Corporate governance advocate urges SGX to relook rules allowing companies to transfer to Catalist

SINGAPORE (Jan 15): Corporate governance advocate Mak Yuen Teen and undergraduate Mark Lai have published a study urging the Singapore Exchange (SGX) to consider disallowing companies from transferring from the Mainboard to Catalist.

SGX in Jan 2016 had clarified and tightened the criteria for transfers from the Mainboard to Catalist, especially for loss-making companies. But Mak and Lai say the changes might not have been effective.

“Companies that transferred after SGX tightened the criteria were on average making lower losses, although it was not clear that their overall quality was better because their share price performance, share liquidity and corporate governance were on average actually worse than those that transferred earlier,” the pair say in their report titled “Where to, Catalist?”.

Mak is an associate professor of accounting at the NUS Business School, and supervisor of the report based on research by Lai, a final year Bachelor of Business Administration (Accountancy) student.

The pair recommend that SGX should only allow transfers from the Mainboard to Catalist on an “exceptional basis” after thorough review by the bourse.

In addition, they say these companies that are allowed to transfer to Catalist should be closely-monitored after their transfer, and should be required to continue to comply with applicable Mainboard rules for at least a reasonable specified period.

“SGX should continue to maintain direct oversight of these companies for some time after their transfer, instead of relying on continuing sponsors. Areas of scrutiny should include transferring companies’ financial performance after their transfer, corporate governance, and the utilisation of more flexible Catalist rules,” say the pair.

Finally, Mak and Lai recommend that SGX take a closer look at whether the difference in listing rules between the two boards is necessary.

“SGX should review whether differences between the Mainboard and Catalist continuing listing obligations are justified, bearing in mind the need to balance greater flexibility for growth companies and investor protection,” they say.

The Catalist board was establish in Nov 2007 as the successor to SESDAQ. It was envisioned to be a platform that catalyses the growth of young companies by giving them access to financing, and hopefully a transfer to a listing on the Mainboard.

But Mak and Lai argue that “the goal of Catalist being a ‘stepping stone’ to the Mainboard has not been realised.

“In fact, there are more companies moving from the Mainboard to Catalist, with 24 having done so since 2014,” they say. “About 11% of all Catalist listings today are companies that have moved down from the Mainboard.”

According to the pair, it is less demanding, faster, and less expensive to list on Catalist. In addition, the continuing listing rules are less stringent in certain areas, such as the absence of a Watch-list.

“These reduce the risk of a mandatory delisting, provide more flexibility, allow companies to execute transactions more speedily, and lower compliance costs,” the pair say.

However, they add that this has opened the door for Mainboard companies that are at risk of being placed on the Watch-list, or that plan to undertake transactions where the Catalist rules are more liberal, to opt to transfer to Catalist.

The research found that only six Catalist issuers have transferred to the Mainboard since 2014, while 24 Mainboard-listed companies have transferred to the Catalist in the same period.

Further, more than a third of the companies that transferred from the Mainboard to Catalist were already on the Watch-list based on the Financial Entry Criteria or Minimum Trading Price (MTP) Criteria at the time of transfer. The remainder were also at risk of being placed on the Watch-list for these criteria.

“Avoiding the Watch-list was the clearest benefit to the companies that transferred to the Catalist,” Mak and Lai say. “Over time, these developments may have a debilitating effect on the overall quality of Catalist and harm liquidity and valuations of companies listed on it. In the longer term, this may also make the Catalist board unattractive for genuine growth companies.”

"The study raises the question of whether Catalist should be strictly reserved for growth companies, or if the platform should also be supportive even when companies have fallen on hard times and are seeking an opportunity to rebound or recover. We believe a balance needs to be struck to take into account the long-term interests of shareholders, throughout the life cycle of a company. We will review the findings and recommendations in this light,” says an SGX spokesperson.