It has been a lukewarm first quarter of 2023 for the global Initial Public Offering (IPO) market. Ernst & Young reports that 299 IPOs raised US$21.5b in Q1, representing 8% and 61% drops, respectively, year-over-year (YOY). Interest rate and inflation hikes, banking industry issues, and pessimism throughout the global stock market have made their mark this year.
However, the Asia-Pacific (APAC) region dominated the same quarter, attributing 59% of all global IPO deals, as noted in the same EY data. Investment interests across APAC are heating up for several reasons. The People’s Bank of China has gone against the grain, holding rates. The International Monetary Fund predicts Asia-Pacific’s gross domestic product to grow by 4.6% this year, following a 3.8% expansion in 2022. And while fears of a US recession amid monetary tightening of the past year are slowly diminishing, economists see the Asian market as displaying strength throughout worldwide economic turbulence.
The State of IPOs in Singapore
Singapore’s economy is expected to grow by 2.5% this year, and the city-state’s political and economic stability could garner more interest from investors. 2022 saw 15 IPOs with S$0.58bn of proceeds raised, as reported by PwC. 2023 may be another positive year for companies going public in Singapore.
Organisations (issuers) seeking a Mainboard listing on the Singapore Exchange (SGX) must appoint an accredited issue manager (IM), responsible for preparing the issuer for listing.
The Monetary Authority of Singapore (MAS) administers the Securities and Futures Act 2001 (SFA) and its subsidiary legislation. It is the primary regulatory authority in connection with the offering of shares or units in Singapore.
The Role of Financial Institutions Acting as Issue Managers
Financial Institutions (FIs) acting as Issue Managers (IMs) play a crucial role as gatekeepers for companies looking to become publicly listed in Singapore. MAS has released a paper detailing good practices and key findings from its thematic inspections of IMs to explain its expectations concerning the due diligence of corporate finance advisory activities for IPOs. These inspections were conducted for 8 IMs from June 2018 to September 2021 and focused on their controls, policies and procedures relating to the due diligence process for IPOs.
The MAS guidelines show that all IMs should incorporate these expectations, and where appropriate, the good practices outlined in their conduct of corporate finance advisory and placement activities.
Any financial institution acting in an IM capacity for IPOs should be aware of these findings, as summarised below. Of course, refer to the full MAS Information Paper for full details.
MAS’ Expectations of IMs’ Due Diligence Process
The MAS information paper states that IMs must conduct due diligence on issuers critically and objectively rather than depending on the representations proposed by issuers. IMs should scrutinise any information that seems contradictory or questionably reliable while verifying information or representations through means such as:
- Interviews
- On-site visits
- Issuer and related-party background checks
- Independent verifications where red flags are identified
IMs should also consider various factors to form a holistic understanding of the issuer’s risk profile, particularly if the issuer is operating in unfamiliar markets or high-risk jurisdictions. These factors include (but are not limited to):
- Conflicts of interest
- Business model sustainability
- Past performance and future trends
- Familiarity with the issuer’s regulatory environment
- Character and integrity of directors, management, and controlling shareholders
IMs should also take guidance from the Association of Banks in Singapore Listings Due Diligence Guidelines (“ABS Due Diligence Guidelines”).
3 Lines of Risk Management Defence
Management oversight of corporate finance advisory activities is critical to ensuring proper governance and regulatory compliance, as is the assurance of robust processes and procedures in this respect. IMs should implement effective written policies for its operational areas to comply with regulation 13(b)(i) of the Securities and Futures (Licensing and Conduct of Business) Regulations. IMs should also periodically review their due diligence processes and procedures and test the strength of their internal controls and the relevance of those procedures.
It is critical to ensure compliance teams have the authority and representation to actively participate in discussions and approvals to act as a second line of defence in risk management. Compliance teams should also regularly conduct compliance reviews of business operations while delivering timely updates to management about regulatory compliance and compliance-related matters.
