Timely revamp of IPO listing rules

THE recent proposed revamp of Bursa Malaysia’s listing requirements by the Securities Commission (SC) is seen as an overdue update to outdated thresholds.

The new thresholds also sets clearly the lines between the Main Market and the ACE Market listing criteria, as we do see some overlapping, whereby companies that are clearly qualified to be listed on Main Market choose to list on the ACE Market instead.

In addition, regulators now recognise that the current listing requirements seem to hinder growth companies, which may experienced negative operating profit in one or more years prior to listing on Bursa Malaysia.

At the same time, the proposal is also seen to be more aligned with regional market standards, thereby raising the floor for Main Market listings.

Local flavour

While comparisons have been made between regional markets and the local bourse, we must also recognise that Bursa Malaysia is seen to be more catered to Malaysian companies, while bourses in Singapore and Hong Kong, which are seen as more developed markets, have a wider market universe and their market reach is far greater.

The proposed revamped of the listing requirements must also not be seen as an attempt to address our lack of competitiveness, or to expand our market reach for non-Malaysian companies to be listed here.

After all, we have already seen overseas-based companies seeking listing on Bursa Malaysia, and hence, the enhanced requirements could see us attracting even more of them.

As a step up, a more profound platform will be to open up dual-listings for large Asean corporates to list on Bursa Malaysia and Malaysian large companies (for example, our top 30 by market capitalisation) to be listed on regional markets too.

This would widen the market depth and breadth of not only Bursa Malaysia but also the presence of Malaysian companies on other Asean bourses.

Larger IPOs

With the upcoming listing of Associated Air-Pak Industries Bhd on the LEAP Market next week, Bursa Malaysia will surpass its target for newly listed companies this year, reaching 61 initial public offerings (IPOs).

However, the real issue has been about quality of IPOs rather than the quantity.

As many of the IPOs this year have been on the ACE Market, there has been renewed concern over the lack of sustainable earnings momentum – especially post-IPO, when earnings tend to falter, or worse, turn loss-making.

Nevertheless, because the valuation and pricing of ACE Market IPOs are market-driven – both at the IPO stage and after listing – it would be misplaced to blame regulators.

Current listing requirements, as well as the proposed new guidelines, do not impose a historical profit track record for ACE Market applicants.

By contrast, the proposed enhanced listing requirements for Main Market applicants introduce higher thresholds that should encourage stronger and more established companies to pursue Main Market listings.

In addition, the SC’s greater flexibility regarding positive operating cash flow is viewed as a sweetener for high-growth companies seeking to list on the Main Market.

After all, some companies in certain industries are heavily dependent on operating cash flow for growth, to the extent they run negative operating cash flows in certain years.

Hence, this flexibility will see some of these growth companies able to come to the market without meeting the continuous operating cash flow requirements.

With growth thrown in, the market tends to be ready to pay a good premium – hence, this is seen as positive.

More quality

With the proposed enhancements, the SC is seen as striking the right balance between improving market quality and encouraging more companies to list on the Main Market.

As a regulator, the SC can only set listing requirements, encourage companies to seek capital market funding for growth, and provide a platform for fundraising.

It cannot be blamed for valuations that are not reflective of the company’s fundamentals or sector’s dynamics, as market pricing has many other factors that determine what is fair or otherwise.

The proposed changes by the SC are more about aligning and differentiating what constitutes a Main Market listing versus an ACE Market listing, and providing the right platform for any company that is seeking listing if it meets the requirements.

Hence, the call by Finance Minister II Datuk Seri Amir Hamzah Azizan for Bursa Malaysia to focus on the scale and quality of new listings is seen as timely, as for the exchange, nothing is more satisfying than seeing good quality listings on the local bourse.

However, the success of the IPO market does not rest solely on the regulator.

Companies seeking to go public must also understand the responsibilities that come with being a listed entity.

Post-listing, companies should focus on meeting expectations when it comes to business growth and earnings, as well as upholding strong corporate governance practices, in line with the Malaysian Code of Corporate Governance.

Principal advisers and other professionals involved in taking a company public also play a crucial role in ensuring best practices are adopted.

Proper pricing of an IPO is another crucial factor in determining long-term success.

Having said that, how the IPO performs on the first day is never a yardstick as the listing day marks only the beginning of a company’s journey in the public market.

More crucially for newly listed companies is to focus on their business growth and deliverables, and letting the market be the judge of the company’s successes or failures over time.

In conclusion, the proposed amendments are basically raising the thresholds for companies seeking to list and ensuring better-quality candidates, especially for the Main Market.

The changes are seen as more about raising the bar and listening to the market’s feedback based on changing circumstances.

For Bursa Malaysia, the number of IPOs in any given year should not be the yardstick; more importantly, it is about attracting the right quality of companies that can enhance market depth and liquidity.