The Singapore Exchange (SGX) will require companies seeking to list on the mainboard to allocate at least some of their IPO shares to retail investors, hoping that increased retail participation could help bolster trading activities and improve market liquidity.
The rules, which come into effect on May 2, will require listing companies to reserve either 5% of the shares on offer or S$50 million ($35 million) of the deal to retail investors — whichever is lower. The nuance means that deals worth more than S$1 billion could end up allocating less than 5% to retail.
“Retail investors are important participants in the Singapore markets and giving them access to at least 5% of each mainboard IPO will encourage more to consider equity investing,” said Chew Sutat, SGX’s executive vice president and head of equities and fixed income, in a statement on Wednesday. “If market conditions permit, we encourage companies to make available more shares than the floor to retail investors.”
In practice, the new rule seems unlikely to have much impact, since nearly all of Singapore’s mainboard listings in recent years have voluntarily included a 5% public tranche. The only exception was Dasin Retail Trust, which reserved only 1.3% of its S$121 million IPO for public investors.
One Singapore-based equity capital markets banker said mainboard IPO companies normally include a public tranche in order to help them meet the minimum shareholder rule. Under the current regime, mainboard-listed companies of under S$300 million are required to have at least 500 shareholders.
The public tranche is also seen as a cheap way to raise publicity and brand awareness.
The new rule could work against the interests of investment banks, however, since it means fewer shares will be reserved for an institutional investor base that tends to be more predictable — and hold on for longer — than their retail counterparts. That could make it more difficult for banks to ensure a stable performance in the aftermarket.
Investment banks are also taking on extra market risk under the new regime because they will need to underwrite the shortfall in the public tranche in case of insufficient retail demand, according to the ECM banker.
Opposition from investment banks may be part of the reason behind SGX’s decision to set a 5% minimum threshold instead of the 10% minimum which it proposed in a consultation paper last year.
In the consultation paper, SGX also proposed to introduce a clawback mechanism to increase the size of the public tranche amid heavy demand. Under the proposal, the public tranche could increase to 20% of the IPO when it is more than 50 times oversubscribed.
The clawback mechanism was not included as part of Wednesday’s rule amendment.
According to the banker, the clawback mechanism is difficult to implement in practice because Singapore’s listing process is different from Hong Kong, the only jurisdiction in Asia where the mechanism applies.
Companies seeking to list on SGX typically need to complete the institutional offering before the retail offering begins. That means the mechanism — which triggers a clawback of shares from the institutional tranche to the retail tranche — is theoretically not possible since the institutional shares have already been placed during the retail bookbuild.
That mechanism works in Hong Kong because bookbuilding for the institutional and the retail tranche take place simultaneously.
In a separate announcement, the SGX said it will seek public opinion on the inclusion of a mid-day trading break from 12pm to 1pm, reversing its decision to introduce all-day trading in August 2011 and bringing back the lunch break for stock traders. The consultation will open until March 29.
