Following our report in January 2019 titled “Where to, Catalist?” about Mainboard companies transferring to Catalist, we are pleased to release our latest report about the Catalist board titled “Who’s Sponsoring Who? Challenges of the Catalist Board”. The report is co-authored by corporate governance advocate, A/P Mak Yuen Teen, of the NUS Business School, and Mr Chew Yi Hong, an active investor and researcher who holds an MBA with distinction from London Business School.
Under the Catalist regime, full sponsors and continuing sponsors play important roles in the initial admission and continuing listing of an issuer. SGX relies extensively on them to help ensure that companies are suitable for listing and continue to comply with listing rules. The sponsor is effectively the frontline regulator on the Catalist board.
The Catalist Rulebook contains extensive requirements regarding the independence of sponsors and that they have no conflicts of interest with the entities they sponsor.
It states: “A sponsor, its partners, directors, officers, registered professionals and employees must be able to demonstrate independence from the issuer at all times. The proof of independence, or absence of conflict, rests with the sponsor.”
A Catalist company is to retain a continuing sponsor as long as it remains listed on Catalist. Our report focuses on these continuing sponsors.
In addition to conflicts of interest due to business relationships between sponsors and the companies they sponsor, the fact that Catalist companies face few restrictions in changing the sponsor can also compromise the sponsor’s independence. A change in sponsor is a potential warning sign for Catalist companies, and multiple changes/short relationships between a company and sponsor are more likely to indicate problems with the issuer.
KEY FINDINGS
The following are the key findings from our study:
- As of May 2020, there were 215 companies listed on Catalist and 20 sponsors, with 16 full sponsors and four continuing sponsors. PrimePartners Corporate Finance Pte Ltd (PPCF), SAC Capital Private Limited (SACC) and RHT Capital Pte Ltd (RHTC) are the top 3, sponsoring 55 (~25%), 35 (~16%) and 25 (~12%) respectively
- Thirty eight companies or about 18% of Catalist issuers disclosed that they paid non-sponsor fees to their sponsor for the financial year covered. Another five issuers disclosed other fees paid to an affiliate of the sponsor which are not included in non-sponsor fees.
- Among the three most active sponsors, PPCF was most commonly paid fees for non-sponsor services by companies they sponsor. Seventeen – or 30% – of their companies did so just for the one year which we considered. In most cases, the nature of the advisory services provided by PPCF was not disclosed and even where they were, there was little specific information provided.
- For companies with sponsors other than PPCF, the nature of non-sponsor services was disclosed in all cases involving large amounts paid to sponsors.
- Of the 25 issuers under RHTC as of May 2019, affiliate firms of RHTC provided corporate secretarial, investor relations and/or share registrar services for 10 of them. There were also several cases of current or recent relationships between directors of the sponsored issuers and the RHT Group companies, such as directors of sponsored issuers serving on boards of RHT affiliates or providing consulting services to these affiliates. Similar relationships were rare for other sponsors.
- 102 out of the 261 issuers included in our study, or 39%, have changed their sponsor at least once. 37 issuers have had at least three different sponsors since their listing on Catalist, with nine having four sponsors and two having five sponsors. Excluding delisted companies, companies that transferred to the Mainboard and “forced” changes of sponsors that ceased their sponsorship business altogether, the overall average length of the relationship with the previous sponsors is 38 months. There are several issuers which have stayed with the same sponsor since 2008.
- Based on recent trends of termination of relationship with sponsors by issuers from January 2018 to July 2020, Novus Corporate Finance Pte. Ltd. (NCF) which was only authorised as a sponsor in June 2018 has been most successful in signing up new clients, followed by ZICO Capital (ZICO) and SACC. These three sponsors picked up 57% of issuers which changed sponsors during this period.
- The percentage changes in sponsor were 7% in 2018 and 8.4% in 2019. These are higher than the overall annual average over the 11-year period between 2008 and June 2019.
- Issuers currently sponsored by Asian Corporate Advisors (ACA), RHTC, Stamford Corporate Services (SCS) and ZICO underperform the overall median for corporate governance and financial performance indicators. In contrast, issuers under CIMB Bank and UOB Bank outperform the median. However, we should caution that this is based on only single-year indicators.
- Six individuals are currently named as the contact person from the sponsor for 10 or more issuers, with the highest number being 26 issuers for a registered professional from PPCF, while another registered professional is named as contact person for all 20 issuers currently sponsored by ZICO. This raises concerns about lack of transparency or “busy” RPs who may not be able to adequately discharge their responsibilities.
The report also includes a number of case studies which raise issues as to whether sponsors are able to adequately discharge their responsibilities. The Catalist rules for sponsors are also compared with those in UK, Hong Kong and Malaysia.
PROPOSALS
The Catalist board is modelled after the Alternative Investment Market (AIM) in UK. Research by two professors at the London Business School on the historical performance of AIM over the 20-year period following its establishment in 1995 found that it has performed poorly, with annualised total return of -1.6 percent a year, investors having lost money in 72 percent of all companies to have listed on AIM, and at least 95 percent of the investment being lost in more than 30 percent of the cases. Other countries such as Germany, France and Belgium have dissolved their “growth boards” and similar boards have also been relatively unsuccessful in a number of other countries. In 2017, HK conducted a public consultation about their second board, GEM, because of concerns about whether it was achieving its objective as a “stepping stone” to the Main Board and other issues.
Looking at the Catalist issuers in our study for which the FY2019 net income is available, 121 out of 214 – or 56.5% – made losses for FY2019. For those listed less than 7 years, about 37% are making losses. However, for those that have been listed for more than 7 years, 71% are making losses. While not conclusive, this is contrary to expectations as one would expect growth companies to start as relatively unprofitable companies and become more profitable over time.
We urge that a review of the Catalist board be undertaken which can consider a number of issues, including some of those raised by our current study:
- How have companies listed on Catalist performed since the first listing in 2008?
- What should be the differentiator for the two boards on SGX? Should it be based on track record, size, industry, or corporate governance or environmental, social and governance (ESG) standards?
- Should companies listed on Catalist continue to be overseen by a sponsor with respect to compliance with rules, or should they be overseen directly by SGX Regco similar to the Mainboard?
- Should Catalist companies be required to retain a sponsor or compliance adviser only for a limited period (with SGX Regco having the power to extend this period) like in HK and Malaysia?
- If the current sponsor-based regime were to continue, how can it be improved, to address the problems raised in this report?
- With 16 full sponsors and four continuing sponsors on Catalist, and 216 Catalist listings as of June 2020, the ratio of Catalist issuers to sponsors is less than 11. The comparative ratio for AIM based on the most recent data available was 25. Are there too many sponsors relative to Catalist issuers, which may lead certain sponsors to lower their pricing and compromise quality of their work to gain more clients, or to pursue non-sponsor work with issuers under their supervision, thereby creating conflicts?
Here is the full report:
