Minimum trading price: no perfect way to meet requirement

Singapore

SHARE consolidation has turned out to be an unreliable way for small Mainboard-listed companies to meet the coming minimum trading price requirement, but market observers are not entirely enamoured of the alternatives.

A Mainboard company whose six-month volume-weighted average trading share price is below 20 Singapore cents after March 1, 2016 will be placed on a watch list and given three years to comply or face delisting. Companies that have completed share consolidations before March 1 will have a six-month extension, and will only be assessed for compliance on Sept 1, 2016.

Share consolidation has turned out to be the most popular method for companies that did not meet the requirement. Of the 167 companies that are likely to be affected by the minimum trading price as at end-October, 2015, only 94 had taken action towards compliance, according to the Singapore Exchange. Of those 94, 86 chose to use share consolidation.

In theory, the post-consolidation share price should scale proportionately with the consolidation ratio. In other words, a consolidation of four 10-cent shares into one share should result in a post-consolidation share worth 40 cents. But that has not worked according to plan for about 27 per cent of Mainboard companies that have consolidated their shares since 2014, by one broker's estimate. Those companies' share prices closed below 20 Singapore cents on Friday, meaning that they are still at risk of non-compliance.

One of those companies is Qian Hu Corp, a distributor of ornamental fish and a frequent recipient of corporate governance awards. Qian Hu, whose shares were trading at about 8.2 Singapore cents before it announced plans for a four-into-one consolidation in May, is once again trading below the threshold, at 16.4 Singapore cents at Friday's close.

Qian Hu executive chairman and managing director Kenny Yap could only sound a note of optimism: "Qian Hu is transforming, and after the transformation we believe our result would be better and hopefully the market can recognise that and thus reflect (it) on our share price. We still have time."

Mr Yap is, not surprisingly, not a fan of the minimum trading price: "I personally do not see the merit of having a minimum price. Companies have no control over stock markets and...economic situations. What if there is a Great Recession again and all companies, good and bad, suffer from low share prices? Is it fair to punish those companies whose share prices fall below the minimum price? Also, some small companies' shares will become even more illiquid due to small float after shares consolidation."

But share consolidation is not the only solution for companies. Companies could try to boost the value of the company by pursuing strategic deals. Mergers and acquisitions lawyer David Chong of Shook Lin & Bok said finding a high-profile investor can give the market greater confidence in the company and boost the share price.

"A lot of the more successful companies would have a strategic private equity fund investor come in and take a fairly sizeable stake," Mr Chong said. "It gives the market confidence. Look at what (Singapore government-owned investment company) Temasek Holdings has done for Olam International. Apart from bulge bracket, sovereign wealth fund players like Temasek, there are a lot of other credible, smaller funds, and if they are going to take up a sizeable stake it could be a real shot in the arm."

Mr Chong, however, noted that companies need to generally be in industries that are attractive to the funds.

There is also the question of control, which is partly why another strategic option - the reverse takeover - has not been popular beyond the challenges of finding a willing and suitable deal counterparty.

"Reverse takeovers are one possibility, but whoever is the controlling shareholder of the day would lose control," Mr Chong said.

Companies could seek to free themselves from the trading price obligation altogether and yet remain listed by seeking a transfer to the Catalist board.

Prime Partners corporate finance managing director Mark Liew said Catalist, which is tailored towards higher-growth companies, could offer some of the current Mainboard companies a chance to retool without a potential sword of Damocles hanging over them.

"Those that have done share consolidation, sad to say not all of them may be out of the woods," Mr Liew said. "If you fall again and the six-month average goes below 20 cents you may have to look at the issue again. I think more boards are thinking more seriously about the options that are available to the company."

Catalist's approval limits and processes could also be friendlier for companies that need to rebuild.

"The Catalist board is meant for growth companies, so hopefully those mainboard companies that do transfer can make use of the platform to restructure and raise capital more quickly from the market, transform themselves and eventually move back to the Mainboard," Mr Liew said. "A company transferring from Catalist to Mainboard means you've grown and matured. Transferring the other way probably means you need to restructure."

One major obstacle, however, is that a listing on Catalist requires the hiring of a continuing sponsor, whose approval must be obtained for every announcement, circular and annual report.

"That's actually a big shift for some of the companies because they're used to doing it on their own," said Mr Liew, who added that there might be an incremental cost increase for companies to engage a continuing sponsor.

Qian Hu's Mr Yap was quick to shut down thoughts of a Catalist listing.

"No, we are not considering moving to Catalist," Mr Yap said. "We like to be on the Mainboard and do not like to have a sponsor breathing down our neck."

Other critics of the Catalist route also argue that having non-compliant companies shift to Catalist from the Mainboard does not help to improve market quality, the key reason for imposing a minimum trading price.

"For Catalist, I don't see how that helps, to be honest," Mr Chong said. "It's not as if in the Singapore market investors are more willing to trade on Catalist counters than Mainboard counters. It's not going to improve liquidity."

Lawyer Robson Lee of Gibson Dunn said that moving too many weak companies to Catalist could also hurt that board's image.

"Catalist is a market for promising fledgling companies to tap the capital market for funds to grow and develop further," Mr Lee said. "To allow penny-stock Mainboard issuers to downgrade to a Catalist listing could inevitably adulterate the brand and image of Catalist that has been vaunted to be a springboard platform for promising companies with good growth prospects."

Companies that cannot comply with the minimum trading price will eventually have to face the prospect of delisting. On the face of it, that might not be an ideal scenario for Singapore's equity market if there are too many companies headed out the door, Mr Chong said.

"You can't kill the goose that lays the golden egg," he said. "The healthy development would be to have more listings than what is taken out."

Mr Lee advocates creating an alternative over-the-counter (OTC) platform so that minority shareholders are not stranded.

"Penny stock companies that cannot comply with the minimum trading price should be allowed to trade OTC," Mr Lee said. "Such companies should be required to re-comply with the listing requirements of either Catalist or Mainboard (like all other new listing candidates) before they are permitted to exit from the OTC market. And that should only happen after the business fundamentals have been sustainably strengthened to qualify for either a Catalist or Main Board listing."