SGX enters new era as it starts dual-class shares for qualifying IPOs

Singapore

SINGAPORE Exchange (SGX) on Tuesday approved the biggest change to its listing rules, giving the go-ahead for companies with dual-class shares (DCS) structures to seek a primary listing on its main board with immediate effect.

With the rules and safeguards in place, new-economy stocks - such as those of start-ups and technology firms - which have shares with different voting rights will now be allowed to raise funds through an initial public listing (IPO) in Singapore.

SGX's chief executive officer Loh Boon Chye said on Tuesday: "SGX today joins global exchanges in Canada, Europe and the US, where companies led by founder entrepreneurs who require funding for a rapid ramp-up of the business while retaining the ability to execute on a long-term strategy, are able to list. Investors who understand and agree with the business model and management of DCS companies will also have more choice."

A spokesman from the Monetary Authority of Singapore (MAS) said: "SGX's framework for DCS structures strikes a balance between supporting high-growth companies and having in place safeguards to mitigate governance risks associated with such structures. DCS listings will broaden the range of investment options for investors and add vibrancy to Singapore's capital markets."

SGX's green light comes barely two months after rival Hong Kong Exchanges and Clearing (HKEx) broke its "one-share-one-vote" principle - considered the bedrock of good corporate governance standards - and accepted companies with weighted voting rights structures to list.

Chinese smartphone maker Xiaomi, targeting a valuation of over US$50 billion, will be the first to list under HKEx's new framework.

SGX's decision to adopt the controversial structure comes after two rounds of public consultations, and months of intense debates with the industry and experts on its pros and cons.

DCS companies must meet SGX's existing main board entry criteria, as well as satisfy the exchange on their suitability to list under the structure.

In place are safeguards against the two main risks presented by DCS structure - expropriation and entrenchment risks.

For example, SGX requires an enhanced voting process in which all shares carry one vote each regardless of class, for the appointment and removal of independent directors and /or auditors, variation of rights attached to any class of shares, a reverse takeover, a winding-up or a delisting.

To prevent founders from entrenching themselves, each multiple vote (MV) share will carry a maximum of 10 votes, and be limited to named individuals whose scope must be specified at the IPO. There are also sunset clauses where MV shares will auto-convert to ordinary voting (OV) shares under circumstances the company must stipulate at the time of the IPO.

Market observers said SGX has done an extremely thorough study ahead of adopting DCS.

Vineet Mishra, who heads Singapore investment banking and South-east Asia Equities Capital Market at JP Morgan, told The Business Times: "SGX's measures, rules and safeguards are in line with acceptable market standards. Singapore is more prescriptive in its listing standards than the more developed exchanges today. But it is the right approach as a starting point, considering the fact that the standards in developed markets have evolved over time."

Tham Tuck Seng, Capital Markets Leader at PwC Singapore, said the safeguards are sufficient to protect minority shareholders.

"Ultimately, the implementation of the DCS rules are really a balancing act - there must be sufficient safeguards to protect the non-controlling shareholders; they must not be overly burdensome and yet be flexible enough to attract DCS listing aspirants, especially new-economy companies which are innovative and have high growth potential."

He added that the one-share-one-vote structure would continue to be the default structure for IPOs in Singapore.

Stefanie Yuen-Thio, joint managing partner at TSMP Law Corporation, said: "The move by the SGX to allow dual-class shares is great news for the Singapore market and shows our regulators' openness to progressive changes.

"The rules strike a good balance between innovation and corporate governance, restricting the extra voting rights from being exercised on important matters, on which the founders' interests may not be aligned with those of minority shareholders.

"They are also more flexible than Hong Kong's new rules, which focus on innovative companies; in contrast, Singapore's rules do not have such eligibility requirements and the regulators have a freer hand in considering which companies and which sectors should be allowed to use dual-class shares in their IPOs."

Eng-Kwok Seat Moey, DBS Group's head of Capital Markets, said the DCS structure fits well into mid-cap companies, notably those in technology startups and family-run businesses, many of which have been monitoring SGX's ruling on the structure before deciding on their listing venue.

"To be a financial market, we need to offer more products and be as comprehensive as possible."

Now that SGX has decided to allow a DCS structure despite the reservations of investors and stakeholders, Associate Professor Mak Yuen Teen of the National University of Singapore Business School said it is critical that SGX and sponsors exercise proper due diligence over the quality of companies using such structures.

The corporate governance advocate added: "In Hong Kong, where DCS has also been adopted, the Securities and Futures Commision has upped the heat on sponsors and taken some to task. Investors should not just rely on the safeguards but should be even more discerning with DCS companies."