Price Stabilisation in Singapore

The authors examine the rules and regulations governing the operation of the price stabilisation mechanism in connection with an initial public offer of securities in Singapore under the Securities and Futures (Market Conduct) (Exemption) Regulations 2002 and the rationale for price stabilisation.

The Securities and Futures (Market Conduct) (Exception) Regulations 2002 (‘Regulations’) were enacted on 1 October 2002 pursuant to s 337(1) of the Securities and Futures Act (Cap 289) (‘the Act’). The Regulations provide an exemption that would allow price stabilisation to be effected in Singapore in respect of securities which are traded following an initial public offer (‘IPO’).

Price stabilisation involves a stabilising manager (typically, the lead manager of an IPO) buying or agreeing to buy the relevant securities in order to stabilise or maintain the market price of such securities. It is a complex and sophisticated process and is an important mechanism used by the lead manager of an IPO to ensure the success of the securities issue.

The inherent nature of price stabilisation involves, to a certain extent, market manipulation of the market price of the securities. As such, unless permitted (as in the case of stabilising actions in the context of an IPO), any attempt to carry out price stabilisation in any other forms amounts to a serious offence in Singapore and would have been caught by several provisions under the Act governing false trading,¹ market rigging,² securities market manipulation³ and certain conduct by connected persons⁴ and other persons⁵ in possession of ‘insider information’. Price stabilisation in the context for an IPO was permitted in Singapore as early as 1999 under reg 37A of the Securities Industry Regulations, the predecessor of the Regulations. It is not unique to Singapore. In the United States, United Kingdom and, more recently, Hong Kong, price stabilisation has also been permitted within the boundaries of the applicable regulations. The justification for this exemption of such market intervention is that price stabilisation, if regulated, is beneficial to the financial market. By maintaining a certain market price of the relevant securities such that the market price of such securities would not fall below the issue price during the issue period, price stabilisation facilitates the successful placement of shares, and minimises short-term price fluctuations (especially those caused by speculative trading which often takes place following the commencement of trading). Minimisation of short-term price fluctuations would ensure the development of a smoother and more orderly primary market and would instil a greater sense of confidence in Singapore’s financial market. Not surprisingly, price stabilisation is widely accepted by participants in the financial services industry as an important step forward in the development of Singapore’s financial markets. Recent IPOs where price stabilisation was provided for or effected include the IPOs of Ascendas Real Estate Investment Trust, MobileOne Limited, SingPost Limited and Full Apex (Holdings) Limited.

The Regulations permit stabilisation action to be taken only if provision has been made in advance for an over-allotment option to be granted by the issuer in respect of the IPO. The over-allotment option⁶ must have been disclosed in the prospectus issued in connection with the IPO and must be limited to no more than 15% of the total number of securities offered for subscription or sale in the IPO. Other prerequisites for price stabilisation permitted under the Regulations are dealt with at a later part of this article.

In order to cover the ‘over-allotment’ (in effect, an over-placement at the close of the IPO) of the securities, the stabilising manager will typically enter into a securities borrowing agreement with certain of the major shareholders of the issuer (the ‘lending shareholders’). Under this arrangement, the borrowed securities will be used in the first instance to satisfy the ‘over-allotment’. The securities borrowing agreement would usually provide for the return of the borrowed securities (or their equivalent) within a specified time following the end of the agreed loan period or earlier termination of the securities borrowing agreement. The stabilising manager should ensure that it is given sufficient time to effect the return of the securities.

Depending on the market condition, the stabilising manager may do one of two things to effect the return of the borrowed securities: (i) exercise the over-allotment option and cause the additional securities issued by the issuer to be given to the lending shareholders; or (ii) go into the secondary market to buy the securities following the commencement of trading and transfer the purchased securities to the lending shareholders at the appropriate time. The latter alternative is where stabilising action comes into play.

In conducting price stabilisation, the Regulations prescribe certain rules that would need to be observed. These rules can be broadly categorised into disclosure requirements, record-keeping requirements, restrictions on stabilisation action and limitation on pricing of stabilising transactions.

Before a stabilising manager can carry out any stabilising action, it would have to ensure that the following conditions are satisfied:⁷

The following are actions to be taken by the stabilising manager prior to the closing date of the IPO:

A public announcement must be made through MASNET one day immediately after the closing date of the total number of securities which is the subject of the over-allotment option in accordance with the prospectus.¹³

Stabilising action may only be carried out during the period commencing on the date of commencement of trading of the securities on the SGX-ST and ending on the earlier of: (i) the date of expiry of the period of 30 calendar days from the date of commencement of trading on the SGX-ST; or (ii) the date when the over-allotment of the securities as announced has been fully covered either through the exercise of the over-allotment option or the purchase of the securities from the market, or both.¹⁴

The stabilising manager is required by the Regulations to make public disclosures of the following:

It should be noted that once a public announcement of the cessation of stabilising action has been made, no further stabilising action shall be taken.

Notwithstanding that the stabilising manager is not required to disclose details of each and every stabilising transaction, a register maintaining records of the particulars of each such transaction including the price, quantity and name of the dealer in relation to every transaction must be kept,¹⁷ and shall be made available for inspection by SGX-ST.¹⁸

The stabilising manager must comply with the following guidelines when undertaking stabilising action:

Further, the Regulations provide expressly that the stabilising action can only be effected at a price lower than the price specified in the second column below and only under the corresponding circumstances stated under the first column:²¹

First Column Circumstances		Second Column Price
(1)	Initial stabilising action	The issue price
(2)	After initial stabilising action, where there has been a transaction of the shares by an independent buyer or seller at a price above the initial stabilising price on the Exchange	The issue price or the price at which the Independent transaction was carried out, whichever is the lower
(3)	After initial stabilising independent transaction as specified in item (2)	The Initial stabilising price

Note: In the second column above, ‘Issue Price’ means the price at which the shares are offered for subscription or sale through an initial public offer of shares or where the relevant shares are offered in more than one tranch at different prices, the highest price amongst the tranches.

