Published March 4, 2009

Revised SGX rules fortify governance

By R SIVANITHY

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IT'D be fair to say that brokers, underwriters and placement agents are generally reluctant to disclose too much when it comes to details of their business, preferring the 'less is best' approach to corporate governance.

IPO prospectuses thus tend to be voluminous, jargon-filled documents in which the use of proceeds would be buried, leaving readers the onerous task of flipping back and forth to work out for themselves where the money would be deployed.

Profit guaranteed deals, in the meantime, proliferated during 2007's bull run, catapulting some stocks to previously unseen levels, but with little in the way of concrete details, especially when they involved unknown foreign parties.

Worse, when all of these deals were called off shortly after they were announced - thus precipitating collapses in the respective stock prices - details as to why the deals fell through were even more scarce.

As for placements, shareholders are often in the dark as to the identities of placees and the rationale for giving these parties the shares.

As we noted in a Dec 12, 2007 article 'Placement disclosure requires more information', since shareholders are not given the first right of refusal as they should, they must at least be told the names of the top few placement recipients, how these people were selected and the benefits they can bring to the company by their entrance as new shareholders.

The urgent need to address all these areas prompted several BT articles calling for greater regulation and disclosure - in addition to the placement article. See for example, 'Don't bury the numbers' (BT, July 13, 2002), 'Make them disclose upfront where IPO money's going' (BT, July 26, 2004), and 'Regulating profit guarantees and discounted placements' (BT, June 26, 2007).

In the first two of the above articles, the call was the same - the investment community should account for use of money taken from the public as simply as possible, preferably in terms of each $1 invested. The community, we wrote, did not want this and sought to discourage the public from asking the question 'what is the money for?' because many companies and their underwriters believed the answers might not stand up to investment-grade scrutiny.

Similarly, we have repeatedly noted that a post-IPO audit should be mandatory, say six months after listing, to reassure shareholders that the money was actually used for its stated purposes.

As for profit guaranteed deals, the recommendations we made were pretty much common sense - more details were needed both when the deals were announced and if they were later called off.

Thankfully, investment community popularity is not a concern to the Singapore Exchange (SGX), which yesterday announced welcome changes to its listing rules that incorporate all of the above recommendations, and plenty more.

From March 24, companies and their underwriters will have to adhere to new rules surrounding fund-raising (not just IPOs but also rights issues and placements) that are aimed at plugging the holes we had outlined in the past and, as a result, should fortify the disclosure-based framework the exchange has been progressively installing over the past decade.

The changes are well-timed too because had SGX introduced the new rules during a bull market, it might have been accused of throwing a spanner into the works and killing off interest. As it is, the changes will now pass largely unnoticed or unfelt because of the current debilitating bear market and so will be well-entrenched by the time the next upturn arrives.

To be honest, none of the above is rocket science and everything is founded on simple common sense. It's great to see that the exchange has plenty.