Singapore’s stock exchange has had a difficult 2014 so far, with a lack of IPOs and de-listings of popular shares causing a steep drop in trading volumes. Among the moves by bourse to win back companies and investors are proposed new rules for secondary listings on the SGX, with companies from developed markets being exempt from regulations such as disclosure requirements on interested party transactions, major corporate transactions and de-listings. Ranajit Dam assesses the impact these new rules could have.

With additional contributions by Anshuman Daga of Reuters

For the Singapore stock exchange, 2014 hasn’t been a banner year thus far. This year has seen a sharp drop-off in IPOs and some big deals take a chunk of popular shares off market - both developments adding to the pain caused by a penny-stock scandal last year. It’s been a particularly difficult comedown for a bourse with lofty ambitions: In 2010, Singapore Exchange Ltd made an unsuccessful $8 billion bid for Australia's ASX Ltd in 2010, and even today, it is one of the most international of Asia's bourses with some 40 percent of its listed companies from outside the city-state, many from China.

However, experts say Singapore's stock market is becoming a niche player - popular for yield plays such as real estate investment trusts (REITs) and business trusts, as well as the mineral, oil and gas sector but not too much else. “They have had a pretty bad run,” says Philippe Espinasse, a former investment banker and author of IPO: A Global Guide, adding that the bourse had to attract more types of deals. “It's a market that has seen so many of these [REIT and business trust] deals and very little else that people tend to think that it's all that it can take.”

Recent trading numbers have been ugly. In the first five months of 2014, share trading on SGX fell by a third to $92.4 billion, making it the second-worst performer among Asia-Pacific bourses after Thailand, data from the World Federation of Exchanges show. In contrast, Hong Kong Exchanges & Clearing Ltd saw a 9 percent increase to $614.6 billion. Much of SGX’s decline stems from an October crash in penny stocks, the most actively traded shares on the bourse. That scared off retail investors, who are estimated to account for just 9 percent of trade compared to 25 percent in Hong Kong.

And things are not being helped by a record $13 billion of takeovers of Singapore-listed companies so far this year - as owners, put off by the decline in trading volume and encouraged by cheap credit opt to take firms off market. Major delistings include shopping mall operator CapitaMalls Asia, which had accounted for 5 percent of the Strait Times Index's trading value, after property developer CapitaLand Ltd offered S$3.2 billion ($2.6 billion) to buy out minority shareholders. A consortium led by state investor Temasek Holdings also lifted its stake in commodities trader Olam International Ltd to 80 percent from around 52 percent, leading to a sizeable reduction in the company's free float. "I see the emergence in taking companies off the exchange, but I don't see the new ones coming in to replace," says investor Jim Rogers.

Singapore's IPO market is having its slowest start since the first half of 2012, having managed to list just six companies from January till June 20, fewer than Thailand and Bangladesh which have had nine each, and far behind Hong Kong which has had 30, according to Thomson Reuters data. Proceeds from Singapore IPOs have fallen 72 percent to $774 million so far this year from the same period a year earlier, reducing SGX's market share in Asia-Pacific to 3.3 percent from 19.2 percent. The last big Singapore IPO over $1 billion was a REIT in February 2013, while the only big name of late to announce a listing is Russia's Gazprom - but only a dual listing, raising no funds.

“The IPO market hasn’t been too active in the last six months, and I suppose there are two reasons behind that,” says Sin Boon Ann, a deputy managing director at Drew & Napier and co-head of the firm’s capital markets practice. “One is that the overall climate has not been encouraging for IPOs at this time, and the second thing is that the other venues have become more popular, particularly for companies from emerging economies like China and elsewhere.” However, he says that as the economy improves, the volume of IPO activity should pick up in the next six months or so. “We’re beginning to see an increase in the number of companies looking to list in the market.” says Sin. “What I do know is that in the first six months of this year, many of these companies have been doing their preparatory work in the hope that there will be a window of opportunity to take it forward. On my side, we’re working quite actively on a couple of matters, and we’re hoping to complete these and get these companies listed by the end of the year, both on Catalist and the main board.”

Seeking a turnaround

As the SGX seeks to win back investors, its Chief Executive Magnus Bocker has cut clearing fees on stock trades and signed up more than 10 financial firms to act as market makers, giving them rebates on clearing fees as incentives to boost liquidity. With the aim of attracting more overseas names to improve trading volume and raise its appeal for large IPOs, the bourse also proposed new rules for secondary listings on the SGX, under which companies from developed markets will be exempt from regulations such as disclosure requirements on interested party transactions, major corporate transactions and de-listings.

"We have received feedback from market professionals, from market participants that we are not very clear or very transparent on how we approach secondary listings and what are the standards and requirements that they have to meet," Mohamed Nasser, head of issuer regulation at the SGX, told reporters last month. “There is an element of uncertainty in the way we have reviewed in the past," he said.

