With fundraising continuing to prove challenging in current market conditions, the business trust structure in Singapore provides a potential alternative source of capital for sponsors and their advisers seeking to access investors in Asia. While Singapore has a well-developed listed REIT market, relatively few business trusts have come to market in the non-real estate space. There are currently 19 registered business trusts in Singapore, 13 of which have at one point or another been listed on the Singapore Stock Exchange (“SGX”). The launch of Religare Health Trust, a Singapore business trust which raised over S$500 million in October 2012 for investment in Indian healthcare assets, demonstrates the potential for using business trusts to finance non-real estate assets in India and other places.
- What is a Singapore business trust?
A trust exists when one party (the trustee) holds property (the trust property) on behalf of another party (the beneficiary). Unlike a company, a trust is not a legal entity; it cannot itself enter into contractual arrangements, deal in property, sue or be sued. To deal with a trust, you must deal with the trustee. For example, you cannot enter into a contract with a trust, you must enter into a contract with the trustee on behalf of the trust.
A Singapore business trust is a form of trust constituted under the Business Trusts Act 2004 (Chapter 31A of the laws of Singapore) (the “BTA”). The business trust is created using a trust deed, which sets out the terms of the trust and its management, its investment policy and the rights of beneficiaries to the trust property. The beneficial interests of investors in the trust property are described by reference to the “units” they hold in the business trust, which represent their proportionate share of the underlying trust property.
Singapore business trusts are normally constituted with a seeded portfolio of assets, which is contributed to the business trust by the sponsor group in return for cash and/or units in the business trust. The valuation of the seed portfolio is, therefore, key to determining the value of units to be issued to third party investors and the amount of the interest to be retained by the sponsor in the underlying assets. As a result, valuations will usually be performed by an independent valuer, whose report will be included in the business trust’s offering document.
Importantly, Singapore business trusts are not subject to the restriction that applies to Singapore REITs preventing them from investing in excess of 10 per cent. in development assets and are also not generally subject to restrictions on investing in trading entities in the same way as Australian managed investment schemes.
- Who are the key parties to a Singapore business trust structure?
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- Why would you use a business trust structure?
Singapore business trusts are permitted to make distributions out of available cash funds, subject to the board of the trustee-manager being satisfied that the business trust will be able to fulfil its liabilities following the distribution, rather than needing to show distributable profits as a basis for a distribution, as would be required of a corporate entity. This allows a Singapore business trust greater flexibility to provide investors with a regular yield through distributions, which can make the structure very attractive for businesses which generate high cash-flows but whose underlying assets are subject to significant depreciation. Significantly, while Singapore business trusts may wish to make such regular distributions, they are not required to distribute any particular level of income as a matter of law, unlike REITs which are required to distribute 90 per cent. of their income in order to maintain their tax status.
The business trust will be subject to Singapore income tax on income that is accrued in or derived from Singapore. Similarly, Singapore income tax will be payable on foreign-sourced income when received or deemed received in Singapore. However, tax exemptions are available in respect of certain foreign-sourced income, including foreign-sourced dividends. While in principle a taxable entity, the business trust is, therefore, able to make use of applicable exemptions in order to minimise tax in Singapore.
The income of the trustee-manager may also be subject to a preferential tax regime allowing for a 10 per cent. tax rate on qualifying income, if certain conditions are satisfied.
The business trust structure allows a sponsor group to obtain third party funding for a portfolio of assets or project pipeline while retaining significant control over the management of the business trust, though the trustee-manager. Although a majority of the board of the trustee-manager must be independent, the independent directors are appointed by the shareholder of the trustee-manager (i.e. the sponsor) rather than by the unitholders of the business trust. This has led to some press criticism of the structure in Singapore, on the grounds that dissatisfied unitholders have limited ability to ensure proper corporate governance. The particular concern highlighted is that the BTA provides for removal of the trustee-manager to be subject to a 75 per cent. vote of unitholders but in practice the sponsor group often retains a significant holding of units following listing, which would allow it to block any such vote. To the extent that investors require greater protection, that could, however, be built into the contractual arrangements and trust deed, for example by giving unitholders or the independent directors of the trusteemanager enhanced powers with a view to promoting good governance generally, as well as more directly through the incorporation of specific provisions dealing with the ultimate removal of the trustee-manager. Alternatively, the ownership of the trustee-manager entity could be structured differently to improve governance position. Corporate governance concerns can, therefore, be addressed, it being noted that such provisions and structures do raise other issues for sponsors, which we have not sought to cover here.