It should be noted that the Regulations only dictate the ceiling price at which price stabilisation can be effected. There is no floor price but presumably, the stabilising manager is expected to conduct itself in a prudent manner and for the purpose of maintaining stability in the market price and not otherwise.

Prohibition Against Sell Orders Prior to the Commencement of a Stabilising Action and During the Period in Which Stabilising Action is Permitted under the Regulations

The stabilising manager cannot, directly or indirectly, effect or cause to be effected sell orders of the shares prior to the commencement of each stabilising transaction or during the period in which stabilising action is permitted.²² This is to prevent the stabilising manager and its associates from intentionally depressing the market price before buying from the market as part of the stabilising action.

This restriction on sell orders does not apply to a situation where the stabilising manager or an associate of the stabilising manager (in its capacity as a dealer) executes any sell order of the shares for a person who is not an associate of the issuer.²³ It should be noted that the definition of ‘associate’ as used in the Act is extremely wide.²⁴ Under the Regulations, the stabilising manager shall be responsible for ensuring compliance with the material rules under the Regulations.²⁵ The stabilising manager would therefore have to exercise prudence in ensuring that any acts of any of its associates would not be attributed to it. It can be argued that the Chinese walls which a stabilising manager typically has should minimise such risk although the strength of such a defence has not yet been tested in the local courts in this specific situation.

While the Regulations have to a great extent clarified and codified the practice of price stabilisation, further clarifications in the following areas would be useful:

The Regulations define ‘stabilising action’ to mean the action that the stabilising manager of an issue of securities takes in going into the securities market to buy or agree to buy the relevant securities in order to stabilise or maintain the market price of the relevant securities.²⁶ The definition of ‘securities’ in the Act is extremely wide. It is defined to include, inter alia, any right, option or derivative in respect of any stocks or shares, any right under a contract for differences or under any other contract the purpose or pretended purpose of which is to secure a profit or avoid a loss by reference to fluctuations: (i) in the value or price of stocks or shares, (ii) the value or price of any group of any such stocks or shares, or (iii) an index of any such stocks or shares. This seems to imply that price stabilisation can be achieved by buying or agreeing to buy derivatives where the underlying obligation is a share of the issuer. Perhaps a clarification from the relevant authorities in this area may encourage the use of derivatives in price stabilisation and nudge the price stabilisation mechanism in Singapore a notch up the financial sophistication ladder.

Regulation 3(3) of the Regulations states that ‘the stabilising manager shall comply with paragraphs (4) to (15)’ of the Regulations. These paragraphs are the substantive provisions in the Regulations governing disclosure requirements, record-keeping requirements, restrictions on stabilisation action and limits of pricing. There is however, no reference in reg 3(3) to the dealers that have been appointed by the stabilising manager. Should all acts and omissions of the dealers appointed by the stabilising manager be automatically attributed to the stabilising manager? Clarification is perhaps required on the scope of responsibility for the acts and omissions of a dealer under the Regulations and whether the stabilising manager is vicariously liable for such acts and omissions.

Unlike some jurisdictions, the Regulations do not currently create a safe harbour for stabilising action to be carried out overseas where such stabilising action would have an effect on the market price of the securities in Singapore. Given the increasing cross-border capital raising transactions and multi-jurisdictional listings, further relaxation in this aspect may be needed to meet the increasing sophistication of the market.

The safe harbour for price stabilisation created by the Regulations and its precedent regulations have brought the regulatory regime governing Singapore’s IPO market a step closer to international standards. We believe we will see an increased usage of the price stabilisation mechanism in Singapore as has been seen in recently completed IPOs, particularly those involving sizeable offers.

Ng Joo Khin, Serene Leow and Marcus Chow
Stamford Law Corporation
E-mail: jookhin.ng@stamfordlaw.com.sg

1	Section 197 of the Act.
2	Ibid.
3	Section 198 of the Act.
4	Section 218(2) of the Act.
5	Section 219(2) of the Act.
6	It is not within the scope of this article to go into a detailed description of the workings of an over-allotment option or a ‘green-shoe’. It suffices for the purpose of this article to mention that an over-allotment option gives the issue-manager or underwriter a right but not an obligation to subscribe for additional shares in the issuer in the event that the demand for the IPO shares is stronger than expected.
7	Regulation 3(2).
8	A ‘stabilising manager’ is defined in the Regulations to mean such manager as may be designated in writing by the issuer of an IPO of securities and notified to SGX-ST before the closing date of the IPO.
9	A ‘Dealer’ is defined in the Regulations to be a holder of a capital markets services license to deal in securities.
10	Regulation 3(12).
11	Ibid.
12	Regulation 3(5).
13	Regulation 3(2)(d).
14	Regulation 3(6).
15	Regulation 3(13).
16	Regulation 3(14).
17	Regulation 3(10).
18	Regulation 3(11).
19	Regulation 3(4)(a).
20	Regulation 3(4)(b).
21	The Schedule.
22	Regulation 3(8).
23	Regulation 3(9).
24	Section 4(6) of the Act.
25	Regulation 3(3).
26	Regulation 2.