Published October 10, 2008

More regulatory oversight needed for cash companies

By LYNETTE KHOO

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WITHIN three weeks, two cash companies have fallen off the trading board without a reasonable exit offer for their minority shareholders.

One wonders if this statistic is fast becoming a norm among the remaining handful of cash companies that are left without a core business and their shares suspended from trading until they inject a new business.

In the latest episode, Iconic Global (the former China Food Industries) was delisted on Wednesday after its proposed reverse takeover (RTO) that promised a 'new life' for the company fell through.

Iconic is unable to provide a reasonable exit offer to its shareholders as it is in a net liability position and even if it could complete a voluntary liquidation, there is no residual cash to distribute to shareholders.

It becomes baffling at this point. Should a cash company be allowed to delist on short notice without an exit offer, leaving minority shareholders in limbo? Shouldn't shareholders whose shares are locked in a delisted company be better informed?

This has happened despite the Singapore Exchange's (SGX) revised listing rules since last December that require all cash companies to place 90 per cent of their cash and short-dated securities in an account operated by an escrow agent. These companies are also supposed to provide updates on monthly assets valuation and use of cash and quarterly progress updates in injecting a new business.

SGX has declined to put cash companies on a watchlist - a suggestion made by this writer in this column one year ago. But shareholders still have little clue as to these companies' real progress from the briefly worded updates issued. Also, public updates on the use of cash are also not evenly implemented across existing cash companies.

In the case of Iconic, even up till May, four months before the deadline, there were no hints that the RTO proposed by Iconic would not go through, or of the possibility of SGX turning down the transaction. In fact, a name change of the firm that month was perceived to usher in a new business totally unrelated to food.

The RTO inked last December involved Iconic buying 75 per cent of Pyramid Manufacturing Industries (PMI) from Bursa-listed Sitt Tatt Berhad for $18.75 million through the issue of new Iconic shares at 1.6 cents each.

But merely two weeks before the final deadline, Iconic announced on Sept 17 that SGX could not approve the proposed RTO nor extend the deadline beyond Sept 30. The group's appeal to SGX to reconsider its decision was rejected.

This begs the question: why the long time lapse from announcing the RTO to informing shareholders on the failure of the RTO attempt? Was such a hitch known earlier? If so, why the inaction to revive the deal or seek alternatives?

In the case of 1st Software, which was delisted last month after failing to complete the RTO to acquire construction firm Teambuild, it ended up with only $30,000-$40,000 in its kitty, even though it had net cash of $2.5 million at end-2007 and additional funds of $2 million from a convertible loan.

For both Iconic and 1st Software, no adequate explanation was given for the failure of their proposed RTOs even though the delisting of both companies left shareholders without a public market to cash in their investments.

In most cases, the directors of cash companies still receive their pay during the interim as they seek out new businesses for the cash companies. This being the case, the fairness of their remuneration should be assessed as to the efforts and progress made in finding a new business to retain the listing status.

Obviously, some instances have fallen through the cracks of existing listing rules. More regulatory oversight is crucial to ensure that a cash company that eventually can't find a core business will still have enough cash balances to allow some recovery for shareholders. And those who champion minority rights could play a part by stepping in when public eyes aren't looking.

At this point, it is a caveat emptor market, which makes it less than ideal for minority shareholders.