By Mak Yuen Teen

Together with a final year accountancy honours student at NUS, Mark Lai, we have just released a report on the Catalist board and the 23 Mainboard companies that transferred to it since 2015. The report can be downloaded from this website under “Reports” and below is an executive summary of the findings and recommendations.

We expect that some minority investors will be unhappy with our recommendation that SGX should not allow Mainboard companies to transfer to Catalist (or if allowed, on a highly exceptional basis). All the companies that transferred were either on the Watch-list already or heading there, and the alternative to a transfer to Catalist is a mandatory delisting after the “cure” period, which is 36 months, with the possibility of an  extension. Therefore, without a transfer, shareholders face the prospect of holding shares in an unlisted company after the delisting.

But we are concerned about such transfers undermining the quality of Catalist, which was started as a board for growth companies and is at risk of also becoming an “intensive care ward” for struggling companies. If a company cannot turn itself around after 36 months (plus possibly more time since SGX does grant extensions), is allowing them to transfer to Catalist the answer? More often than not, after the transfer, they continue to get worse. Once on Catalist, they can make bigger pro-rata and non pro-rata share issues under the general mandate, and they can make proportionately larger acquisitions and disposals without shareholder approval (and there are other rules that are more liberal on Catalist). Even if transfers are allowed, does it make sense to allow struggling companies access to more liberal rules, and to expose shareholders to lower investor protection?

Later this year, we hope to release a further report on continuing sponsors. We will look at who are key players, the companies they look after, possible conflicts of interest, etc. and also compare with similar regimes in other markets like HK and Malaysia.

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Executive Summary

In this study, we examine the differences between the Mainboard and Catalist in terms of admission criteria and process, listing rules and the characteristics of companies listed on them. We then look at 23 companies that have transferred from the Mainboard to the Catalist since 2015.  We also examine whether the performance and liquidity of companies that transferred improved or deteriorated after they transferred.

The following are our key findings:

  • A total of 21 Catalist issuers have transferred to the Mainboard since 2008, but only six have done so since 2014. In contrast, 24 Mainboard-listed companies have transferred to the Catalist since 2014, with 23 doing so since 2015.
  • Eight of the 23 companies that transferred from the Mainboard to Catalist since 2015 were already on the Watch-list based on the Financial Entry Criteria and/or Minimum Trading Price (MTP) Criteria at the time of transfer. The remaining 15 transferring companies were all at risk of being placed on the Watch-list for either or both of these criteria.
  • On average, the transferring companies had poorer corporate governance than other Mainboard and Catalist companies, lower profitability than other Mainboard companies, and lower growth potential than other Mainboard and Catalist companies.
  • Although only eight of the 23 transferring companies were already on the Watch-list at the time of transfer, by the time of our study, another nine companies that transferred to Catalist would likely have been placed on the Watch-list based on Financial Entry or MTP criteria had they remained on the Mainboard. Avoiding the Watch-list was the clearest benefit to the companies that transferred to the Catalist.
  • Eight companies benefitted from not having to seek shareholder approval for major transactions that exceeded the thresholds in the Mainboard rules following their transfer, two companies made pro-rata issues of shares that exceeded the 50% limit under the Mainboard rules, while one exceeded the limits for share/share option schemes under the Mainboard rules. Other companies that have transferred may also utilise the more liberal Catalist rules in due course.
  • Twelve of the 23 transferring companies have seen their average net income worsen. Also, 15 companies experienced a fall in their share price following their transfer to Catalist, while the share liquidity of 16 companies also worsened.  Six companies saw all three measures worsen, while only two saw all three measures improving. Therefore, in most cases, transferring to Catalist did not help the companies.
  • In January 2016, SGX clarified and tightened the criteria for transfers from the Mainboard to Catalist, especially for loss-making companies. Companies that transferred after SGX tightened the criteria were on average making lower losses, although it was not clear that their overall quality was better because their share price performance, share liquidity and corporate governance were on average actually worse than those that transferred earlier. While more companies that transferred earlier saw their net income, returns, share liquidity and corporate governance worsen, more companies that transferred later saw these measures improve, except for share liquidity which also tend to worsen. However, we caution that this additional analysis is based on a very small number of companies in each group and therefore the findings may not be conclusive.

Based on the findings in this study, the following are our recommendations:

Recommendation 1: SGX should consider disallowing companies from transferring from the Mainboard to Catalist. If allowed, transfers should only be on an exceptional basis after a thorough review by SGX.

Recommendation 2: Companies that are allowed to transfer to Catalist should be closely-monitored after their transfer. SGX should continue to maintain direct oversight of these companies for some time after their transfer, instead of relying on continuing sponsors. Areas of scrutiny should include transferring companies’ financial performance after their transfer, corporate governance, and the utilisation of more flexible Catalist rules.

Recommendation 3: Transferring companies should be required to continue to comply with applicable Mainboard rules for at least a reasonable specified period, with exemptions granted only on an exceptional basis.

Recommendation 4: SGX should review whether differences between the Mainboard and Catalist continuing listing obligations are justified, bearing in mind the need to balance greater flexibility for growth companies and investor protection.

SGX relies significantly on full sponsors and continuing sponsors under the sponsor-based regime of Catalist. We hope to publish a further report later this year on the sponsors and issues relating to them.