Full and timely disclosures important for capital market

Updated: Monday November 11, 2013 MYT 10:40:38 AM

Full and timely disclosures important for capital market

BY RISEN JAYASEELAN

FULL and timely disclosures are the essence of a well-functioning capital market. Without such accurate information, investors will be disadvantaged. The recent case of Ranhill Energy and Resources Bhd indicates that the authorities take this seriously and rightly so. The fine imposed by the Securities Commission (SC) on Ranhill, the company, and its head honcho Tan Sri Hamdan Mohamad, is referred.In meting out its punishment, the SC pointed out that “time is of the essence” in the disclosure of information and that the SC views “timely and transparent disclosure of material information by companies and promoters seeking to raise funds via an initial public offering (IPO), as fundamental to ensuring trust and confidence in the capital market. Companies, promoters and advisers are reminded to exercise vigilance in this regard”.

These comments are worth repeating and should serve as a reminder to all company owners, directors and advisers embarking on corporate exercises.

Aside from timeliness, one should also bear in mind the qualitative aspects of disclosures.

This relates to the “materiality” of information. It is always risky to assume that the information relates to a minute part of the business, and so it isn’t enough to justify a disclosure.

This was the case with the attempted IPO of New Century Shipbuilding on the Singapore exchange in 2010.

The promoters of New Century decided that it wasn’t necessary for them to disclose the fact that two of their shipbuilding contracts had been cancelled and were now the subject of arbitration.

They reckoned that this was not material because these contracts amounted to a mere 3.5% of New Century’s order book.

Not surprisingly, the authorities took a different view and sanctioned them for this non-disclosure.

Timely and accurate disclosures is not rocket science. You just need to put yourself in the shoes of an investor and decide if you would need that information before making that investment decision.

Most of the time, disclosing such information would not have a massive impact the success or failure of your IPO. Sure you will be questioned about the matter but at least investors would respect your honesty and at the most, decide not to invest or put a lower value on your company.

That is a far better scenario than having to pull back your IPO and getting sanctioned by the authorities and ending up with a stigma thereby making it difficult for you to come back to the capital market later.

Another group of companies in which disclosures are all important are the special-purpose acquisition companies or SPACS. As we all know, SPACS are companies looking to raise funds to invest in certain type of businesses.

Because this is a risky proposition, arguably, its promoters need to provide an even higher level of disclosures. After all these group of managers are going to take your money and invest it.

Are they really qualified to do so? Their track record should be impeccable.

If they had worked in mining for example, one needs to know what exact role that person performed in the said mining entity. That’s not all. One needs to know if that role had actually led to that mine showing good financial results.

Another concern raised by industry players, notably the private equity industry players, is that the promoters of SPACS are able to enjoy the benefits of their fund raising activity far too soon, even before the assets they invest in start to perform.

This is relation to how much the promoters or initial investors are able to trade in some of the equity of their SPACS, such as the warrants, even before an asset is acquired and shows positive cash flows. There is also concern about the usage of the 10% of funds raised as operating expenses.

SPACS are essentially modeled after private equity and in effect give retail investors an opportunity to participate in this asset class, considering that private equity investors are usually only big funds or high net worth individuals.

In private equity, the modus operandi is typically for the managers of the fund to get a small management fee while they are investing the money raised.

Their big returns only come after they return the capital their investors gave them. The excess profits are then shared between the investors and the private equity firm.

No surprise then, that word is the regulator is going to be tightening disclosure requirements on SPACS.

Don’t be taken aback if these additional pronouncements on SPACS by the regulator cover issues related to the moratorium imposed on promoters, caps on the discounts that initial investors get as well as higher disclosure standards on how SPAC promoters use the money they raise from the market.

Senior business editor Risen Jayaseelan is confident that tighter rules will only bring about better quality SPACS without necessarily killing the spirit of this asset class.