SGX RegCo enhances Mainboard rules to strengthen oversight over issue managers and due diligence standards

21 January 2020

Singapore Exchange Regulation (“SGX RegCo”) has incorporated The Association of Banks in Singapore Listings Due Diligence Guidelines (“ABS Guidelines”) and issue manager (“IM”) independence requirements, among others, into the Mainboard Listing Rules (“Mainboard Rules”) with effect from 10 January 2020. SGX Regco is strengthening its oversight over IMs as part of overall enhancements to regulations governing the Mainboard listings review process.

SGX RegCo finalised these enhancements after considering feedback received in a public consultation on the proposed changes to the regulation of IMs. The rule enhancements are set out in its “Responses to Comments on Consultation Paper” on “Regulation of Issue Managers” dated 10 January 2020 (“Response”). The key changes are highlighted below.

Responsibilities of issue managers expanded

SGX RegCo is of the view that as IMs play a critical role in advising listing applicants on the listing requirements and conducting due diligence on them, IMs must be technically competent, possess the necessary experience to discharge their professional duties fully and professionally, and provide impartial advice. The amendments to the Mainboard Rules governing the roles and responsibilities of IMs include requirements that an IM must:

• discharge its obligations with due care, diligence and skill; 
• conduct adequate due diligence on the applicant. Singapore Exchange (“SGX”) will have regard to the ABS Guidelines when assessing the adequacy of due diligence conducted. In this regard, SGX RegCo considered feedback received with respect to the ABS Guidelines and decided not to use them as the minimum standard for the conduct of due diligence, but to incorporate the ABS Guidelines in the Mainboard Rules as a reference point for expected industry standards and guidance on the broad framework and principles which IMs should consider when conducting their due diligence work;
• provide to SGX, as soon as practicable, any information or confirmation that SGX may require for the purposes of ensuring that the Mainboard Rules are complied with by the IM, the applicant and its directors and executive officers. Such information or confirmation shall be provided to the SGX in such form and within such time as SGX may reasonably require and must be complete and accurate in all material respects, and not misleading. The IM has a responsibility to notify SGX as soon as practicable if it has reason to believe that the information provided does not meet this standard;
• inform SGX of all matters relevant to the listing application that should be brought to SGX’s attention in a timely manner.

Independence of issue managers requirement codified

IMs play a major role in initial public offerings, listings by way of an introduction and reverse takeovers. In order to ensure that the interests of investors are safeguarded, the Mainboard Rules have been amended to include the requirement that at least one IM must be independent of an applicant for a new listing (including an initial public offering, a listing by way of an introduction or a reverse takeover). SGX will retain the discretion to deem an IM independent or otherwise. The introduction of the IM independence requirement in the Mainboard Rules codifies existing IM independence requirements.

In determining whether an IM is independent, SGX will have regard to the matters set out in the new Practice Note 2.1A on Independence of Issue Managers (“Practice Note”).

Thresholds for issue manager independence

The Practice Note sets out the following circumstances which, if any of them exist from the date of submission of the listing application up to the date of listing, will result in an IM being considered to be non-independent:

• More than 20% of gross proceeds to reduce/retire any loans or available committed credit facilities, or to discharge any guarantees extended by IM group: More than 20% of the gross proceeds from the offering is or will be used to reduce/retire any outstanding loan or available committed credit facility extended by the IM group (see “Definition of “issue manager group” introduced” below) to the applicant and/or its subsidiaries (“applicant group”), or discharge any guarantee given by the IM group on behalf of the applicant group. 

References to “loans” and “guarantees” exclude short-term financing facilities granted by the IM group to REITs, business trusts and/or their subsidiaries for the sole purpose of the acquisition of assets for the proposed initial public offering or reverse takeover, where such short-term financing facilities are repaid on or around the time of completion of the listing.

SGX RegCo has clarified that it would not consider an IM non-independent as a result of subsequent involuntary downsize of an offering at the tail-end of the listing process due to market conditions, as it is recognised that due diligence on the applicant would have been substantially completed by the IM at that juncture.

SGX RegCo has also clarified that “gross proceeds” refer to proceeds raised by the applicant as a result of the offering, including cornerstone, placement and public tranches, but proceeds due to vendor(s) arising from the offering and to be received from the over-allocation of securities are excluded.

• Aggregate amount of outstanding loans, available credit facilities and guarantees extended by IM group exceeding 30% of assets: The aggregate amount of (i) outstanding loans and available committed credit facilities extended by the IM group to the applicant group, and (ii) guarantees given by the IM group on behalf of the applicant group, exceeds 30% of: (A) the applicant’s latest audited total assets or latest unaudited pro forma total assets (if applicable) prior to the submission of the application; (B) in the case of an applicant engaged principally in property investment and/or development, the latest valuation of the assets of the applicant group; or (C) in the case of a REIT or business trust that does not have audited financial statements, the latest unaudited pro forma total assets prior to the submission of the application.