- What regulatory requirements need to be satisfied?
In addition to the general requirements of the BTA, a business trust’s application for listing will be governed by the eligibility requirements of the SGX. Waivers from certain of those requirements may be sought to accommodate the business trust structure but in principle the business trust is subject to broadly the same regulatory requirements as a trading company, including those relating to the need for a prospectus containing prescribed information to be produced and ongoing obligations in relation to transactions with interested persons and substantial transactions. In particular, the following key requirements will need to be addressed:
- Track record: a Singapore listed investment fund must normally have a reputable management company with an established track record in managing investments. Generally, the management company must have been in operation for at least five years. In the context of a business trust, the trustee-manager will normally be a newly incorporated entity, such that it will likely be necessary to seek a waiver of this requirement from the SGX on the basis of the track record of the individuals comprising the management of the trustee-manager.
- Financial information: applicants for listing are normally required to provide annual accounts for each of the last three financial years. However, in the case of a newly established business trust, pro forma financial information should be included in the business trust’s offering document, to provide investors with an illustration of how the proposed structure may have affected underlying financial performance of the group in the relevant period. If pro forma information cannot be provided (as was the case, for example, in the case of the Religare Health Trust), the business trust may be required to provide profit estimates, forecasts and/or projections.
- Minimum size and public hands requirement: applicants for listing are normally required to show an operating track record and to meet the SGX’s profitability requirements for the three years prior to listing. In the case of a newly established business trust, this requirement can be satisfied by demonstrating that the business trust will generate operating revenue immediately upon listing, provided that it also has at least a S$300 million market capitalisation. At least 25 per cent. of the units of the business trust will need to be held by not less than 500 public shareholders (in the case of a Singapore dollar denominated business trust) or by a spread of holders necessary for an orderly market in the units of the business trust (in the case of a foreign currency denominated business trust).
- Investment restrictions: in principle, a business trust will be subject to the same investment restrictions as apply to other Singapore listed investment funds, including those limiting its investments in companies which are related to substantial shareholders and to investments in unlisted companies. However, in practice a waiver of these requirements may be sought on the basis that the business trust will comply with the requirements of the BTA. While a business trust will need to publish its borrowing policy, it is not subject to any statutory limit on gearing under the BTA. Amendments to the regulations applicable to closed ended funds were published by the Monetary Authority of Singapore ("MAS") on 1 April 2013, which subject closed ended funds generally to the same regulatory regime as collective investment schemes, including investment and gearing restrictions that apply to retail funds. However, a specific carve out from this new regulation was included for closed ended funds that make investments for the purpose of operating a business and MAS has stated that it is not its intention that the new regulations should apply to a business trust with active business operations.
- Lock-ups: the SGX requires there to be a contractual lock-up or moratorium on disposal of units in the business trust by its promoters, which includes controlling shareholders and their associates, to maintain the promoters’ commitment to the issuer and align their interests with that of public shareholders. The sponsor group will, therefore, normally be required to enter into a lock-up agreement with the underwriting banks, limiting its ability to dispose of any units for the first six months following listing and 50 per cent. of its units for the six months thereafter.
In addition, consideration will need to be given to any specific structuring requirements in relation to the particular assets to which the business trust will seek exposure. For example, some jurisdictions may impose limits on investments in certain industries by foreign entities, which could affect the ability of the business trust to hold assets directly. Similarly, the application of withholding and other taxes in the relevant target jurisdictions will need to be considered in the context of structuring the flow of funds to and from the business trust and, ultimately its investors. This investment structure, together with the overall investment objective and policy of the business trust and its borrowing and distribution policy, will need to be described in its offering document.
The Singapore business trust provides a flexible structure which can be adapted to a variety of different underlying investment strategies. The ability to make distributions from available cash funds lends makes the structure particularly attractive for income-producing assets but unlike REITs, for example, the business trust structure can be used for investment in asset classes other than real estate, such as infrastructure and shipping, and can accommodate operating businesses. The lack of restrictions on a business trust’s ability to use gearing (to the extent it has active business operations) and the flexibility to make distributions in accordance with the business trust’s policy, rather than on a mandatory basis, also positively differentiates the business trust structure from REITs, as well as some overseas vehicles such as Australian managed investment schemes. Sponsors wishing to sell infrastructure or other assets into a structure that allows them to raise funds from the capital markets while retaining significant control over management may find the Singapore business trust to be an attractive option.