The Catalist conundrum which shows no sign of getting resolved

EVEN though the Straits Times Index (STI) has not performed this year, it is still hovering around a two-year high, having gained some 130 per cent since the low reached during the 2008 US sub-prime crisis.

In contrast, the FTSE ST Catalist Index has, over the past few weeks, been sinking to consecutive five-year lows. This vastly divergent performance is partly due to October 2013's penny stock crash which badly dented retail investor confidence; in the 17 months since that collapse, the Catalist index has lost 42 per cent.

But Catalist's problems run deeper than a dearth of speculative retail players. In its 28 years of existence, it has not been able to shake off its "poor relative" label - the perception that it is inferior to the main board. It is an image which has plagued the second board from 1987 when it was launched as Sesdaq, a platform for smaller companies to raise capital, and it is an impression which exists today. The challenge then, which the finance industry has never quite come to grips with through the years, is how to raise the profile of this junior listings board and make it an attractive listings destination.

The perception that Catalist companies are somehow second- class means that many face several hurdles in their bid to grow and expand after listing. Banks, for example, are typically reluctant to provide financing for second-board firms since they are seen as small, unprofitable and with potential cash flow problems. Without sufficient funding, these firms tend to stay small - which in turn prompts stockbroking firms to avoid covering their shares.

Poor research coverage then leads to low investor interest, which worsens their plight. It is a seemingly never-ending cycle which is frustrating for the companies involved, some of whom have decent prospects but are ignored by the market.

Any moves to revive interest in Catalist must begin by asking whether it is still relevant today. Critics have argued that having one set of listing rules for the main board and another, more lax, set for Catalist is discriminatory, and that in a world ruled by caveat emptor, there should be only one set for all firms.

Maybe so, but there are two compelling reasons for persisting with Catalist. One, most firms on the second board are up-and-coming, promising and entrepreneurial, which means given time and resources, they could develop into tomorrow's winners. In theory, at least, Catalist serves as an ideal corporate nursery which offers the economy a link to the future.

Second, it is now the default destination for companies who choose not to adhere to the Singapore Exchange's (SGX) minimum trading price (MTP) of S$0.20 for the main board. The exchange knows that undertaking a share consolidation to satisfy MTP is expensive and has said companies have the option to move to the second board if they so wish.

How to revive and maintain interest in Catalist? Brokers should be the logical starting point since tomorrow's gems are likely listed on Catalist today. But the reality is that brokers prefer to channel limited research resources to areas where the chance of quick success is as great as possible, and often this does not include Catalist.

SGX can help with marketing and education but, again, these efforts are often stymied by the perception that Catalist firms are small, risky and speculative. It's a conundrum which has been in force for many years - and looks set to stay in place for years to come.