Spanning the Straits of Johor, the Johor–Singapore Causeway and Tuas Second Link are among the busiest foot crossings in the world. Nearly 300,000 people used them to trudge between Malaysia and Singapore each day, according to Singapore’s Immigration Department.
Now, the two neighbours and erstwhile rivals want to create a cross-market stock trading link that will make trading as smooth and convenient as travelling across the border.
But investors hoping for the same kind of success as mutual market access schemes elsewhere in the region must be wary of some key differences between Singapore and Malaysia which – while they were once the same country – have evolved into very difference markets.
On Tuesday, Malaysian and Singaporean regulators announced they would establish a tie-up between Bursa Malaysia and Singapore Exchange (SGX) by the end of this year, in a bid to connect the two equity markets with 1,600 or so stocks between them and more than $1.2 trillion in value.
In theory, this will provide serious investor traction and boost both markets in the long run with perks like eaiser clearing and settlements, as illustrated by the success of another financial hub.
Two Stock Connect schemes – one between Hong Kong and Shanghai in November 2014, and the other between Hong Kong and Shenzhen in December 2016 – have provided wider investor access and stimulated money flows.
According to Hong Kong Exchanges and Clearing (HKEx), the southbound trading turnover –from mainland investors buying into Hong Kong – totalled HK$3.327 trillion ($425.42 billion), bringing a net capital inflow of HK$637.5 billion as of the end of October. And the northbound channel’s turnover – trading by Hong Kong investors in the A-share market – totalled Rmb4.055 trillion ($643.65 billion) as of October 31, bringing a net capital inflow of Rmb326.3 billion into the mainland.
Naturally, attempting to replicate that kind of success looks appealing.
“The devil is in the detail, of course, but the trading link would appear to be positive for SGX and Bursa, as well as for the investing community in the long term,” said David Smith, head of corporate governance for Asia Pacific at Aberdeen Standard Investments.
But investors need to take note of a key drawback: a potential corporate governance gap between Bursa and SGX, especially as the latter jumps on the bandwagon of allowing companies to list with controversial dual-class shareholding structures. Absent sufficient regulatory oversight and coordination, this could leave investors facing more risks.
DUAL CLASS SHARES
Faced with heated regional competition, particularly from Hong Kong and Shenzhen, Singapore – which fancies itself as a start-up hub – is introducing dual-class shares on its exchange to lure hot new companies. This shareholding structure allows founders or senior executives to remain control of the firm post a listing, even if economic stake is smaller than that of other shareholders.
SGX last month said it would publish proposed rules this quarter that would allow dual-class share companies to have their first, primary listing in the Lion City – only weeks after HKEx approved a similar change.
Bursa Malaysia admitted contemplating dual-class shares last year, but later affirmed it had no immediate plans for a study of such changes. But with this trading link, Malaysian investors will still face the risks associated with dual class shares. As Jamie Allen of the Asian Corporate Governance Association put it, such a structure generally reflects weaker governance.
“Obviously from a corporate governance perspective, dual-class shares are discouraged…but exchanges are also driven by their business [interests],” said Suken Bhandari, Singapore-based executive director at ISS Corporate Solutions, a corporate governance specialist.
Some reassurance comes from the fact Singapore's sovereign funds play an essential role in its stock market, with entities such as GIC and Temasek holding massive stakes in some of its largest stocks. And these institutional investors are known to invest in firms with strong corporate governance.
“The regulators here have reluctantly opened up dual class shares, so my suspicion is that they will be very closely following the development and the companies that are dual class listed...and any abuse of this structure will invite regulatory scrutiny fairly quickly,” Bhandari said.
CURRENT PAR
Now, “Malaysia is at about par with Singapore” in terms of corporate governance requirements, said Bhandari. His firm assesses metrics – including average board size and independence, average director tenure, and number of directors sitting on more than six boards – and finds Singapore and Malaysia run “neck to neck” in these parameters (see picture).
Malaysia actually does a better job than Singapore in the average number of women on board, he added, partly because Malaysian regulators require a certain number of women on boards while Singapore doesn’t.
But even without dual class shares, one difference between the two markets could also bring potential risk to investors.
Unlike Singapore where the block shareholders are government related entities, Malaysia has a concentration of companies owned by powerful families.
“With family-owned companies, generally there is heavy tension between families trying to maintain control versus focusing on shareholder value, and we’ve seen that in Japan, South Korea, Hong Kong and Taiwan as well,” Bhandari said.
While Singapore has a number of block-owned listed companies, the fact that they are owned by some of the largest pension funds in the world means their governance is generally strong.
In the World Bank's latest report on economies' ease of doing business, Singapore and Malaysia ranked thefirst and second in East Asia, respectively, on protecting minority investors. Hopefully, that will remain the case after dual class shares are introduced.
