Tuesday, August 01, 2006

Malaysia's SC Cracking The Right Whip

The many complaints on the lack of quality in many of the IPOs over the past 3 years, in particular those destined for the Mesdaq Board, has finally resulted in some effective and constructive decision making on the part of the Securities Commission. There were 28 initial public offering (IPO) submissions rejected by the Securities Commission (SC) in the first half of 2006. The SC on July 31 published the reasons for its rejection of IPO submissions, expressing concerns on corporate governance issues and the applicants' failure to demonstrate business sustainability. A total of 20 of the rejections involved Mesdaq aspirants while two were vying for Main Board and six for Second Board listings.

The SC received 51 listing applications in the first half. They included four applications that were either withdrawn or returned, and one company deferred its IPO. Notably, seven of the Mesdaq applicants did not qualify as technology-based companies for a variety of reasons, which include absence of technology development and innovation, and high reliance on third parties for components and software tools. Also, a few companies' research and development capabilities were described as uncertain and that the investments were relatively low, indicating low technological barriers to entry into the industries. Some of the companies’ target markets were limited, raising concerns on sustainability of financial performance, growth prospects and the ability to compete. Others failed to exhibit characteristics of a high-growth company based on overall growth in revenue and profitability.

The two Main Board submissions were turned down as they were operating in highly competitive markets with minimum advantage, while the operation of one of them would not result in any new technology transfer to the country. The SC expressed concerns on the financial sustainability of one of them, as it was too dependent on limited contracts, while the other did not comply with the profit track record.

Of the six Second Board applications turned down, the common reasons included operating in highly competitive industries with minimum advantage, poor corporate governance issues and dependence on limited customers. The SC also cited sales restriction in the domestic market, design capabilities not being well demonstrated and products not being patented as reasons for rejection for some of the six.

The reasons cited are valid, and does not encorach into the actual "management or corporate strategy" sphere of the companies concerned. The danger here is the SC getting too vigilant in drawing the boundaries, as that could squeeze the hoop too narrow for companies to pass through. Overall A+ job by the SC so far. No point in having 100 new companies listed every year if 80% fail to garner genuine investors' interest. Better to have 50 good quality companies and having 80% of them performing well on merits (not via financial engineering or orchestration). At least now by setting clear parameters, merchant bankers would know how to better control the pre-selection process for IPO candidates. Some VCs may feel dismayed by SC's actions, but they are needed for the betterment of the market.

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