By Mak Yuen Teen

I refer to the report “Critical report on Catalist sparks a lively debate” (Business Times, January 17, 2019) in which a number of corporate lawyers and sponsors disagreed with our views in our report “Where to, Catalist?”. I am not surprised and the purpose of our report is to generate a healthy debate on a number of issues relating to Catalist, including (a) whether companies should be allowed to transfer from the Mainboard to Catalist,  (b) if transfers are allowed in highly exceptional cases, whether companies that transferred should be immediately treated like other existing Catalist companies, with full access to more liberal rules and reliance on continuing sponsors to supervise them, and (c) whether there should be more liberal continuing listing rules for Catalist companies in the first place, when our Mainboard rules in those areas where Catalist rules are more liberal are already more liberal than rules for both the mainboard and second board in markets like HK and Malaysia. We also did this study because of concern about the state of the Catalist board and the sponsor-based regime. After 11 years, we think it is timely to review the Catalist board  – like Hong Kong has done with their second board, GEM.

Let me respond to the specific views. One was that the report’s criticism of low liquidity and depressed prices of Catalist companies also applies to the Mainboard. Yes, our market as a whole is in some trouble and I have said many times it goes back to our laser focus on increasing the number of listings with little consideration for investor protection and shareholder rights. The point here is not that the two boards are suffering the same problem, but we found that after transferring, things actually deteriorate further more often than they improve for companies, including profitability, share price and liquidity. While the objective of the transfer may be to help the companies improve their fortunes, more often than not, it doesn’t. For example, finding that share liquidity worsened is probably not a surprise because CPF funds cannot be used to invest in Catalist companies (and I hope it remains that way). As we said, with a transfer, the pressure to deliver is eased through no more threat of a mandatory delisting for failing to exit the Watch-list, no more quarterly updates, and no real deadlines to meet to improve performance – and more time for management to continue to be paid (or for abusive interested person transactions).

On the issue of whether companies transfer to “arbitrage” the rules – taking advantage of the more liberal rules on Catalist – our report shows that a number of companies have used the more liberal rules, sometimes on multiple occasions. Perhaps they did not transfer with the objective of “arbitraging” the rules, but 10 out of the 23 companies so far were certainly not shy about using the more liberal rules after they transferred, some on multiple occasions and/or for multiple rules.

We also found that transferring companies tend to have poorer corporate governance. Isn’t giving more poorly governed companies access to more liberal rules that generally revolve around not requiring shareholder approval and/or potential dilution of shareholders just giving companies a greater opportunity for abuse? Remember the fraud triangle about pressure and opportunity and their relationship to fraud risk. Think about the combination of financially struggling companies, poorer corporate governance and more liberal rules.

Under such circumstances, should we rely on continuing sponsors to supervise these companies when continuing sponsors generally issue standard boilerplates that they don’t even independently verify announcements? Can we expect them to verify that transactions are not abusive to shareholders? Therefore, our view is that if transfers are allowed, SGX should continue to exercise oversight for a reasonable period of time – and should not allow transferring companies blanket access to more liberal Catalist rules.

One sponsor said that the fact that companies already on the Watch-list based on financial entry criteria and low market capitalisation are not allowed to transfer already addresses the concerns of poorly performing companies transferring to the Catalist. But companies will just make their application  for transfer earlier. For example, if a company is heading towards a third successive year of loss and sees its market cap head down closer to $40 million, it would make sense to apply for a transfer before it gets there. Those 23 companies that transferred were already on the Watch-list or heading there, based on either the financial entry criteria and/or minimum trading price. A sustained low trading price despite consolidation would suggest that the company is struggling financially. Those who wait until they are already on the Watch-list based on the financial entry criteria before they apply for a transfer are probably poorly-advised.

We should bear in mind that companies have 36 months to exit the Watch-list and can be granted extensions. Is allowing them to transfer given that they already have 3 years or more to turn around sensible? If SGX truly believes that the company has a chance to turn around, then perhaps it should consider allowing it to remain on the Mainboard to do it. Of course, this may undermine the Watch-list if exceptions are granted too often, but is kicking the problem down to Catalist a better option?

Another issue we pointed out in the report is whether the benefits of Catalist, including more liberal rules, makes the Catalist a more attractive board for companies to list on. There may be very little incentive to transfer from Catalist to the Mainboard – and this may explain why so few have moved up. Our report shows that some of these Catalist companies are much more like Mainboard companies based on their financial profile like market capitalisation, profitability, growth ratios, etc. Is there any incentive for them to transfer given the benefits of a Catalist listing versus a Mainboard listing? We are not suggesting forcing Catalist companies to list or move to the Mainboard when they qualify to be on it, but we should not make Catalist so attractive that companies prefer it there.

We have actually already done some research on the continuing sponsors. We decided to hold that back and do more work, and  hope to release another report later this year. We expect another lively response from sponsors when we do that.