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Proposed ASX listing rules curtail retail IPO access

Ben Bucknell  |  23 Jun 2016Text size  Decrease  Increase  |  

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If the ASX has its way in reducing the minimum number of investors needed for initial public offerings, this will cement the exclusion of ordinary investors from most IPOs.

The ASX has proposed reducing the minimum number of investors that a company must have to list to 100 (for large companies) or 200 (for small companies) in its consultation paper, "Updating ASX's admission requirements for listed entities".

If implemented, those changes would have a dire impact on Australian retail investors' ability to participate in IPOs.

Over 1,200 retail investors had protested against the changes in an OnMarket BookBuilds' (OMB) petition as at the time of writing.

The petition demands fair retail investor access to IPOs, which as detailed below occurs in Hong Kong and Singapore.

OMB will be delivering the petition to the ASX on 24 June when the consultation period ends. OMB urges retail investors to sign the petition in order to demand the same right as institutions to invest in every ASX company float.   

As it is, most retail investors consider themselves lucky if they get an allocation in any IPO.

This is not surprising because over the last 10 years, the average IPO has traded 14.8 per cent higher on its first day than the issue price.

But, most investors can only immediately think of Telstra (T3), Queensland Rail or Medibank when they think of IPOs.

That's because these are the only ones that most investors have been "invited" to bid into.

They might be surprised to learn there have been more than 1,000 IPOs in the last 10 years. They are surprised, because ordinary "mum and dad" investors, along with 99 per cent of self-managed super funds, can't get access to 99.7 per cent of IPOs on the ASX.

This means your average retail investor has to pay 15 per cent more, because they can only buy the shares after they begin trading.

Ordinary mum and dad investors, and their SMSF, end up buying shares from the institutions that were issued shares directly in the IPO.

In reality, the managers of the IPO process have unfettered discretion over the allocation process. So, as you would expect, they give IPO allocations to institutions that pay the most brokerage.

Currently, the ASX listing rules require companies to have 300, 350 or 400 shareholders (depending on other factors) to be eligible to list.

As it's difficult for most lead managers to get more than 200 institutional names on an IPO, a portion is given to a selected retail broker, who also has discretion to give allocations to selected clients only. Allocations are generally given to clients that pay the most brokerage.

A study by the UK's Financial Conduct Authority into all allocations of UK IPOs over the last five years confirms the link between allocations by lead managers and the trading commissions they receive.

It's reasonable to believe, in the absence of a similar study by ASIC, that the same practices occur in Australia.

Imagine if secondary trading worked the same way. First, you'd have to be invited in to trade. Then, your order to buy or sell shares would be queued on the basis of how much brokerage you had paid over say, the past year, relative to institutional investors with $1 billion under management.

Of course, even if you did get invited in, you'd probably choose not to participate. This is why OMB is calling for rules to ensure everyone can participate in IPOs, irrespective of their broker, and that allocations are made on a fair and pre-defined basis.

So, it is unsurprising that it is only when there is reasonable access and the assurance of a fair allocation process that retail investors come out in force. Once again, think of the Telstra, Medibank, Queensland Rail IPOs.

Imagine the benefits to companies that are raising capital, and the Australian economy generally, if the $600 billion in SMSFs were given assurances they would be treated as fairly in all IPOs, as they are in government privatisations.

Unlocking this pool of capital for IPOs could lower their cost of raising new equity, which would have benefits for the national economy.

Comparing the ASX changes to other international exchanges

The ASX is not following the lead of the Hong Kong Stock Exchange (HKEx) or the Singapore Stock Exchange (SGX) where in simple terms, 25 per cent to 40 per cent, respectively, of every IPO is reserved for retail investors.

OMB plans to ask the ASX for a listing rule to reserve at least 25 per cent of every IPO for bids under $100,000, in a pool available for every investor (irrespective of their broker). This rule would benefit all retail brokers as well.

Instead, the ASX is following the rules of the Hong Kong second board, the small-cap Growth Enterprise Market (GEM).

Hong Kong's second board only requires 100 shareholders, which is what the ASX is proposing. It also has no rule that guarantees public participation.

Ironically, representatives of Hong Kong's Securities & Futures Commission (SFC) and HKEx have recently made public statements that increasing the 100 shareholder rule, and other changes, are under consideration for GEM.

It was recently reported that a poll of 200 financial services executives and regulators at a Hong Kong conference found that 83 per cent said Hong Kong's small-cap GEM exchange should be reformed.

Furthermore, the global index provider MSCI has threatened to exclude GEM stocks from its global indices as a result of the high concentration of shareholders.

So why is the ASX wanting to implement these rules in Australia?




Free float does not mean equal access

The ASX's proposal to impose a minimum free float requirement of 20 per cent might be intended to improve liquidity, but it does not address retail investors' lack of access to IPOs.

In summary, the ASX listing rules define "free float" to mean shares held by persons that are not related to the directors of the company.

So, the entire free float could be entirely offered to one or more institutional investors. Free float does not guarantee one share ends up being allocated to retail investors.

The ASX's consultation paper on proposed listing rule changes does not make any reference to IPOs being fair.

Yet I believe the ASX has a duty to ensure its listing rules create a fair basis for all investors to participate, both in IPOs and secondary trading.

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Ben Bucknell is CEO of OnMarket BookBuilds. his is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind.

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