The week: ABS and SGX RegCo enhance due diligence standards for SGX listing process

The ABS Listings Due Diligence Guidelines has been updated and enhanced to raise the standards of due diligence conducted on companies planning to list on the Singapore Exchange (SGX). The revision was carried out by the Association of Banks in Singapore (ABS) in collaboration with the Singapore Exchange Regulation (SGX RegCo).

Under the guidelines, issue managers are expected to perform diligence work related to the IPO, reverse takeover (RTO) and listing process in accordance with certain recommendations. This also applies to full sponsors assessing the suitability of Catalist-listing aspirants.

Among the key updates, issue managers are to give a harder look at whether the company’s internal controls can, for example, be adequate and effective, considering the company’s expansion plans. They should also obtain and review the internal control reports, including follow-up reviews, from the internal control auditor.

Secondly, issue managers should review the companies’ growth prospects, by looking at a combination of “negative profit”, declining revenue trend, negative working capital, negative operating cash flow and/or high gearing ratio.

If these are deemed to be unviable, issue managers should help the company consider and identify material downside scenarios. Of course, such assistance should be provided to a reasonable extent that a “non-expect” can do so, the guidelines say.

That aside, issue managers should conduct “reasonable” due diligence on companies that have significant operations and/or customers and suppliers in “specialised, restricted or niche” industries.

Such due diligence would also cover companies that operate within any jurisdiction that may traditionally have been vulnerable to corruption and/or is associated with international sanctions or other geopolitical risks.

Where reasonable and appropriate to do so, they should also consider appointing a suitably “qualified” and “experienced” advisor and/or expert to advise on key issues relating to such industries and jurisdictions.

Ultimately, the guidelines emphasise that issue managers should focus on the substance rather than form when it comes to compliance with the listing rules.

The Edge Singapore understands that the guidelines were enhanced in response to several corporate controversies. For instance, e-commerce company Y Ventures Group had a manual inventory system, which may have been adequate at the point of listing, but couldn’t cope as its volume grew, leading to errors subsequently.

FinTech company, Ayondo, is another example. The Catalist-listed company had divested its UK unit Ayondo Markets (AML) for £5.7 million ($10.2 million) to reduce its liabilities. But in doing so, Ayondo had brought the viability of its business into question as AML was one of two primary subsidiaries through which it offers social trading and brokerage services in the UK.

Indran Thana, head of real estate, lodging and leisure SEA at UBS, sees this as a positive step for the capital markets to function more effectively. “It is important for regulators to maintain and, wherever possible, enhance the robustness, quality and accountability of the market participants,” he says.

David Cheng, OCBC Bank’s head of corporate finance, says the enhanced guidelines does not make his job as an issue manager more difficult. “Many banks already uphold such standards of due diligence. So the update in the guidelines are to provide better guidance and clarity for professionals to conduct their due diligence and therefore bring good candidates to list on the SGX,” he says.

Nevertheless, will this deter companies from pursuing a listing on SGX? Allen & Gledhill partner Leonard Ching disagrees. The revised guidelines aim at enhancing the quality of issuers that come to market in Singapore. Over time, this should improve the quality of the Singapore equity capital market itself and attractiveness of Singapore as a listing destination, he says.

“For these reasons, we do not think that the enhancements to the due diligence guidelines should directly discourage companies from listing in Singapore,” he adds.

Still, Tham Tuck Seng, capital market leader at PwC Singapore, warns that the enhanced guidelines are at risk of becoming a box-ticking effort. This is due to the prescriptive nature of the recommendations related to conducting due diligence on internal controls and business viability, he notes.

“The guidelines are just guidelines. It means that we don’t use them like a checklist. At the end of the day, professional judgement is still required because each business is different,” he says.