There are 33 companies with secondary listings on the SGX, including Prudential Plc and IHH Healthcare Bhd. Sin says that while secondary listings in Singapore were initially received with excitement, they had lost some of their shine in recent times. “For a market to work for secondary listings, there must be sufficient liquidity and sufficient volume,” he says. “The problem with secondary listings for some of these issuers is that the liquidity is not enough and there aren’t sufficient research reports in these markets to interest local investors.” He adds that what is worse is that if there’s an arbitraging opportunity, it tends to go to the lower level rather than to the higher level. “It’s a very simple question of choice: if I can pick up the same stock for cheaper, then why do I want to pay a premium for it?” he asks. “A lack of demand has had an effect on the performance of some of these counters, and this is coupled with the fact that there is not enough volume.”

Under the new methodology, companies will be grouped under developed or developing markets based on classifications from index providers. If a company has a primary listing in any of the 23 developed markets such as Australia, United Kingdom or Hong Kong, SGX will not impose additional listing rules on the company, thus making it easier for companies seeking secondary listings in Singapore. "This approach recognises that for secondary listings, the primary regulator role and oversight lie with the exchange and supervisory regulator in the jurisdiction of the home exchange," SGX said in a statement.

Existing listed companies from these 23 markets, which are already operating under additional obligations imposed by the SGX, will be freed from those extra compliance requirements three months after the proposed changes take place. The three months are meant to give investors an adjustment period. The bourse, which is the frontline regulator of the city-state's stock market as well as its commercial operator, expects to bring in the new regulation by the start of next year after a public consultation process. "Perhaps you'll find interest from some of these developed jurisdictions where we already have a handful of companies listed," says Simon Lim, head of listings for Southeast Asia at the SGX.

Market watchers feel that SGX’s proposals for a new regulatory framework for secondary listings could be the key that unlocks the door to attracting an even greater number of overseas issuers. “Should SGX's proposals go ahead, we expect this number to increase as it makes Singapore a much more compelling proposition for the increasing number of foreign companies gazing east and eyeing access to the growing pools of available capital and business prospects in the region,” says Neil Atkinson, Head of BNY Mellon's depositary receipts business in Asia-Pacific, in a research note.

Sin of Drew & Napier says that among the important changes brought about by the proposals is a greater clarity with regard to secondary listings in Singapore. “Currently, the parametres are not clearly defined: for example, which primary listings’ stocks or securities will you accept? Then there are expectations with regard to the standards of the primary listing, and in terms of disclosure, what kinds of disclosure  requirements does the SGX expect when it comes to the introduction document,” he says. “Also, if there are any rules that they want them to comply with for the secondary market, what will those rules be, and how will they impact the listed company in the primary exchange. Presumably these will relate to standards of disclosure, investor protection and corporate governance. We have handled deals from developed jurisdictions. So far, none of these deals require the companies to take on board more onerous obligations of disclosure and governance standards as a consequence of the secondary listing. I suppose this may have to do with the companies coming from more mature jurisdictions where the rules are better developed and rigorously enforced.” He adds that SGX recognises this, and the proposals have sought to clarify what jurisdictions will be deemed acceptable, and what will require further review to make the regulation of these companies more robust.

The road ahead

Key to improving the SGX's fortunes overall, experts say, will be winning big listings beyond the REITs it is known for and attracting growth stocks like Hong Kong. The kind of mid-sized Chinese firms that had flocked to SGX till a few years ago have been put off due to depressed valuations, the lack of retail investor interest, and they now have better options in Hong Kong and China. Attracting listings from other parts of Southeast Asia has also become more challenging as neighbouring countries step up efforts to develop their own bourses. "If Singapore could be the one go-to place for investing in Southeast Asia, that'll be great, but it just isn't going to happen," says Mark Matthews, head of Asia research at Bank Julius Baer.

Sin says that making Singapore’s capital markets will require more than just SGX’s initiatives, and cites a number of factors that need to come into play. “For one, is there a sufficient pool of shares available for trading? I know there are some very popular counters where the available pool is very limited. So if you actually want to buy or trade on these counters, you won’t find a lot because it’s all very closely held. Liquidity is very important,” he says.

“Secondly, as a financial sector hub, are we creating enough spread of funds that are institutional funds that look into not just bigger entities and blue-chip companies, but also the emerging companies that have smaller market cap which have huge growth potential? Institutional funds are a necessary part of the ecosystem for securities. Unfortunately, many of these funds are not established to look at companies with a market cap of less than S$300 million, where many of the companies that are bound for listings belong to. Having more institutional funds in the small- to mid-cap sector will certainly help to strengthen capital raising in the longer term. Thirdly, we need to develop a more active retail market. This may be achieved through investor education, and reviewing our policies on allowing investors to have more credit to invest in shares. This will certainly result in making the market more vibrant.”

He also suggests making procedures easier for secondary listings by requiring a shorter time for review, having a better understanding of where these companies come from, posing fewer requirements, and thus reducing the number of hurdles for them to cross. He believes the cost of listing should be kept low to make the exercise attractive. “Successful secondary listings require much information from research about the issuer. You can’t just list and hope that people will pick you up. There needs to be analyst write-ups and other reports on the company, so that interest may be generated as well,” he says.