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Singapore exchange proposes changes to IPO structure

Nicholas ChangGerald Cheong
The Singapore Exchange (SGX) has proposed some significant initiatives to the offer structure relating to initial public offerings (IPOs).

In Singapore, the offer structure for an IPO normally comprises a placement tranche and a public subscription tranche. For Mainboard IPOs, the SGX listing rules specify that the shareholding spread and distribution requirement for companies with market capitalisation below S$300 million ($244.9 million) must have a public float of at least 25% to be held by at least 500 shareholders. This number of shareholders includes shareholders from both the public subscription tranche and the placement tranche. This rule provides assurance of fair and orderly trading of shares when listed. There is, however, no requirement for Mainboard listing applications to allocate a minimum proportion of shares to the public subscription tranche as a method of offering.

Under the new proposal, the SGX seeks to impose a requirement that a minimum initial allocation of 5% of the shares offered under an IPO be allocated to the public subscription tranche.

A claw-back mechanism is proposed to increase the minimum allocation under the public subscription tranche to 10% if the public subscription tranche is over-subscribed by 15 to 20 times. The minimum allocation will be increased to 20% when the public subscription tranche is over-subscribed by more than 50 times.

The proposals also introduce a reverse claw-back mechanism to allow the transfer from the public subscription tranche to the placement tranche should there be insufficient demand in the public subscription tranche during the initial allocation. This reverse claw-back mechanism is subject to the issuer meeting the prescribed minimum shareholding spread requirements in the SGX Listing Manual.

It is expected that with the introduction of the above proposals, the consequent increase in retail investor participation will enhance the vibrancy of trading in the secondary market, leading to greater liquidity and potentially improved valuations for listed companies. There would also be an easing of pent-up frustration when market sentiment is bullish or where there is unsatisfied public demand for specific IPOs where only a small proportion of shares are made available during the public subscription tranche.

Despite these benefits, there are also possible concerns, particularly on the part of issue managers and underwriters who prefer to allocate shares via the placement tranche where they have more control and certainty of the process with respect to the public subscription tranche where the rate of subscription is only ascertained at end of the public offer period.

In balancing the above considerations, the SGX takes the view that while the allocation of shares between the public subscription and placement tranches should remain a primarily commercial decision for issuers and underwriters, the proposed initiatives will gradually increase the proportion of shares allocated to the public subscription tranche and would be optimal for the further development of Singapore's capital markets.

Nicholas Chang and Gerald Cheong

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