Word in the New$: De-listing
by Ryan Ong
SINGAPORE aims to be Asia’s top financial hub, which is a bit difficult if our stock market resembles a five stall pasar malam in Tengah. Blame it on de-listings: As of 2016, almost $7.7 billion in market capitalisation has been wiped off the Singapore Exchange (SGX). The de-listing of companies like SMRT, while perhaps necessary, is stomping all over SGX’s attempt to compete with neighbours like Indonesia, Thailand, and Malaysia. What are de-listings? Well…
What is a de-listing?
A de-listing occurs when a company listed on the stock exchange is taken off it. This can happen on a voluntary or involuntary basis.
A voluntary de-listing occurs when the costs of being listed outweigh the benefits. Being listed imposes a lot of conditions and fees. The simplest of these is having their books audited, and their financial statements open to the public. Then there is the issue of shareholder relations, interference in business from shareholders, and having to host Annual General Meetings where there are still shareholders who ask “why don’t you put the plus and minus in front of items in the balance sheet?”
One of the key reasons for SMRT’s de-listing was to allow it to focus on core goals. While SMRT was listed, its senior management had to answer to shareholders, and shareholders are generally more concerned with how much money they’re making, not how good SMRT’s service is. Hey, people who drive can probably also afford more SMRT shares.
Don’t ask me how exactly shareholders have gotten in SMRT’s way, as the company hasn’t pointed out any specific examples (and why would they? No one wants unnecessary conflict). But the general theory behind it holds: Shareholders can motivate the company to seek financial benefits, at the cost of its public service.
For example, if you look at its last annual report, SMRT’s Earnings Before Interest and Tax (EBIT) for its non-rail services (advertising, the shop spaces in the train stations, the cabs, and so forth) is higher than for rail services. If shareholders were mercenary enough, they might be wondering if it’s worth spending billions to upgrade the train system. Why not do the minimum, and make profits and pay higher dividends?
With Temasek Holdings taking SMRT off the exchange, this is precisely the kind of interference that can be stopped.
The other reason to voluntarily de-list is when the market places too small a value on a company. The de-listing of Osim, for example, follows a 40 per cent drop in share price (from $2.61 to $1.56) between Sept 2014 and Sept 2015. This is usually on the back of poor performance by the company. Eu Yan Sang, also in the process of de-listing, saw a 95 per cent plunge in its net profits for the third quarter of this year.
When the market doesn’t value the company much, there’s no point wasting time and money on staying listed. It makes more sense to de-list, consolidate the business (without the interference of shareholders to boot), and maybe come back to the stock exchange in the future.
How does the de-listing happen?
For a voluntary de-listing to occur, SGX has three conditions in its rulebook:
(1) the issuer convenes a general meeting to obtain shareholder approval for the delisting;
(2) the resolution to delist the issuer has been approved by a majority of at least 75 per cent of the total number of issued shares excluding treasury shares held by the shareholders present and voting, on a poll, either in person or by proxy at the meeting (the issuer’s directors and controlling shareholder need not abstain from voting on the resolution); and
(3) the resolution has not been voted against by 10 per cent or more of the total number of issued shares excluding treasury shares held by the shareholders present and voting, on a poll, either in person or by proxy at the meeting.
This is why companies that want to de-list move to buy back their shares. They want to ensure they have the requisite 75 per cent, and minimise the odds of a 10 per cent vote against de-listing. In some cases, this can cause share prices to temporarily spike. Some people will buy the shares in the hopes of extor… of making a profit, when the company has to offer a high price to buy back the shares.
What about involuntary de-listings?
These occur when a company breaks the rules of the exchange (such as by lying in its financial statements), or simply fails to meet requirements like minimum share prices. A recent victim of this was fashion chain Aeropostale, which was de-listed from the New York Stock Exchange (NYSE) prior to a bankruptcy filing.
Most of the time, a company that is involuntarily de-listed is on its last legs. For obvious reasons, there won’t be a big rush to buy shares in hopes of a lucrative buyback offer.
Singapore has had fewer IPOs than de-listings
Since 2015, there have been fewer Initial Public Offerings (IPOs) on SGX. The number of de-listings exceeds the number of companies being listed. If left uncorrected, Singapore could end up with a stagnant stock exchange. Companies won’t believe they can raise the money they need by listing here, and they’ll list in other countries like Thailand and Malaysia instead. In a “big picture” sense, it also provides fewer investment and trading opportunities for Singaporeans.
Hopefully, it’s just a symptom of the weak global economy and not a reflection of deeper problems.
Featured image from TMG file.
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