Rules see sponsors baulk at taking on small firms
Tough requirements on sponsors in the proposed Growth Enterprise Market (GEM) are making them reluctant to take on small and medium-sized companies, according to accountants and potential issuers.
Under the new market's listing rules, announced yesterday, sponsors are saddled with more responsibilities than exist in the main board, such as monitoring the company on compliance issues as well as reviewing documents two years after listing.
Sponsors are also required to have a minimum paid-up capital of $10 million and stringent expertise requirements have been imposed.
'Sponsors in the GEM bear far more risks than in the main board,' PricewaterhouseCoopers partner Ernest Ip said.
He said the the fact companies were not required to produce profit records might bring hidden risks.
As a result, sponsors might prefer picking big companies for sponsorship in a bid to reduce risk, Mr Ip said.
'So I am afraid it may not be easy for those small and medium-sized companies to find [sponsors] for listing,' he said.
The scale of listing fees also appears not to justify smaller companies listing in the GEM.
'Listing fees, including expenses from accounting, legal advising and underwriting, may cost up to $5 million or $6 million,' international accounting firm Grant Thornton partner Henry Cheung said.
'If a small company only wants to raise $30 million - the minimum amount for public offer in GEM - the costs may not justify it to list there.' Some accountants suggested it would be more cost-effective to allow small firms to employ one accountant to do both auditing and sponsorship jobs.
The stock exchange banned that idea due to concern of conflict of interest.
Some accountants said this concern was not legitimate.
'It is an irony. We know those companies [that we audited] so well, but we are not allowed to sponsor them,' Deloitte Touche Tohmatsu corporate finance managing director Lawrence Chia said.
'At one time, the exchange wanted to encourage other professions like lawyers and auditors to participate in sponsorship, but now it turns up telling us that we can't be both auditor and sponsor of GEM companies - I really don't understand them,' Mr Chia said.
He also said it was a well-accepted practice in British and Australian markets for auditors to sponsor their client for listing, and the fact that the local stock market was modelled on London's meant it should follow British practice.
Some smaller companies have complained the rules make it difficult to find a listing sponsor.
'I can't find an investment bank willing to act as sponsor for my company, though I have contacted several,' supermarket operator Consumer Republic chief executive Wellen Sham said.