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Higher due-diligence standards for IPO managers, sponsors with immediate effect

Higher due-diligence standards for IPO managers, sponsors with immediate effect

Source: Business Times
Article Date: 13 Nov 2020
Author: Angela Tan

ABS guidelines seek to boost assessment of internal controls, sustainability and viability of a business, and compliance, especially in niche or higher risk areas.

With immediate effect, issue managers and full sponsors which advise firms seeking to list on the Singapore Exchange (SGX) will be held to higher standards for the companies they help take public.

Under the enhanced listings due diligence guidelines issued by the Association of Banks in Singapore (ABS) on Friday, they will be subject to higher standards when they conduct their due diligence work during an initial public offer (IPO), reverse takeover and listing process.

ABS director Ong-Ang Ai Boon said: "With the increase in issuers from more nascent sectors such as technology that are seeking equity capital, it becomes especially important for issue managers, full sponsors and their professionals to adapt due diligence practices that address the particular needs of the new market environment."

The changes revolve around three key aspects - the assessment of a company's internal controls, sustainability and viability of its business and compliance issues, notably in a regulated area and higher risk jurisdiction.

The guidelines were last revised in 2016. In January, SGX published the response to a consultation on strengthening its supervision of issue managers and sponsors and at the same time, it announced it would take into consideration the ABS listings due diligence guidelines in determining if an issue manager had discharged his responsibilities.

Tan Boon Gin, chief executive officer of SGX Regulation (SGX RegCo), told The Business Times, the changes were prompted by cases seen, but declined to elaborate on them.

"They are driven by cases we have seen, which raise the question whether issue managers and sponsors can be doing more in these areas. We felt it is incumbent on us to make these requirements more explicit.

"Overall the message we are trying to send to all issue managers is that it is not possible for us to legislate everything."

Mr Tan sees issue managers and full sponsors as fellow frontline gatekeepers to the market.

"That is their first and foremost role and responsibility. They must therefore emphasise substance over form and exhibit a healthy dose of professional scepticism when conducting listings due diligence. Where due diligence is robust and of a high standard, increased investor confidence and quality listings will follow."

According to market observers, the greater focus on an issuer's internal controls could have been prompted by what happened at Y Ventures. The Catalist-listed e-commerce start-up had mistakenly overstated its net profit by S$1.3 million for the first half of 2018, when in fact, it was loss-making.

The largest error was related to inventories. It turned out that it had a manual inventory system using Excel. That was adequate for the size of its business at the point of listing but became inadequate when its business grew rapidly.

Following queries from SGX RegCo, Deloitte and Touche Enterprise Risk Services was hired to scrutinise the "adequacy and effectiveness" of Y Ventures' internal controls for the financial period of Jan 1, 2014 to Dec 31, 2018. Y Ventures was listed on the Catalist board under the sponsorship of RHT Capital in July 2017.

Then there was Ayondo, which market observers believed prompted focus on the sustainability and viability of an issuer's business. The maiden pure-play fintech for SGX's Catalist platform was sponsored by UOB Kay Hian and started trading in March 2018, after an initial attempted RTO with Starland Holdings fell through.

But the European social trading broker failed to live up to its hype. It was mired in various issues such as the progress of the business, funding needs and future direction.

It was later discovered that KPMG LLP in the UK was engaged to re-assess the accounting and regulatory treatment of certain items in its 99.91 per cent-owned UK subsidiary, Ayondo Markets Limited (AML). Its share price has plunged to 4.8 Singapore cents, from its IPO price of 26 cents. It was suspended from trading on Feb 1, 2019.

Issue managers must thus test the viability of an issuer's business and check key assumptions made in the prospectus, including the working capital adequacy confirmation for Catalist companies and profit forecast for mainboard companies like real estate investment trusts (Reits). This is to prevent false, misleading or omitted statements as the prospectus is the principle document SGX uses to assess an issuer's eligibility for listing and for the public to base their investment decisions. If there are any issues such as material breaches or non-compliance of rules, the issue manager should consider appointing its own separate legal adviser to advise on the matter.

The same scepticism and diligence has to be applied on issuers operating in specialised, restricted or niche industries. Again, in the example of Ayondo, it operated in a regulated industry in the UK and was regulated by the Financial Conduct Authority - both of which may be unfamiliar areas for the issue manager.

This also applies to issuers operating in higher risk jurisdictions and subject to sanctions such as Russian agri and dairy firm Don Agro International, which made its debut this year. The company operates in Russia's Rostov region.

The enhancements were seen as timely and sensible by the market.

"To optimise any capital markets environment, it is essential for regulators to enhance the supervisory framework from time to time to ensure the robustness, quality and accountability of market participants," said Indran Thana, head of real estate, lodging & leisure-SEA at UBS AG.

Tham Tuck Seng, capital markets leader at PwC Singapore, said the enhancements are more prescriptive in the sense that expectations, measures and procedures are set out in the due diligence process.

"The implementation of more prescriptive guidelines will reduce the likelihood of interpretational inconsistencies," he said, but stressed that the guidelines are not a "checklist".

"Professional judgements are still required by the listing professionals. We have to strike an appropriate balance between encouraging the spirit of the guidelines to be complied with and yet not to undermine the exercise of judgement and the role of the listing professionals," he said.

David Cheng, head of corporate finance at OCBC Bank, believes many banks in Singapore already follow a very high standard of due diligence and therefore it should not make it more difficult for issue managers or companies to list on the SGX.

These changes should have a combined effect of enhancing the quality of issuers that come to market in Singapore, said Leonard Ching, a partner at Allen & Gledhill LLP.

"Over time, this should have a consequent effect of enhancing the quality of the Singapore equity capital market itself and attractiveness of Singapore as a listing destination. For these reasons, we do not think that the enhancements to the due diligence guidelines should directly result in fewer foreign listings," Mr Ching said.

Neither should the updated guidelines raise the cost of IPO, delay or lengthen the listing process.

As Mr Thana said: "The regulators are only asking participants to do what they should be doing in any case."

Source: Business Times © Singapore Press Holdings Ltd. Permission required for reproduction.

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