How to stop the ASX decline? ASIC and investors have some radical ideas

Addressing the ASX decline is a question that has been considered for many months now. In 2023-24, more companies left the ASX in the past 2 years than any 2 year period since the 1990s recession – whether being brought out by private equity or a big industry player, delisting to a penny stock exchange like the NSX or US OTC markets or being delisted.

The irony is that the value of listed equities is nearly double 10 years ago ($3tn vs $1.58tn) but the number of companies is lower, the value of IPO equity is 82% lower, whilst the value of debt markets is up 114%. And even the first figure is arguably inflated by growth in the banks and miners.

Of course, this is hardly an Australian-only phenomenon – in fact, the decline in listed entities is more manifest in the UK, Canada and Germany. But with our compulsary super system, you cannot blame a lack of funds for a lack of investment.

How to solve the problem?

 

How to address the ASX decline?

This question is beyond the realms of think tanks that may be credible but won’t achieve anything. This is being openly considered by ASIC, which put out a discussion paper in February and earlier this week released dozens of non-confidential submissions it received with ideas. There are factors outside ASIC and the ASX’s control including that private market assets are increasingly publicised (just look at ETFs and LICs for example) as well as which companies are taken over.

But they are concerned about the decline of listed companies and want to reverse it. ‘Public markets provide important public goods with price discovery and liquidity, facilitating efficient valuation, pricing and capital allocation for public and private markets and the wider economy,’ ASIC’s February paper said.

‘A weakening of public markets would diminish this public good’.

Questions it asked included,’ What would make Australian public markets more attractive’, and,’ To what extent is any greater expectations of public companies, compared to private companies, the result of Australian regulatory settings or the product of public scrutiny and community expectations of these companies’.

 

Some radical ideas

We will look at them by submission and we won’t review all of them, but a few from some of the market’s most noteable players.

Let’s start with the submission from Wilson Asset Management, the fund manager headed by Geoff Wilson who led the campaign in 2019 against Bill Shorten’s proposed changes to franking credits. Obviously he wanted no changes that’d take the system backwards. He noted that dividend imputation (or franking credits) was ‘a unique and powerful competitive advantage for the Australian public markets’. It noted, that it boosted post-tax returns by 1-2% per annum for the ASX 200.

Still, he argued that ‘restoring stability and predictability of the imputation system is paramount’ and calling for the repeal of Schedule 4 and 5 of the 2023 TLA Act and policy certainty regarding refundability. It also called generally to review ASX Fee structures and reduce compliance costs, as well as to maintain stable corporate tax settings and economic policy.

Martin Currie, another investment specialist, argued that index weights should take into account a company’s liqudity and that index weights should take into account liquidity reflected by a cap on index weighting. It argued this would free up capital for smaller companies and incentivise more companies to list.

The AFMA was unique in addressing director liabilities noting there were more duties for public than private companies. It recommended a fault element for liability and reintroduction of the due diligence defence in relation to director duties, forward looking statements and continuous disclosure laws.

‘Although public markets facilitate access to capital in efficient ways, and are a public good, the costs and risks of this access for directors personally and professionally and the companies themselves are higher than those that exist for private capital,’ it said.

Other ideas included:

• More efficient ‘exposure periods’ (i.e. between the shares being allocated to investors and listed on the exchange),
• Post-offer market stabilisation measures (colloquially known as Greenshoe measures),
• Not proceeding with the forthcoming measures to require reporting of ‘Scope 3’ emissions,
• Relaxing Listing Rule Requirements (specifically minimum 20% free float),
• Enabling immediate inclusion in indices,
• Using automation and AI to review and process filings,
• Explore more regulatory sandboxes where companies could test new models and technologies in a controlled environment with relaxed regulations, and
• Dual-class shares.

 

A stock exchange aspirant had something to say too

One of the most curious parties to make submissions was the NSX, an aspirant to be alternative exchange but held back by a lack of liquidity. The NSX argued that it was misleading to say there were declines in equities in other jurisdictions – the AIM and CSE had seen listings growth, and including them would’ve almost doubled the total number of listings.

It argued that,’ Viable alternative competing public markets can clearly mitigate declines on the legacy public market and such an outcome should be encouraged in Australia’. It’d be tough to argue against that, but also tough to argue the NSX is anywhere near the level the AIM and CSE is in terms of liquidity…but perhaps the partnership with the CSE could at the very least steer things in the right direction.

One other submission to support the NSX’s ideas was IFM Investors. IFM is an infrastructure investor that invests in both listed and private companies, purporting to manage $66bn in equities. It is partly to blame for the decline having bought out one of the ASX’s biggest companies in Sydney Airport in 2021. It noted the explanation of listing rules and compliance costs for the decline was ‘particularly relevant to small cap companies’. It also said there were lessos to be learnt from AIM, but warned there’d need to be some protection measures and that even the AIM was not completely immune from broader IPO trends.

 

The ASX itself spoke

The ASX gave its own suggestions as to what ASIC could do. These included:

• A more quicker IPO forecasts,
• Not having to include financial forecasts in prospectuses,
• Enabling the US process for founders to sell down,
• Reduce free float,
• Reduce the minimum size requirements for a Foreign Exchange listing, and
• Allowing dual class shares.

 

Good for shareholders?

Many measures above may not be necessarily good for investors. Sure more investment option would be, but not necessarily companies where they’d have less voting power or if companies had to disclose less than they would now.

The Australian Shareholders Association made a submission and while it acknowledged there was a need for more public listings and perhaps less red tape to facilitate this, the association also recommended that certain protections for retail investors in stocks be expanded. These should include baseline disclosures on performance, fees, risk, liquidity and valuation for super, ETFs and other funds, as well as for ASIC to reinforce disclosure and financial literacy standards.

Moreover, it also recommended that retail investor groups should be involved in policy development, that smaller investors in private markets should receive equitable treatments, access to disclosure and enforceable rights should be maintained and marketing practices that promote complex or illiquid private market products to retail investors should be monitored.

 

Conclusion

There is a legitimate recognition that the ASX decline needs to be addressed, hence the discussion happening amidst ASIC submissions. We think something will give, but it is not clear what. Perhaps some of the submissions made will be indicative of what will be done.

But these all boil down to making it easier and less costly for a company to list and stay listed. Obviously this would involve reducing costs and red-tape, but may even involve allowing dual-class shares.

Only time will tell what will happen.

 

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