A regulatory close up on Emerging Market Issuers
Three years after the release of ASIC’s report on Emerging Market Issuers, recent releases by ASIC and ASX suggest an inquisitorial approach by the Australian regulators towards Emerging Market Issuers.
EMIs’ Predisposed Challenges
In the 2013 report, Emerging Market Issuers were defined as listed entities where the operations and assets of the entity are based in Eastern Europe, Asia and the Pacific (excluding Singapore, Hong Kong, Japan and New Zealand), Africa, South America or the Middle East (EMIs).
ASIC observed the challenges tend to be faced by EMIs to include:
- Implementing a sound corporate governance framework;
- implementing internal controls and risk management systems;
- the prevalence of related party transactions; and
- the verification of information or opinions by experts or professionals in an overseas jurisdiction.
Dispersed geographical operations and a lack of sufficient key personnel in Australia were among the main reasons noted for EMIs’ predisposition to these challenges.
Consequently, the proper corporate governance structure of EMIs has long been a focus of ASIC.
ASIC’s Further Prognosis
In its February 2017 Corporate Finance report, ASIC’s view of EMIs and approach to these challenges became more definitive and diagnostic. EMIs were singled out as presenting heightened due diligence challenges.
This prognosis led to a positive responsibility being placed on the Australian advisers to:
- apply sufficient scepticism towards the due diligence work carried out by foreign legal and other advisers, and
- understand the political and cultural environment in which the issuer operates, local business practices affecting the issuer, local laws affecting the issuer and the issuer’s local expert advisers.
In conjunction with ASIC’s emphasis that the due diligence process underpins the quality of regulated disclosures, we anticipate that ASIC will scrutinise the due diligence and verification undertaken by EMIs in its review of an EMI’s prospectus.
ASX Joins Forces
The timing of ASIC’s 2017 report is opportune as the overhaul of the ASX Listing Rules that came into force since 19 December 2016 also have implications for applicants from emerging markets.
Among the various changes to the Listing Rules in December 2016 was the renewed emphasis on ASX’s discretionary power under Rule 1.19 which appears to be largely arising from ASX’s concern over the EMIs.
ASX provides in its revised Guidance Note 1 a non-exhaustive list of examples where ASX may exercise its discretion to not admit an applicant even if the applicant meets the specific conditions set out the Listing Rules.
An example from the list is where an applicant is established or has its main business operations in an emerging or developing market and ASX has concerns about the regulatory environment in that market.
Echoing ASIC’s sentiment, another example listed was where ASX has concerns about the applicant’s structure, business, financial condition and governance arrangements.
Another example provided is where ASX has concerns about the genuineness of the applicant’s interest in accessing the Australian equity market, which is also mainly relevant to EMIs.
The revised listing condition 1.8 on satisfaction of spread now expressly requires that some or all of the security holders be resident of Australia, as the measure of local interest and liquidity in the securities.
Guidance Note 1 further provides that “some or all” is to be interpreted as “a reasonable level”, and that such reasonable level is at least 75% for applicants incorporated or has its main business operations or has a majority of its board or controlling shareholder resident in an emerging or developing market.
In our recent experiences, we have observed ASX requesting information outside of the specific conditions set out in the Listing Rules thereby exercising their discretionary power and demonstrating their inquisitorial approach in respect of applicants from emerging markets.
While all this may not be considered a sea change in the regulatory environment, a general regulatory close-up on emerging market issuers seeking to be listed on the ASX is transpiring.
In response to ASIC and ASX’s increased scrutiny of EMIs, we note these recommendations to be adhered to by EMIs:
- The directors should proactively seek understanding of the legal and corporate governance requirements prescribed by ASIC and ASX;
- Arrange an initial discussion with ASX listings compliance and submit a preliminary suitability review application at the earliest opportunity;
- Ensure that the disclosure document sets out the issuer’s business and revenue generation model, the key assumptions underlying the model and the associated risks, in substantive analysis, as opposed to simply descriptions, and provides clarity in the use of funds table;
- Ensure that a robust due diligence mechanism is conducted through out the prospectus preparation and listing application; and
- Ensure that all professional advisers engaged in the listing applications are qualified and experienced.
This article was written by Stephanie Wen. Stephanie is an Associate in our Sydney commercial team and can be contacted by phone on 02 8298 9533 or by email.
Macpherson Kelley communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from communication. Persons listed may not be admitted in all States and Territories.