implies that the consolidation option may not be sustainable. Market observers are of the view that some companies trading below the MTP are in fact "over-priced" but could not trade lower than their already low price levels. Hence, post-consolidation, their share prices would likely correct to more realistic lower levels.

Share values have to be backed by fundamentals including financial performance, competitive positions, growth strategies and, of course, sectoral attractiveness. Prudence should prevail to factor in and buffer any such expected share price correction or fluctuation post-consolidation.

Companies that are not backed by strong fundamentals could potentially find themselves forced to undertake continuous rounds of share consolidation to meet the MTP rule. This would inevitably reduce the usually small free floats and hence, further impede liquidity and trading volume.

Another option for affected companies is to transfer to the Catalist listing platform. For starters, the MTP rule does not apply to Catalist companies. (However, note that mainboard-listed companies on SGX's watch-list for having been loss-making for the past three consecutive years do not have the option to transfer to a Catalist listing. Such companies have to turn around from their losses before they can consider this option.)

Catalist is a sponsor-supervised listing platform for fast-growing local and international companies, especially those from the emerging economies. Catalist companies do not need to comply with prescribed track record, market capitalisation or quantitative requirements. There are also no quantitative requirements on financial parameters such as the size of the company and certain distribution of invitation shares.

More importantly, Catalist rules are more responsive to fast-growing companies' need to seize growth opportunities in a timely manner and accordingly, to raise funds in a similar timely fashion.

For instance, for acquisitions of assets not in the ordinary course of business, shareholder approval is only required for the acquisition of assets of more than 75 per cent but less than 100 per cent of the relevant bases, such as group net assets, profits, market capitalisation or equity securities issued, as the case may be. In the case of disposals, the relevant threshold is 50 per cent.

To put it simply, if two listed companies with market capitalisations of S$100 million each were to raise funds, the one listed on SGX's mainboard would have to seek shareholders' approval for every acquisition or disposal with a value of S$20 million or more. However, the Catalist-listed company will only need shareholders' approval for acquisitions and disposals exceeding S$75 million and S$50 million respectively.

GREATER FLEXIBILITY

This fast-to-market advantage far outweighs the perceived higher sponsor-supervised compliance cost. On balance, the higher thresholds built into the Catalist rules accord greater flexibility to the board and management of companies to facilitate corporate transactions, allowing them to take advantage of business opportunities quickly without having to obtain shareholder approval, which can be both time-consuming and costly.

The opportunity costs could be far higher than the listing and compliance costs that Catalist companies have to bear.

It is worthwhile to note that there are many profitable Catalist companies that continue to do well, with promising growth prospects. As at May 31, 2015, there were a total of 158 Catalist companies that make up approximately S$10 billion of Singapore's market capitalisation of approximately S$1 trillion.

Of these, 16 companies on Catalist have market capitalisations of more than S$150 million each. In fact, six of these - Duty Free International, International Healthway Corporation, Polaris, REX International Holding, SingHaiyi Group and TalkMed Group - have market capitalisations exceeding S$300 million, equivalent to SGX's mid-caps and larger than a number of mainboard companies. The largest Catalist company is TalkMed Group which had a market capitalisation of approximately S$730 million as at June 15.

A transfer to Catalist looks to be not just a viable but also an attractive option, especially for companies on fast-track growth paths that need to raise funds regularly to support their growth appetite.