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SGX's first DCS listing is a letdown

Jeffrey Tan
Jeffrey Tan4/17/2020 07:00 AM GMT+08  • 7 min read
SGX's first DCS listing is a letdown
SINGAPORE (April 17): When the dual-class shares (DCS) structure for Singapore-listed companies was first mooted in 2016, the proposal generated quite a buzz. This came at a time when the Singapore Exchange (SGX), itself suffering from a dearth of major I
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SINGAPORE (April 17): When the dual-class shares (DCS) structure for Singapore-listed companies was first mooted in 2016, the proposal generated quite a buzz. This came at a time when the Singapore Exchange (SGX), itself suffering from a dearth of major IPOs, was salivating at the prospects of clinching a blockbuster IPO similar to that of Alibaba Group Holding’s listing on the New York Stock Exchange in 2014.

The usual criticism of DCS revolves around the risks of entrenchment and expropriation by the founder, which could be detrimental to the interest of minority shareholders. This is because the founder, who is also usually part of management, would be accorded greater voting power. That would be unfair to ordinary shareholders, who have only one vote a share.

On the other hand, proponents of DCS argue that this structure was crucial to attracting exciting growth companies to list here. This is especially true for those that operate in the technology and New Economy sectors. The founder of such companies would have greater control to realise his growth vision for the company, unencumbered by opposition from other shareholders. For example, the company can easily acquire or dispose of an asset without the need to obtain significant approval from minority shareholders.

Back in 2016, among the advocates of DCS was the Listings Advisory Committee (LAC), an independent external committee tasked to review the listing process. The LAC had given its approval after reviewing the suitability of implementing DCS here. Gautam Banerjee, chairman of the LAC then, said he believes that companies in the New Economy and technology sectors would prefer a DCS structure.

“We want our stock exchange to be able to consider all sorts of structures. Given that we don’t have a hinterland, the exchange needs its competitive edge, and the option to look at people who apply to us [for listing] with a very broad mind,” Banerjee told The Straits Times in 2016.

But, of course, SGX would be selective in allowing which companies to list with a DCS structure to prevent abuse. “...I think ultimately the structure will have a limited application [in Singapore]. We are not opening the flood- gate, and we are not doing this to cater to any specific company. Quite frankly, at the moment, I can’t think of any suitable applicant the SGX should aim for,” he added.

One of DCS’s staunchest critics was Mak Yuen Teen, associate professor of accounting at NUS Business School. He reportedly said that the pursuit of DCS makes SGX look desperate to attract listings at any cost.

In a series of blog posts, Mak highlighted the historical context and empirical evidence against DCS in the US. He also warned of the dangers of implementing it without considering the differences in legal and institutional environments between the US and Singapore. Moreover, he noted the difficulty of implementing “meaningful” safeguard without defeating the raison d’etre for DCS. “Most institutional investors are against [DCS], and we should brace ourselves for criticism if we allow it,” he wrote in 2016.

Nevertheless, approval by the LAC paved the way for Singapore regulators to allow companies to list with a DCS structure. In 2017, SGX put out a consultation paper to gather feedback from the market. It issued another consultation paper in early 2018, following feedback from the first consultation paper. On June 26, 2018, SGX launched the DCS framework, outlining several safeguards to enhance the protection of minority shareholders. The stock exchange was finally ready to receive its first listing of a DCS company.

DCS for financial services firm

However, almost two years after the framework was drawn up, SGX’s first DCS listing was still nowhere to be seen. As I recall, SGX officials could only give vague responses when the media, including myself, raised the question.

That was until April 8 when SGX announced that AMTD International was the first company to list under the DCS structure. About 23.9 million Class A ordinary shares of the company were listed on the Mainboard and opened at $13.95. The counter closed at $15.33 on April 16. Interestingly, these shares are only secondary listed. AMTD’s primary listing is on the New York Stock Exchange. The company listed its Class B ordinary shares there in April last year.

According to the company’s prospectus filed to the US Securities and Exchange Commission (SEC), a Class A ordinary share is entitled to one vote and is not convertible into a Class B ordinary share. Each Class B ordinary share is entitled to 20 votes, subject to certain conditions.

AMTD International is a Hong Kong-headquartered financial services company. It is a subsidiary of AMTD Group and houses the latter’s businesses in investment banking, asset management and strategic investment. The company was incorporated in Cayman Islands in February last year, according to its prospectus. AMTD Group was formerly known as Allday Enterprises and was founded in 2003 by Asian tycoon Li Ka-shing’s CK Hutchinson Holdings, adds the prospectus.

AMTD International is led by a 40-year old Calvin Choi, who is CEO and chairman at both the company and AMTD Group. The compa- ny’s website notes that the former UBS banker has nearly 20 years of experience related to investment banking, international capital markets and auditing. He is also a non-executive director of Bank of Qingdao, which is listed on the Mainboards of the Hong Kong Stock Exchange and Shenzhen Stock Exchange.

Choi indirectly holds 65 million Class B ordinary shares or 28.2% interest in the company, representing 32.3% of the total voting power. On the other hand, AMTD Group directly owns 200 million Class B ordinary shares or 86.7% interest in the company, representing 99.2% of the total voting power.

Where are the tech companies?

AMTD International’s listing under the DCS structure raises several questions. Why did SGX allow a financial services company to list under the DCS structure? After all, it has emphasised many times that the DCS structure was specifically implemented to welcome technology and New Economy companies. To be fair, SGX officials had clarified that companies operating in other sectors can also opt to list under the DCS structure, provided that they fulfil the relevant requirements.

Perhaps the justification lies in the fact that apart from providing investment banking and asset management services, AMTD International makes long-term strategic investments in Asia’s new economy sector companies.

Choi, whose company is one of the bidders for a Singapore digital banking licence, says that a listing on SGX would enable AMTD International to connect companies with global investors through Singapore and other Southeast Asian markets. “Most importantly, we are committed to bringing into Singapore our SpiderNet ecosystem, expertise in capital markets and the new economy sector to empower local entrepreneurs, support their innovations and developments and bring their equities or bonds to ultimately list on recognised exchanges,” he says.

Still, AMTD International at its core is a financial services company. It is neither a technology nor New Economy company. Providing financial services to companies operating in these two sectors does not change that.

So, where are the supposed technology and New Economy companies that SGX had so badly wanted to bring here to be listed? In my view, the explosive growth of private equity (PE) investments in these companies in recent years has made redundant the need to tap funds from the stock market.

Case in point are ride-hailing giants Grab and Gojek that have benefitted from huge PE investments. Founders rarely want to subject themselves and their companies to stringent listing disclosure and compliance. Why would they do so when they can hide behind PE funds to avoid public scrutiny?

It is not immediately clear to me if SGX was keeping a close eye on the surge in PE investments when it was mulling over the implementation of DCS here. But it does appear to me that the stock exchange is late to the DCS game when PE investments are all the rage now.

In my view, the lack of such companies has forced SGX to settle on AMTD International as its first DCS listing. The company’s secondary listing status here only reinforces my point. Until we see the next DCS listing of a technology or New Economy sector company, SGX’s first DCS listing would be seen as a face-saving effort. I hope to see Singapore's next DCS listing be a company in the likes of Alibaba.

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