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SGX increases thresholds for IPOs

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HONG KONG (Dow Jones Banking Intelligence)— Singapore Exchange Ltd (the SGX) has just introduced a new set of rules for admission to listing on its main board. This makes perfect sense and also addresses one of the exchange’s key weaknesses: a lack of liquidity caused by the presence of too many smaller, and lower quality, issuers. Hong Kong Exchanges and Clearing Limited (HKEx) should take notice.

The SGX is effectively now making it more attractive for larger companies to IPO and seek a listing in Singapore. This follows a series of earlier initiatives, including a US$250 million upgrade of what was already one of the fastest exchange matching systems in Asia, to make the SGX the world’s fastest; the introduction of continuous, all-day trading; and a reduction in minimum bid sizes.

From August 10, the new rules will raise the bar by setting higher quantitative requirements for IPOs. Issuers will now need a minimum market capitalization of S$150 million (US$120 million), as compared to S$80 million (US$64 million) previously, so long as the company has been profitable in the last financial year and can demonstrate an operating track record of at least three years. Those who are only able to show operating revenue in the last financial year will need a market capitalization of S$300 million (US$240 million) or higher.

Crucially, the profitability requirements have been given a makeover too: minimum consolidated pre-tax profit of at least S$30 million (US$24 million) will be mandatory for the latest financial year – also assuming an operating track record of at least three years. Previously, issuers could secure a listing on the main board with yearly profits as low as S$1 million, provided that the three-year, cumulative figure reached S$7.5 million. Smaller companies will still be able to list on Catalist, Singapore’s second board.

This is good news. The SGX is now wiping the slate clean to restore a somewhat dented reputation, as a number of smaller Chinese companies had secured listings that were seen as easier to achieve in the Lion City as compared to a quotation in Hong Kong. This also means that listed companies in Singapore should see a marked improvement in aftermarket trading volumes, something that has so far eluded Singapore, in spite of its can do attitude that saw, among other things, the introduction of the first real estate investment trusts (REITs) in East Asia (excluding Japan), as well as of business trusts, a structure that was later copied by HKEx – but then only once, with rather mixed fortunes.

[See my DJIB column of December 30, 2010: “SGX bets on innovation to catch up”]

The SGX has also stated it is looking at increasing the proportion of IPO tranches allocated to retail investors, particularly for listings that draw a high retail subscription. This is also interesting as public offer tranches in Singapore typically represent low to mid-single digit amounts in percentage terms. Such a move would now put offer structures for SGX IPOs on a par with the claw-back triggers commonly seen on HKEx.

The SGX was said to have recently been in merger talks (since denied) with London Stock Exchange Group PLC (LSE), which could have seen the $7 billion Singapore bourse take over its smaller, $4.3 billion European counterpart. Should it ever go ahead, the tie-up should throw up opportunities for cross listings in the mining and resources sectors in particular–an industry at the forefront of the earlier proposed (and pulled) mergers between the LSE and Canada’s TMX Group Inc, and Australia’s ASX Ltd…and the SGX.

(Philippe Espinasse worked as an investment banker in the U.S., Europe and Asia for more than 19 years and now writes and works as an independent consultant in Hong Kong. Visit his website at http://www.ipo-book.com. Readers should be aware that Philippe may own securities related to companies he writes about, may act as a consultant to companies he mentions and may know individuals cited in his articles. To comment on this column, please email djbankingintelligenceereditors@dowjones.com).

[This article was originally published on Dow Jones Banking Intelligence on 26 July 2012 and is reproduced with permission.]