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Tighter rules for corporate finance advisers may weigh on listings' attractiveness

Tighter rules for corporate finance advisers may weigh on listings' attractiveness

Source: Business Times
Article Date: 16 Mar 2023
Author: Raphael Lim

MAS last month introduced a notice on business conduct requirements for CF advisers, setting out specific requirements to manage conflicts of interest and ensure proper governance and supervision.

Tougher standards for corporate finance (CF) advisers introduced by the Monetary Authority of Singapore (MAS) may have an impact on the timeline needed for listings. They could also reduce the attractiveness of listings as a means for raising capital.

Industry practitioners told The Business Times that advisers would generally be practising most of the requirements set out in the notice already, and there should not be a material difference on how due diligence is conducted.

Nevertheless, the new rules may result in greater enforcement action from regulators. CF advisers would therefore be taking extra care to ensure proper documentation, which could weigh on listing activities.

MAS last month introduced a notice on business conduct requirements for CF advisers, setting out specific requirements to manage conflicts of interest and ensure proper governance and supervision.

The notice, which takes effect in October, also imposes detailed requirements on the conduct of due diligence. These apply to advisers acting in the capacity of an issue manager, sponsor or financial adviser for initial public offers (IPOs) and reverse takeovers (RTOs), and business combinations.

“In general, corporate finance advisers in Singapore already make significant efforts to ensure that a high standard of due diligence is performed for the IPOs that they lead,” said Mah Kah Loon, chief executive of Ernst & Young Corporate Finance.

“For these corporate finance advisers, the issuance of this MAS notice may not lead to material differences in how they conduct their IPO due diligence.”

But he noted that more effort may be required from advisers to ensure due diligence steps for IPOs are properly recorded and documented.

“Such efforts to consider, discuss, document and address due diligence findings may lead to an extension of the timeline needed to complete a listing exercise,” he said, adding that CF advisers and issuers may also need to expend additional resources to satisfy the requirements in the notice.

“Issuers may have to balance the increase in costs against the benefits of gaining market access on the Singapore Exchange by way of an IPO or RTO,” Mah said.

“If issuers are unable to realise such benefits having incurred compliance and due diligence costs, the attractiveness of listings as a means of raising capital will be adversely affected.”

The rules come amid a slowdown in IPO activities globally.

Last year, the Singapore Exchange saw 11 listings raising S$580.3 million. This compared against eight listings raising S$1.7 billion in 2021. The number of listings was also far lower than delistings, with over 30 counters delisted in each of the past three years.

Still, some believe trading fewer listings in favour of quality may be helpful for the market.

“I personally think that we probably reached a stage where we need to spend more time building up the quality of the market rather than continuing to try to attract more listings,” said Professor Mak Yuen Teen of the NUS Business School.

“With this stringent standard, IPOs may dry up, RTOs may dry up, if you truly insist on applying this standard… and I don’t think that’s a bad thing, because I think it’s just been too easy in the past,” added Mak, an active corporate governance advocate.

One area where he sees greater challenges for CF advisers is carrying out due diligence for foreign listings.

“These are things I think they should have done anyway, but MAS has decided it’s time to put in these (requirements) more explicitly,” he said.

“There is a threat that if you don’t follow the standards, you will be called to inspections and there may be enforcement action.”

Regulators have previously taken action against corporate finance advisers for breaches of regulations and notices.

Last August, MAS imposed a composition penalty of S$375,000 on UOB Kay Hian (UOBKH) for failure to comply with business conduct requirements, as well as breaches of anti-money laundering requirements.

MAS noted that UOBKH’s internal policies and procedures on conducting due diligence for IPOs failed to meet the standards set out in the applicable Association of Banks in Singapore (ABS) listings due diligence guidelines.

SGX RegCo later barred UOBKH from undertaking new mandates to act as issue manager or full sponsor for IPO and RTO submissions until further notice.

Industry practitioners also believe that greater enforcement action could be expected for corporate finance advisory transactions, as requirements have now been codified.

“We expect greater enforcement actions in general and CF advisers to take extra care in due diligence processes going forward,” said Ong Hwee Li, CEO of SAC Capital. “But this should be viewed in the spirit of improving standards across the industry and building investors’ confidence in our market.”

Even so, he doesn’t expect an impact on transaction volume or time taken for IPOs to be done.

“The new rules set out in the MAS notice have little impact on us since we are already practising them, including complying with the ABS guidelines,” he said.

Meanwhile, Mak observed that the notice places greater emphasis on admitting new entrants to the exchange.

“If you truly want to improve the market, maybe the overall point is really that this is only one piece of it,” he said. “There are a whole lot of other things that are not going too well in the market.”

Source: Business Times © SPH Media Limited. Permission required for reproduction.

MAS: Notice SFA 04-N21 on Business Conduct Requirements for Corporate Finance Advisers


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