By Mak Yuen Teen
We are pleased that our Catalist report has sparked a lively debate although we find some of the arguments puzzling or one-sided to say the least. For instance, some seem to think that the share price of a company is independent of its profits or prospects – that a company whose share price is low even after consolidation is because the market is undervaluing the company or because of volatility. Yes, perhaps our market is not as efficient as the most developed markets but there are fundamental reasons other than underpricing and volatility why a company’s share price is low and remains low even after consolidation.
It was also said that forcing a company to delist rather than allowing it to transfer harms public shareholders. Granted, companies often delist without a reasonable exit offer (even though the rules require it), but is allowing a company that is unable to turn itself around after 36 months or more to transfer to Catalist the answer? What does this do to Catalist? How about existing shareholders being asked to throw good money after bad through further share issues? What about the interest of potential shareholders who invest in the “demoted” companies that more often than not get worse after the transfer?
Then there is the comment about no self-respecting English soccer team would choose to stay in the lower leagues if they have a chance to move up and play with the big boys. This is in relation to our comment about Catalist companies not having much incentive to transfer to the Mainboard. But would any self-respecting team voluntarily apply to move to the lower league? The premier league teams will fight to stay in the premier league, not roll over and apply to be relegated when things become tough. SGX allows 36 months plus possible extensions to stay in the “premier league” but yet companies often very quickly feel they belong in the lower league. What kind of teams would do that? The problem is that our “premier league” (Mainboard) and “lower league” (Catalist) have different rules, and as we said in the report, there are actually quite a number of benefits of being in the lower league on SGX!
Our report shows that there are a number of Catalist companies that have attributes much more like Mainboard companies but yet they choose to stay in the “lower league”. Why? Perhaps our Catalist is more attractive and comfortable for these companies because the rules are more liberal.
Our report actually includes four recommendations. Disallowing companies from transferring from the Mainboard to Catalist is one of them, and we said that if allowed, they should only be on an exceptional basis after a thorough review by SGX. Further, we also included recommendations in the event that such transfers continue to be allowed on an exceptional basis. We repeat the four recommendations below as it seems some commentators are reacting in a knee-jerk fashion to our recommendations to tighten up such transfers.
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.
In case readers are interested, we have included more information about the 23 companies that have transferred from the Mainboard to Catalist since 2015.
Our follow-up report which we hope to release by the middle of this year will focus primarily on sponsors, and include a comparison of similar sponsor-based regimes in other markets. Other issues we may look at include who are the major sponsors, changes in sponsors, track record of sponsors, sponsor fees (for sponsor- and non-sponsor-related activities), and conflicts of interest.
