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SGX provides insight into its listing decisions

The Edge Singapore
The Edge Singapore • 5 min read
SGX provides insight into its listing decisions
(Nov 6): Are you unsure whether your company is suitable to be listed on the Singapore Exchange? Are you concerned that your company will be scrutinised closely after the S-chip debacle of the last decade? Want to know what other companies that successful
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(Nov 6): Are you unsure whether your company is suitable to be listed on the Singapore Exchange? Are you concerned that your company will be scrutinised closely after the S-chip debacle of the last decade? Want to know what other companies that successfully listed got away with?

As part of its efforts to enhance the whole IPO process, SGX has decided to regularly publish its “listing decisions”, which briefly describe why some companies were not allowed to list as well as how concerns about companies that were approved for listing were addressed. While SGX will not name any company, it offers very specific details in the areas of concern.

“We want to be more transparent in our decision-making when it comes to IPO applications,” says Tan Boon Gin, CEO of SGX’s recently formed, independently run regulatory unit. According to him, SGX is most effective in protecting the investing public at the listing stage. “We have the most control at the point of IPO; that’s when we can really ensure whatever information we get is verified. That’s when we can impose conditions, or even reject [applications],” he says.

To kick things off, SGX has provided three listing decisions — a trust that succeeded in listing and two companies that were rejected. SGX’s concern with the trust was that all unitholders were subject to an ownership limit, but the trust deed also contained a clause that allowed the trustee the right to increase the ownership limit for one or more unitholders and decrease the limit for all other unitholders.

This ability to raise the ownership limit for some unitholders at the expense of other unitholders created a risk that some unitholders might be treated unfairly. To satisfy SGX, the right of the trustee to decrease the number of units held by unitholders was removed from the trust deed.

The two companies that were rejected were even more interesting, as SGX had concerns with the quality of their businesses. The first was an overseas company in the business of processing and exporting meat. SGX found that a substantial proportion of the company’s business relied on a group of contract purchasers. These individuals were employees of the company’s own subsidiaries. They had the leeway to buy livestock on behalf of the company, at prices that could not be ascertained to be market prices. In addition, advance payments were made to these purchasers.

Furthermore, this company had reported a compound annual growth rate of more than 30% for its gross margin. By contrast, industry peers, listed on other regional exchanges, could manage only less than 10%. Also, the company claimed a significant proportion of its revenue from selling processed pork in a Muslim country.

SGX decided that the company’s internal controls were lacking. It was also not satisfied with the company’s explanation about its margins. It reached the conclusion that the company’s issue managers had not done enough due diligence.

The second company that SGX had rejected was also a foreign company, which had been in operation for only three years. The company ran service outlets for an unspecified sector. And, within its short history, it had grown quickly via a series of acquisitions of other outlets. It claimed to be able to integrate new acquisitions in less than two weeks. The company also relied on referral agents to generate a third of revenue, even though this practice was not the norm in its business. The most worrying of all was that a personal bank account of one of the company’s directors was used to receive revenue remitted by the referral agents.

Tan says SGX is not taking a harder, reactionary stance on new listings. Instead, it is simply trying to make its standards known. “We are all aligned in that we all want quality companies to come and list. They should come here and list for the right reasons. You have seen some [real estate investment trusts] that have come here and listed, and that’s a good reason because we are a leader in the REIT sector,” he says.

Separately, Tan says the number of queries about unusual trading activity from SGX is likely to halve, following a refinement in its market surveillance system. “We are always calibrating our surveillance system so that we don’t generate too much unnecessary ‘noise’ in the market,” says Tan.

The number of queries by SGX about unusual trading activity was 72 during its FY2012 ended June 30. This rose to 136 for FY2016 and 173 for FY2017. In effect, SGX queries a listed company about heightened trading activity on two out of every three trading days. Tan denies, however, that SGX is reacting to murmurings that it has been too stringent in its surveillance.

“I don’t think there’s either a good time or a bad time. This is something we’ve been working on,” he says. “We are rolling this out because we are sufficiently confident that, at this point in time, these parameters are right.”

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