Thursday, September 29, 2011





Published September 21, 2011
It's the market that decides on an offer's merits: SGX

IT is the market that decides on the commercial merits and attractiveness of an offer, and not the regulators.

The Singapore Exchange (SGX) drove home this point yesterday in a regulatory column aimed at explaining the differences between two capital structures: (a) a capital structure of ordinary and preference shares and (b) a capital structure involving dual-class ordinary shares.

The regulatory note was issued after SGX came in for recent criticisms over its reported approval of Manchester United's US$1 billion listing that will involve mainly preference shares.

'Singapore operates a market-driven and predominately disclosure-based regulatory regime with companies having the flexibility to structure the terms of an offer,' SGX said in the note. 'Market discipline will dictate the success of an offer and the market, not the regulators, decides on the commercial merits and attractiveness of an offer.'

Without referring to the Man U IPO, SGX noted that there has been a recent interest in dual classes of shares. 'Investors should not mistake a capital structure of ordinary and preference shares with a capital structure of dual-class ordinary shares,' it said. 'They are completely different.'

Ordinary shares and preference shares are different categories of securities entitled to different economic benefits, dividends and liquidation preference and bearing different risks.
Preference shares are ranked above ordinary shares in dividends and liquidation claims but normally do not have voting rights except on matters that affect their fundamental rights.
For assuming higher risks, ordinary shareholders have voting powers to influence and collectively decide the company's actions.

This is not the case for dual-class ordinary shares. The two classes of shares have the same economic benefits and bear the same risks but they differ in voting rights. Such unequal voting rights could become a sticky point in the event of a takeover bid.

Singapore, like most jurisdictions, allows companies to list both ordinary and preference shares. It does not allow the listing of dual-class ordinary shares.

Though Man U's reported listing of mostly preference shares does not breach SGX rules, SGX has come under fire for allowing the listing, which is said to compromise the influence of new shareholders.

Some market critics even question if SGX is being too willing to accommodate Man U's demands, given there were rumours that one reason Man U's billionaire owner Malcolm Glazer chose Singapore over Hong Kong was that listing requirements and regulations here were perceived to be more lax.

SGX said yesterday that it 'administers its rules in an even-handed manner so that the same high admission standards and continuing listing requirements apply to all listed companies, regardless of their country of incorporation'.


My thots....
Therein lies the inherent flaw in the SGX setup....
The message being communicated here is NOT wrong - SGX aim/goal/raison d'etre is to maximise profit and SGX operates on the "Buyers beware" disclosure based regime.
If investors do not know what is a "dual class" share or for that matter, the difference between Preference shares and common shares, SGX cannot be blamed. Investors buy at their own risk.
SGX merely provides the platform for listing and the buy N sell of shares.
          Where is the flaw?
          The flaw is that SGX also has the regulatory functions under its ambit !!
          The regulatory function in this case is in obvious conflict with its profit maximising function.
          The "flaw" as it is , does NOT lie with SGX
           - it lies with the structure which the MOF/MAS policymakers must look into.
Such conflict of interest issues will keep recurring and the replies from SGX will be seen as "lame" and laced with self-interest until and unless the regulatory functions are restructured and re-housed.
Whether it's with regards to HFT (high frequency & algo trading) or with regards to the issue of Preference shares, the same organisation that is profiting from and promoting that biz cannot at the same time claim that it can regulate those activities with "absolute" impartiality.
Any tiny tinge of doubt, creates uncertainty and breeds cynicsm and rumour mongering, something SGX can do w/o.
If Sg aspires to be an equity and financial powerhouse, these obvious areas of weakness must be remedied.
As an investor in SGX, I will also like to see that the regulatory functions be seperated.

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