Michael Bleby Reporter

Michael writes on emerging markets, architecture and engineering. He has served as a correspondent in Tokyo, London and Johannesburg and has written for Reuters, the Financial Times, The Age and The Sydney Morning Herald.

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ASIC warns of investment challenges around emerging market IPOs

Published 27 August 2013 11:56, Updated 28 August 2013 07:53

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ASIC warns of investment challenges around emerging market IPOs

Investing in new ASX companies focused on emerging markets requires a degree of caution. Photo: Michel O’Sullivan

Emerging market companies, which are listing in Australia in increasingly greater numbers, commonly face challenges in implementing good corporate governance, risk management and disclosure practices, all of which are “relevant” to investor confidence, the Australian Securities and Investments Commission says.

There are no areas of systemic concern for Australian investors, but they should beware the risks that may accompany the growing number of listed investments exposed to or based in emerging markets, such as Toronto-listed Sino-Forest Corporation, which had a market capitalisation of $C6 billion ($6.35 billion) at one point and collapsed in 2011, the regulator says.

“In our review, we identified a number of instances where emerging market issuers appeared not to be sufficiently aware of their legal obligations and may not have been in compliance with the Corporations Act,” the ASIC report says. “The areas in need of particular focus involve corporate governance, conflicts of interest, disclosure and financial reporting.”

We identified a number of instances where emerging market issuers appeared not to be sufficiently aware of their legal obligations and may not have been in compliance with the Corporations Act

Even at a time when investors are becoming more bearish on emerging markets, companies from those economies are increasingly seeking to list in Australia. In many cases they do so to get their governance and other processes up to a level not required in their home market and to win a level of respectability and improve key relationships, such as with their bankers.

Big exposure

More than a third of the ASX’s 2184 listed entities – 760 – have operations or assets in emerging markets, ASIC says. Asia and the Pacific accounted for most, with 571, followed by Africa (257), South America (135) and Eastern Europe (65). More than 56 per cent were involved in mineral exploration and mining, or the oil and gas sectors. A number of these entities have another listing, with Toronto, Frankfurt and Berlin the most common.

Low disclosure levels are one problem the regulator identifies.

“Almost a third of the emerging market issuers we reviewed did not make frequent or meaningful continuous disclosure,” ASIC says in the report.

Further, a “small number” of entities incorporated in Australia identified by ASIC did not have two directors ordinarily resident in Australia, as required under section 201A of the Corporations Act.

Almost a third of the emerging market issuers we reviewed did not make frequent or meaningful continuous disclosure.

Many emerging market issuers which have a capitalisation of less than $50 million, “are likely to struggle” to implement ASX principles and recommendations on financial reporting. While more than half of the entities reviewed formed an audit committee, most did not meet ASX recommendations on how the committee should be formed, the report says.

ASIC does not single out any Australian listed entities, nor does it single out any individual emerging markets. The report, however, comes at a time when an increasing number of Chinese companies are seeking to list on the ASX. The number remains small – just 23 of the ASX’s 2184 listed entities have a majority of shareholders in China (14) or Hong Kong (9).

Coming months are likely to see others join that list, including mobile e-commerce marketplace 99 Wuxian, men’s clothing retailer Sunbridge, copper miner Sunlong International and mining services company Sino Australia Oil & Gas. None of these companies is yet listed, so would not have formed part of ASIC’s study.

Nonetheless, a spokesman for Sunbridge, which seeking to raise up to $10 million ahead of a local listing, said the company was fully compliant.

“The story for Sunbridge is that it ticks every box on governance and compliance,” he said. “It will have a market capitalisation of $100m on listing and two of the most highly regarded Australian based directors and will pay a dividend.”

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