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Wednesday, January 19, 2011

Trust listed on a stock exchange!! The reason why Singapore beat out Hong Kong

While surfing Bloomberg, I read that Hutchison Whampoa had decided to spin off some of its HK-Chinese trust operations. So far nothing surprising-these restructurings keep happening. What surprised me was the choices to
  1. Use a 'business trust' as an investment vehicle
  2. List the above trust in Singapore(instead of their primary domicile Hong Kong)
The company website itself had a jargon filled description of the transaction without clearly describing the rationale. Then I saw this website of Norton Rose(a Singapore law firm) where they clearly described why the trust is an appropriate investment vehicle for capital intensive businesses.
One of the main reasons in their words is(besides tax reasons, access to finance etc)

Distributions can be made out of cash flows rather than accounting profits, which is likely to be attractive to investors. In capital intensive sectors such as shipping and infrastructure, which also boast steady income streams, this could prove to be a significant advantage for investors.
 No wonder that Hutchison decided to use a trust as their vehicle. They need to raise funds for expansion yet this expansion will increase depreciation lowering accounting profits. This way, dividend seeking investors can still tap the operating cash flows for income.And HK does not permit listing such trusts, as yet.

Takeaway:- With such innovations, no wonder Singapore has remained a global financial hub. Contrast this to India where the only novel business structure launched(after plenty of delay) recently was Limited Liability Partnership(LLP)-and you see why the dream of a 'International Financial Centre' at Mumbai seems far fetched.

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