References to “loans” and “guarantees” exclude short-term financing facilities granted by the IM group to REITs, business trusts and/or their subsidiaries for the sole purpose of the acquisition of assets for the proposed initial public offering or reverse takeover, where such short-term financing facilities are repaid on or around the time of completion of the listing.

Where a loan provided by the IM group is drawn down for the purpose of the acquisition of an asset and such asset is not included in the applicant’s latest audited total assets, unaudited pro forma total assets or valuation of the assets (where applicable), the valuation of the asset, for which the loan was based upon, may be included as part of the applicant’s total asset figure.

SGX would consider an applicant to be engaged principally in property investment and/or development where the property investment and/or development activities of the applicant group, based on the applicant’s latest audited financial statements, represents 50% or more of the total assets, revenue or operating expenses of the group, or is the single largest contributor of its total assets, revenue or operating expenses.

• IM group having interest in 5% or more of equity securities: The IM group has or will have an interest (direct or deemed) in 5% or more in the equity securities of the applicant, its principal subsidiaries and/or controlling shareholder(s) before or after the listing.

 Reference to “equity securities” excludes equity interests held (i) by an investment unit/entity in the IM group on behalf of, and for the benefit of its independent and discretionary clients, (ii) by a fund management unit/entity in the IM group on behalf of its independent and non-discretionary clients, (iii) in a custodial capacity on behalf of independent clients, and (iv) by the IM group that arise as a result of an underwriting obligation. Further, an IM group would be deemed to have an interest in the equity securities of the applicant, its principal subsidiaries and/or controlling shareholder(s) if the IM group will be granted securities that may be convertible to shares in the applicant, its principal subsidiaries and/or controlling shareholder(s) before or after the listing.

Consideration of other circumstances that may materially affect independence

The IM must also consider whether there are any other circumstances that may materially affect its independence and consult SGX in the event of any uncertainty.

In this regard, the Response contains certain non-exhaustive examples of circumstances that may materially affect an IM’s independence:

• where the amount of outstanding loans, available committed credit facilities and/or guarantees extended by the IM group, or an associate of a director, chief executive officer or key officer of the IM (who are directly involved in the decision-making in respect of the new listing application and is also the controlling shareholder of the IM) to/on behalf of (as the case may be) the applicant’s controlling shareholder(s) and/or its associates is material; 
• where the increase in fair value of the IM group’s interests (direct or indirect) in the equity securities of the applicant pursuant to the listing is deemed to be material, in comparison to quantum of fees received by the IM for its role as the IM; 
• where the IM group has or will have an interest (direct or deemed) in 5% or more of the equity securities of the applicant, its principal subsidiaries and/or controlling shareholder(s) through an existing loan facility; 
• where an employee of the IM who is directly involved in the applicant’s listing has or will have an interest (direct or deemed) in the equity securities of the applicant; and
•  where the appointment of the REIT trustee (that is part of the same corporate group as the IM) is a condition for the appointment of the IM.

Definition of “issue manager group” introduced 

In connection with the introduction of the Practice Note, the term “issue manager group” (“IM group”) is defined in the Mainboard Rules as:

• the IM and any other company which is its subsidiary or holding company or is a subsidiary of such holding company; 
• the controlling shareholder(s) of the IM; and
• the director(s), chief executive officer(s) (or equivalent person(s)) and key officer(s) (“key persons”) of the IM who are directly involved in the decision-making with respect to a new listing application.

A reference to the IM’s key persons who are directly involved in the decision-making with respect to a new listing application shall include a Singapore-based entity’s key persons who are directly involved in the decision-making with respect to that listing application and any key persons of an overseas-based entity of that IM who are directly involved in the decision-making with respect to that new listing application.

Responsibilities of an issuer’s directors and executive officers for information submitted to SGX expressed

The amendments also clarify the obligations of directors and executive officers of listing applicants (or where applicable REIT manager or trustee-manager). Whether they are proposed or appointed, they are responsible for ensuring information submitted to SGX in listing applications and SGXNET announcements is complete and accurate in all material respects, and not misleading, and must assist and facilitate the IM’s conduct of due diligence. SGX RegCo has clarified that it is not intended for proposed directors and executive officers to be held responsible for incomplete, inaccurate and/or misleading information in the event that it is established that they were not involved in the relevant matter nor responsible for providing such information.

Background

On 29 November 2018, SGX RegCo issued a Consultation Paper to seek feedback on proposed amendments to the Mainboard Rules on (i) the regulation of IMs, and (ii) change to the order of the listing review process.

SGX RegCo issued its Response to feedback received for the proposed changes to the listing review process on 12 July 2019 and the order of the listing review process has been revised with effect from 15 July 2019.