SINGAPORE Exchange's revised mainboard admission standards unveiled yesterday contain many hits but also one glaring miss. The hits are obvious, though long overdue - much higher profit, revenue or market-capitalisation requirements should in theory at least ensure the entry of larger, better quality companies. This, together with the 50 cents minimum offer price for initial public offers (IPOs), should go some way towards reducing the number of low-priced stocks that dominate the local investment landscape, effectively addressing the unwelcome but growing perception of this being primarily a penny-stock market.
The miss? There were no steps to improve accountability of the use of IPO funds. This is a pity: If this were to be done in the simple and easily understood format recommended several times before in this column, retail investors would be better equipped to evaluate offerings put before them.
Granted, use of funds is included in the offer document, but as we have noted many times before, this is always buried inside the document and there is no proper juxtaposition of gross and net proceeds on the same page.
Worse, in a feeble, token attempt at improving accountability, underwriters have recently taken to accounting for IPO funds net of payouts to vendors as "100 per cent of capital received", possibly to downplay the fact that a significant portion of investors' money goes to major shareholders.
As noted before, the correct accountability focus should not be the money the company receives but instead the money the public forks out.
The exchange therefore could and should have done more in its latest revamp by requiring all underwriters to cut to the chase and place on the cover or page one of the IPO prospectus a simple accounting of where every $1 invested in the company is to be deployed.
This isn't rocket science by any means. Rather, it is elementary accounting that even the least sophisticated retail punter would understand, especially since the majority would not wade through hundreds of pages to work out the numbers for themselves.
Still, if SGX hasn't delivered on the disclosure/accountability front - yet - retail investors can take encouragement from the fact that the admissions bar has been raised significantly.
The pre-tax profit requirement, for example, used to be a cumulative figure of $7.5 million over three years but is now $30 million for the latest year, while the market-cap floor used to be $80 million versus $150-300 million now.
By substantially upping the admissions ante, the exchange has signalled a strong intent to attract large, quality companies. This is actually a reversal of the policy which prevailed throughout most of the 2000s, when standards were lowered in a bid to attract as many listings as possible to fill the void left by Malaysian stocks that used to be traded here on Clob International.
This in turn led to a flood of small, low-priced and in many cases, low-quality listings entering the market, prompting calls for higher quality standards and a shift back to the tighter stance that existed during the 1980s and 1990s.
In this connection, it's good to see that SGX plans to move away from the current practice of allowing prospective listings to place out either all or most of their IPO shares and to force these companies to allocate more shares to the retail public.
According to yesterday's announcement, public consultation and feedback on this point will be sought this year and implementation is expected next year as part of the Exchange's "next building block" in its bid to improve the local equity market.
Hopefully, this building block will also include steps to improve disclosure of the use of IPO proceeds in the simple manner described earlier, instead of the present confusing arrangement that tends to discourage investors from asking where their money is going.