Wednesday 4 March 2009

SGX lays down marker on profit guarantees


New rules also seek more clarity on use of funds raised; Life sciences firms to get easier IPO ride

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Guanyu said...

SGX lays down marker on profit guarantees

New rules also seek more clarity on use of funds raised; Life sciences firms to get easier IPO ride

By JAMIE LEE
4 March 2009

(SINGAPORE) The Singapore Exchange (SGX) has pushed for more disclosure on profit guarantees and the use of funds raised by listed companies in a set of new rules introduced yesterday.

Besides raising the level of transparency, SGX could pave the way for more listings amid sullen market conditions by tweaking rules on initial public offerings (IPOs) and making exceptions for life sciences firms that have no financial track record.

Under the new rules - to be implemented on March 24 - companies are required to make immediate disclosures when guaranteed profits relating to the acquisition of assets or businesses have not been met.

Besides mergers and acquisitions, reverse takeovers will be subject to the new rule. Notable cases of proposed projects with lofty profit guarantees include Rowsley’s $2.7 billion proposed reverse takeover of a Chinese solar energy company that promised an annual net profit of at least $300 million over a three-year period. The project eventually did not materialise.

Another such proposed backdoor listing involved contact lens maker Oculus, which tried to move into the renewable energy business with an eye on multi-million profit guarantees over two years. This proposed transaction too fell flat.

Penalties for errant firms that do not make prompt disclosures on changes in profit guarantees and forecasts will be determined on a case-by-case basis, head of issuer regulation Richard Teng told a news conference.

Currently, SGX can chide public companies privately by issuing warnings behind closed doors.

While such rules would help to raise accountability, enforcement is key, said Mak Yuen Teen, co-director of the Corporate Governance and Financial Reporting Centre at the NUS Business School.

‘Clearly, they need to be enforced stringently,’ he told BT, referring to the new rules on disclosure.

‘There is the wider issue as to whether profit guarantees are used too often in the first place, possibly to entice investors,’ he said, adding that SGX should pay ‘particular attention’ to firms that are unable to meet guarantees soon after announcing them.

But executive director of JPMorgan Singapore, Cheah Sui Ling, noted that the new rule is sufficient protection for investors.

‘These days, when the SGX calls up and you’ve got to make a clarification, it’s punishment enough,’ she told BT. ‘We can’t treat companies like children.’

The exchange added that companies that are raising funds must announce when the monies are being disbursed, as well as whether it follows their intended purpose as announced earlier.

Companies that are issuing shares, warrants or other forms of convertible securities must also promptly disclose the purpose of the issue and include a percentage breakdown of the use of proceeds.

Placement agents must be identified and if the company did not appoint one, it must point out who the placees are, the number of shares allotted to them and the reasons.

Against expectations of a quiet IPO market in the first half of the year, SGX has halved the number of shareholders needed in a primary listing to at least 500 public shareholders from 1,000 previously.

This comes as placement agents face difficulty in getting enough investors to subscribe for shares, market watchers said.

‘It’s a proactive and pragmatic move,’ said Ms Cheah. ‘The more flexibility you have, the more helpful it is, in these times especially. It’s one less box to tick, or one smaller box to tick.’

Managing director of Phillip Securities, Loh Hoon Sun, said that under such market conditions, it has been especially tough to get retail investors to take on IPO shares.

To welcome life sciences companies to Singapore, SGX has also allowed such firms that have no financial track record to list on the mainboard.

However, these companies must have a three-year record in research and development (R&D), have raised funds from institutional investors no less than six months before application and have ample working capital for at least 12 months after listing.

The minimum market capitalisation of $80 million remains as a rule and all IPO proceeds must also be used to commercialise the firms’ products. To continue being listed, the firms must offer quarterly projections of fund use for the next three months.

A determining factor for companies in life sciences sector looking to list is the level of support from institutional investors under such market conditions, said Tan Sze-Wee, chief executive officer of biotechnology start-up Rockeby.

Prof Mak said that the moves to bring in life sciences firms and to reduce the number of shareholders ‘seem designed to increase the IPO pipeline in the difficult economic climate’.

‘It may help SGX’s profitability but that needs to be balanced against how they will affect the perceived quality of our market,’ he cautioned, while proposing a separate board for the life sciences companies, which he deems riskier.

Other rules include removing the limit on convertibles in companies’ capital structure, subjecting fundamental changes of a company’s business to SGX approval and disqualifying directors who were barred from holding directorship in other jurisdictions.

SGX is also looking to revise rules on fund listings and expects to implement them by mid-2009.