OVER in Hong Kong, regulators are contemplating stricter penalties for bankers and underwriters who fail to properly discharge their fiduciary duties when handling initial public offerings (IPOs).
One proposal is to make it a criminal offence punishable by prison time if underwriters are found to have been fraudulent or slipshod in performing due diligence - a proposal which (not surprisingly) has met stiff resistance from the investment community so far.
However, if it passes, it will bring Hong Kong in line with other countries like Australia, where strict laws have been progressively enacted over the past few years to give the main regulator tighter rein over its capital market.
Regulators in Singapore will likely be watching developments in Hong Kong closely while evaluating their suitability for adaptation to the local market.
If and when new rules are deemed necessary in the Singapore context, it's worth noting that one IPO-related area which would benefit from better governance and disclosure is the accounting of use of funds raised from the public.
No formal rules
Currently, there are no formal rules compelling new or even existing companies to fully account for money raised when they go public.
This should change - it should be mandatory for all new companies to disclose in full, say, 3-6 months after floating whether IPO funds were actually deployed for the purposes stated in the issue prospectus; and it should also be mandatory that directors sign off on such declarations. If the money was diverted elsewhere, it should also be incumbent on senior management to explain why.
At the heart of this issue is the question of why companies list in the first place. Some might be motivated by the prestige of being a public-listed company. Some might see a listing as a means of entering a new market or garnering wider shareholder support.
Many of current offerings here are aimed at enabling major shareholders to cash out.
Be that as it may, the orthodox and most common reason for companies to float on a public exchange is that they need to raise capital for expansion and, by so doing, to grow. It is therefore wholly reasonable for companies to be held accountable to the public for the use of this money - something which is currently not the case.
All issue prospectuses contain the planned use of funds - for example, working capital, purchase of plant and machinery, marketing expenses for expansion into new ventures, to buy new premises and so forth.
But there is no formal mechanism to check that funds once raised were actually used for the purposes stated in the prospectus.
In fact, it wouldn't be too far from the truth to say that shortly after listing, few people even remember what the prospectus promised in terms of funds deployment.
The authorities should look into changing this. What's more, the same principle should be extended to other related areas such as placements and rights issues in which the public is tapped for money.
Placements are customarily at generous discounts to the existing market price. So companies should have to divulge the identities of the placees and reasons why these recipients deserve discounted shares.
This is primarily for the benefit of existing shareholders who have to suffer a dilution and therefore have a right to have full knowledge of the reasons for the dilution. Moreover, it would be consistent with a disclosure-based regime in which more information is always preferable to less.
Note also that apart from the identities of placees and reasons for the discounts, the same rules associated with accounting for IPO funds should also apply post-placement - that is, were the placement funds really used for the stated purposes?
Similarly, rights issues. If the public is approached for money for specific projects, then it is wholly reasonable to expect companies to say a few months later if the money was really used for those projects.
Whatever the means chosen, whether the accountability discussed above is enshrined in the Securities or Futures Act or the Listing Manual, the point is that there should be formal rules to ensure listed companies make full and proper accounting of money raised from the investing public.