The lack of credible second boards on Asia’s stock exchanges has seen most junior board companies in the region excluded from the radar of key investors. So the recent introduction of Catalist, a sponsor-supervised listing platform, spells renewed hope for emerging companies to raise funds and expand existing operations.

 

The Singapore Exchange (SGX) has openly stated the goal of Catalist – to emulate the success of the Alternative Investment Market (AIM) in London. At a media briefing to mark its launch, SGX chief executive Hsieh Fu Hua said: “Having seen the movement of companies to AIM in London, we decided it's time to respond and set the pace in Asia.”

 

The fact that more than 100 Asian companies — mostly Chinese — have listed on AIM shows the huge potential of a viable alternative listing forum, especially one on Asia’s doorstep. But amidst the excitement, some market watchers may have jumped the gun in making peer-to-peer comparisons between Catalist and AIM, invariably setting unrealistic expectations.

 

The latter is after all the world’s most successful market for growing companies, with listed firms raising over US$43 billion ($62 billion) from the market since its inception in 1995. With Catalist yet to get off the mark, surely it’s a case of comparing apples with oranges at this early stage.

 

But in setting up this new market, valuable insights may be gleaned as to how AIM has surged ahead of other alternative markets. One of the key aspects has been its ability to attract institutional interest. Unlike London, the local market is largely the domain of retail investors, many of whom exhibit the typical market behaviour: buy in hope, sell in fear.

 

Banking on investors likely to support a firm based on short-term earnings rather than long-term prospects does not bode well for a market of growth companies, most of which do not have formidable earnings record yet. Corporate finance lawyer and partner at Shook Lin & Bok, Robson Lee, believes that investor relations (IR) needs to be upgraded in order to attract more institutional plays.

 

“You need to have an active IR and I think what’s also important is to encourage lots of research and analyst coverage of all kind of companies. There’s not much research in terms of the depth and not much institutional interest because the research houses haven’t been able to give a good valuation on companies.

 

So generally, you find the institutional play is very mild and restrained and that contributes to very little trading,” says Lee. Metax Engineering is one company currently trading on Catalist and its finance manager, Tan Sian Yue, feels the new branding can be a differentiating factor in influencing more institutional investors to look towards the Singapore market.

 

“SESDAQ was perceived as the smaller version of the SGX Mainboard, with fairly similar rules and structure, but catered for smaller companies. Catalist on the other hand caters for ‘growth’ companies, which should in theory be more interesting to the institutional investor than the ‘smaller’ companies of SESDAQ,” he says.

 

Clearly, attracting enough well-managed growth companies to list on Catalist will also be crucial in canvassing investor interest. SGX has been able to draw a number of Chinese firms to list on the Singapore market, but companies still need approval from the China Securities Regulatory Commission (CSRC) before listing abroad. Likewise, firms in India need to list on their local bourses first before venturing out for secondary listings overseas.

 

Hence, Lee expects to see the emergence of more growth companies from Southeast Asia listing on the Singapore Exchange. Indeed, for those who may not have the earnings track record to qualify for the Mainboard, Catalist presents an ideal opportunity for business expansion.

 

“If you say you’ve got good companies in Vietnam, Indonesia, the Philippines, then Singapore hopes to be a platform. The attractiveness is that Singapore would understand their culture better… if you go to AIM, you have to deal with the time zone difference and the cost is also a lot higher,” says Lee.

 

SGX’s Hsieh has already indicated that listing costs on Catalist are likely to be “at least 33 per cent cheaper than London.”

 

Prospective companies listing on Catalist would require a ‘sponsor’ chosen from an approved pool to be announced later this month. Sponsors would be divided into two categories: full sponsors and continuing sponsors.

 

Full sponsors ensure that the company meets all listing requirements before they are ready to be admitted to the market. Post-IPO, both sponsor and company will remain tied for three years after which, the latter is free to choose alternative sponsors from the continuing sponsor list.

 

Analysts have indicated that full sponsors would likely include the three local banks – DBS, UOB and OCBC – as well as the bigger brokerages and boutique corporate advisers.

 

“Catalist is still a new concept and we’re all in the learning phase, so I hope there are a considerable number of sponsors for Sesdaq companies to choose from,” says Novena Holdings’ chief executive, Toh Soon Huat, who plans to bid his time before deciding on a sponsor.

 

A Catalist-listed company needs to retain a sponsor at all times or face delisting. SESDAQ companies have been granted a two-year transitional period to engage a sponsor and comply with the new Catalist rules.

 

On their part, sponsors have to ensure that the companies they are tied to comply with all listing rules and best practices. A breach would cost the sponsor firm $250,000 in fines for each indiscretion, while registered professionals within the sponsor firms are also liable for personal fines of $100,000. These figures are much higher than the 50,000 pounds ($145,000) imposed on AIM’s sponsor firms - referred to as Nominated Advisers or ‘Nomads’.

 

The current sponsor set-up decentralises the regulatory process and de-emphasises the role of SGX. Lee feels that the market will take time to adjust to the new system where sponsors double up as pseudoregulators.

 

“Singapore has always had a certain guided approach which is regulator driven. Now it’s decentralised and they tell you to go to the ‘town councils’. So I think it’ll take time before the market sets a common standard.” Lee also notes concerns raised by companies as to whether sponsors might “over-react” to the prevailing climate, since they are entirely responsible for the companies which they sponsor.

“Would sponsors become strict regimental sergeant majors, so much so that corporate objectives are all now subsumed under the name of compliance for the sake of making sure the sponsors don’t get into trouble? I think that’s one of the main concerns that companies have.”

 

Metax Engineering’s Tan eschews the wait-and-see approach and adds: “We have to look at each sponsor and see what standards they set and who are the good ones that we can work with, as each would have their own set of standards.”

 

Obviously, teething problems may surface in the near term as Catalist seeks to prove itself. Given an almost free hand to set out conventional best practices, an established protocol will eventually arise. As it seems to be a question of when rather than if, the market has good reasons to look forward in earnest.