As a third line of defence, the Internal Audit (IA) function must act as an effective third line of defence, requiring regular risk assessments and audits of corporate finance activities by experienced auditors who can deliver high-quality audit outcomes.
MAS highlighted the case of one issue manager demonstrating poor management oversight by holding “only one management committee meeting” before submitting the listing application to SGX. “There were no subsequent check-ins with the management committee on the resolution of red flags or new material issues uncovered since the meeting.”
Conducting Due Diligence on Issuers
The MAS information paper states that IMs should exercise due care, scepticism, and rigour in assessing the suitability of potential issuers for listing in Singapore. Expectations of the conduct of IMs’ due diligence should also be considered.
The regulator notes that good practices in this regard include the development of detailed guidelines and checklists to provide more guidance to deal teams in executing the due diligence plan.
MAS’ expectations of conducting due diligence on issuers include:
- Timeline verification of customer identities must be undertaken, with clear guidance to staff on identifying red flags during customer onboarding. These activities are designed to support anti-money laundering and anti-terrorist funding measures through the use of strong Know Your Customer (KYC) policies.
- Appropriate checking should be undertaken before transaction commencement to reduce conflicts of interest risk from the key parties working on the transaction.
- Adequate due diligence should be conducted on key personnel of the potential issuer, such as directors, executive officers, founding, and intended controlling shareholders, to help the investing public assess the issuer. For corporate vehicle shareholders, due diligence applies to the natural controlling persons of such entities.
- IMs should conduct interviews with major customers or suppliers of the issuer (and without the issuer present to reduce any undue influence from the issuer).
- Site visits should be conducted on key assets of the issuer to confirm the issuer’s assets.
- Interested Party Transactions (IPTs) and financial arrangements that may impact the proposed listing’s merits should see due diligence applied by IMs, such as independent verification of IPTs using benchmarking methods and reviewing supporting documents and corroborating that information with third parties.
- IMs should approach the IPO process with healthy scepticism, be alert to red flags, and carefully review offering documents to ensure the most accurate offering information is provided to potential investors.
The Role and Suitability of Experts and Advisers
Experts and advisers play an essential role in the due diligence process. As such, IMs should take steps to satisfy themselves that they can rely on the findings and opinions of such third parties. These steps include:
- Assessing the suitability of these roles involved in conducting any aspect of due diligence on which IMs may rely.
- Checking the experience, qualifications, and potential conflicts of interest when relying on these parties to carry out specific due diligence work.
- Perform their own due diligence in identifying any gaps, inconsistencies, or red flags in the reports from experts and advisers.
IMs will also want to document their reasoning and demonstrate the suitability of appointing the selected experts and advisers.
Ensuring Proper Record Keeping
Documenting the due diligence work undertaken demonstrates that the IM has properly executed its duties and obligations under the relevant rules and regulations.
MAS reinforced that IMs must maintain proper records of the due diligence work conducted, including records of key discussions - internally and externally to the IM (such as the proposed issuer, key suppliers and customers, and experts and advisers).
All critical decisions and the basis for such decisions should also be adequately recorded, along with the onboarding process and any actions taken to address anti-money laundering and anti-terrorism funding considerations.
MAS’ Findings Reveal Much Room for Improvement
The information paper revealed many areas for improvement in the processes and procedures of FIs acting as IMs for companies looking to become publicly listed in Singapore. For example, several IMs could not produce records to demonstrate they had conducted appropriate due diligence and taken actions to remediate issues, including unmaintained documentation of conflicts of interest and potential red flags.
There were also instances where deal teams had failed to escalate to the relevant management committees on matters such as regulatory breaches by the issuer, sanctions and fines imposed on the issuer’s business partners, and lawsuits against the issuer’s major customers.
MAS’ thematic inspection of IMs showed “much room for improvement” in the conduct of IMs’ advisory activities for IPOs and IMs’ placement activities.
Financial institutions engaged with issuers in an IM capacity in Singapore should seek a deeper understanding of the good practices and areas of weakness documented by MAS during its thematic inspections, as detailed in the full information paper.
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