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Critical report on Catalist sparks a lively debate
A REPORT questioning the relevance of the Catalist board has sparked a lively debate, with market watchers suggesting that a more nuanced perspective is needed.
The study, led by corporate governance advocate Associate Professor Mak Yuen Teen and released on Tuesday, argued that recent transfers of troubled companies from the Mainboard to the Catalist board have diluted the original purpose of the board for growth counters and hurt its reputation.
The report had highlighted that eight of the 23 companies that transferred from the Mainboard to Catalist between 2015 and 2018 were already on the SGX watchlist at the time of transfer, while the remaining 15 were at risk of heading to the watchlist, either under the financial-entry criteria and/or the minimum-trading-price criteria. The report also called for changes to the Catalist and regulatory framework.
Sponsors and corporate lawyers told The Business Times that while nurturing growing companies may be the Catalist board's main aim, there are other companies that need "breathing space" in the midst of restructuring. A Catalist listing allows for this, with its less onerous requirements, particularly when it comes to the need for shareholders' approval when corporate action is taken.
They added that the report's criticism of the low liquidity and depressed prices of Catalist counters can apply equally to the broader market including the Mainboard, which is in the grip of the same malaise.
In its response to the report, the Singapore Exchange (SGX) on Tuesday said a balance should be struck between reserving the Catalist board for growth companies and using it as a platform that supports companies that "have fallen on hard times and are seeking an opportunity to rebound and recover". SGX is reviewing the study findings and recommendations.
Stefanie Yuen Thio, joint managing partner of TSMP Law Corporation, said the most "racy" allegation by Prof Mak was that of "rules arbitrage" by companies transferring to Catalist.
"In my experience, I have not seen Mainboard companies transferring to the Catalist board to take advantage of the more lax rules. In the cases I have seen, the Mainboard company may have fallen on hard times - whether because of unfavourable market conditions or because its business has not done well. Transferring to the Catalist board will give them time to rehabilitate without the tougher restrictions. The greater flexibility on Catalist will give more breathing room to turn the company around."
Mark Liew, chief operating officer at PrimePartners Corporate Finance, noted that to begin with, the revised ruling already states that an issuer on the watchlist based on the financial-entry criteria (pre-tax losses for three straight financial years and an average daily market capitalisation of less than S$40 million over the last six months) cannot exit from the watch-list by a transfer to Catalist. This already mitigates the problem of poorly-performing companies moving to the Catalist board.
Yee Chia Hsing, head of Catalist at CIMB Bank Singapore, added that sometimes, companies are stuck between a rock and a hard place. When share consolidation exercises have failed to boost their trading prices to meet the market capitalisation requirement, the only option left - besides a move to the Catalist board - is to delist. That can be as damaging to minority shareholders.
Ms Thio said the Catalist board should be seen as a market where companies have the flexibility to grow - whether in the infancy of their business development, or when they are turning around from a bad patch.
"So long as the rules are rigorous to root out mismanagement and wrongful activity, I think we should not be so quick to condemn companies for low market capitalisation or unprofitability, neither of which is a corporate sin."
An example of a company that has benefited from a move to the Catalist board is hard disk-drive maker Miyoshi. It posted losses for three years in a row and was put on the watch-list at the end of 2013, as its business took a hit when disk drives started to be phased out. Since its move to Catalist in 2016, it has undertaken two placements and an acquisition to move into China's electric car industry, and disposed of its Singapore factory - all without having to obtain shareholders' approval.
Gibson Dunn & Crutcher partner Robson Lee argued that taking a hardline stance against companies struggling to survive operational challenges may hinder rather than promote market growth.
"The SGX is doing the right thing to provide regulatory breathing space and an alternative listing platform for Mainboard companies in the doldrums to migrate to Catalist which has less stringent listing rules... The analogy is allowing distressed companies to be placed under Chapter 11.
"These companies need total environmental support to allow them to restructure their businesses and refinance through private placements, which can be effected more expeditiously under Catalist rules.
"In my view, the existing policies of the SGX singled out by Professor Mak do not diminish the reputation of the Catalist market."