CSE to revamp listing rules on IPO cash but is it enough?

With new regulations, firms which aim to go public won’t be able to raise cash at their whims and fancies, but these deterrents may not do the trick entirely.

The Colombo Stock Exchange ( CSE) aims to issue stringent directions on funds raised through Initial Public Offerings (IPOs) in their yet-to-come listing rules.

“We’ll be issuing listing rules on using IPO cash for the precise purpose as stated in the firm’s prospectus. If a company wants to use the IPO funds for something else, they need to go to their shareholders and request permission,” a CSE official said.

The CSE in their yet- to- come listing rules aims to issue strin- gent directions on firms ' doing things that weren’t promised’ with funds raised through Initial Public Offerings (IPOs).

“We’ll be issuing listing rules on using IPO cash for the precise purpose as stated in the firm’s prospectus. If a company wants to use the IPO funds for something else, they need to go to their shareholders and request permission,” a CSE official said.

He added that more than two years ago, there were instances where firms used to use raised IPO cash for other projects owing to bad conditions in the economy, etc. For example, those who wanted to build hotels switched their objectives saying that market conditions weren’t good to do so and either parked this cash in Treasury bills or did something totally different to what was promised. “In such an event if macro conditions are bad for the intended raising of cash, they need to hold an extra ordinary general meeting, etc and obtain shareholder approval for change in purpose,” the official said.

The CSE having observed this trend in changing aims by firms which listed publicly in utilising their IPO funds two years ago, had put in a mechanism to stop this from happening.

In one instance, Business Times research shows where Citrus Kalpitiya was a recent instance when the regulator had had to step in. The company by way of a prospectus issued in December 2011 to the public raised approximately Rs. 283 million to part finance the construction of a resort hotel within the stipulated period of 24 to 30 months. By 2015, a hotel wasn’t still built.

Then in April of that year the Securities and Exchange Commission (SEC) directed that in the event the company is unable to rectify the issues in respect of the construction of the hotel, that it is required to propose a viable alternate scheme to shareholders who have been prejudiced by the failure of the company to carry out its objectives as stated in the prospectus. Complaints by investors with regard to this firm have been flowing into the SEC since the new administrators took office.

This was a test case for the CSE to incorporate a clause in the IPO go-ahead letter.

“For the past two years we have incorporated a clause in the IPO approval document saying that in the event that a company doesn’t decide to go ahead with the intended purpose for the IPO money, they need to go to the shareholders and get approval,” the official added. But they thought it’ll be better to formalise it in their listing rules.

The Colombo Stock Exchange (CSE) aims to issue stringent directions on funds raised through Initial Public Offerings (IPOs) in their yet-tocome listing rules.

The new CSE listing rules are now with the SEC for their go-ahead and these gaps in the listing rules will be addressed with the revamp. “Also there are certain practices that are followed (which aren’t in these rules) which we’ll include as rules,” the official added.

But analysts say that this move won’t do much to stop those who want to do what they want to do. Here’s how. When a firm decides not to carry out work pertaining to the intended purpose, it reverts to the shareholders who are made up of (often) less than 10 major shareholders amongst a few minority shareholders. This is because over 70 per cent listed firms account for less than 30 per cent in public holding. So what a company in the aforesaid example would do is to diligently go before shareholders, but do what they want to as the major owners are their friends/families/allies/cronies and will vote with each other.

While the CSE is responding to an issue that has been festering for sometime, the new measures to slap rules may do little to drive the point home. The CSE and the SEC agree.

So far a penalty mechanism hasn’t been discussed for flouting the rules. That for the most part is due to the rules still to be sanctioned by the regulator. “We will need to come up with a suitable mechanism to arrest the issue,” the official said.