Tuesday 11 June 2013

Make IPO documents readable

I have complained many times in the past about the large (unreadable) IPO documents in Malaysia, for instance here (AirAsia X, 492 pages), here (Astro, 596 pages) and here (Bumi Armada, 600+ pages).

Quantity does not substitute quality. One of the most important aspects for me is the corporate history, who invested how much for how many shares? Or, when a company is delisted and relisted, why is there such an enormous increase in valuation, what were the reasons for delisting and what has changed that the company want to list again, what assurance do minority investors have that the company will not be delisted again?

Unfortunately, these important issues are not properly tackled. Instead, we get hundreds of pages of detailed information which is not really helpful at all, and only makes the documents more or less unreadable.

The Straits Times published an article "Big is not always beautiful with IPO documents" on June 10th, 2013 written by Goh Eng Yeow. The link to the full article can be found here.

Some snippets (emphasis mine in bold):

Some of us have grown tired of trying to make sense of initial public offering (IPO) documents that have become thicker than the Yellow Pages.

So the prospectus issued by Manchester United last year ahead of a United States listing was a joy to behold.

In just 152 pages, excluding appendices, the famed English football club was able to tell Wall Street investors why they should be buying its shares and the risks they faced in doing so.

It begs the question: Would Man U have been able to achieve similar brevity if it had pressed on with its listing plans here?

In all likelihood, its offer document would have ended up more like the one put out by IHH Healthcare, which made its debut about the same time. Its IPO featured a 667-page document 7cm thick and weighing about 3kg.

It is interesting that the writer uses a Malaysian company listed in Singapore as an example (a company that was also partly delisted before, listing previously delisted companies  seems to be the flavour of the day in Malaysia).

A bit further:

".....In Singapore, by contrast, where lawsuits over soured IPOs are virtually non-existent".

The same is unfortunately also very true in Malaysia, where many IPO's have shown disappointing results from the day they were listed, but hardly anyone has ever been punished for that. It is important to note that companies should in actual fact increase earnings once they are listed, since they attract a fair amount of money during the listing process, money that should help to grow earnings.

What is needed is the introduction of class action suits, which would make it more easy for minority shareholders to take action against the perpetrators. An organisation like MSWG would be able to take legal action, and disgruntled minority investors could register with them to file their claim.

I am sure that would help to level the playing field between majority shareholders and minority shareholders, and also would increase the quality of companies that file for an IPO.

The newspaper article continued:

Nor is the problem confined to Singapore apparently. When the Australian securities regulator asked for feedback on how to make prospectuses more user-friendly two years ago, the litany of complaints it attracted were woefully similar.

Australian investors complained that their prospectuses were long and difficult to read, complete with repetitive summaries and risk disclosures that resembled a shopping list.

It led Australian Securities and Investments Commission (Asic) deputy chairman Belinda Gibson to observe that prospectuses must clearly advise investors on what information they should focus on, and in language they can understand.

Asic's solution was to advise issuers to draw up an investment overview to help investors grasp the contents. It also encouraged issuers to cut down on the prospectus' length by leaving out irrelevant information and using cross-referencing to avoid repetition as much as possible.

Now, that is one approach that would be warmly welcomed by the local investment community as the battle to attract huge IPOs heats up among major bourses.

After all, a company may not want to list on a stock exchange where IPO documents read like gibberish, when Wall Street has set the trend issuing prospectuses that even a novice investor can understand.

But the big challenge would be to get investment bankers and their lawyers to change their mindsets and agree to cut down on irrelevant information.

While the aim of cramming the prospectus with as much information as possible was ostensibly to enable investors to make informed decisions, it may also be a catch-all effort to escape any legal liability in case the IPO subsequently turns sour.

One corporate lawyer says the Securities and Futures Act lays down onerous liabilities for professionals who fail in their due diligence. Their only defence is to "make all reasonable inquiries and ensure there are no omissions".

This explains why investment bankers assume a worst-case scenario each time they work on an IPO, putting in every bit of information that may exonerate them from any liability if something goes wrong.

But it raises a point made many times in this column: Are hefty prospectuses issued to protect the investment bank, or the investors for whom they are supposedly intended?

To remedy the problem, the Singapore Exchange (SGX) can try to make its rules less prescriptive as it revises its Listing Manual, and establish broad guidelines, rather than specific rules, on company disclosures.

For example, take the current SGX rule on "interested person transactions" - which sets transactions above $100,000 as the benchmark for disclosure.

Corporate lawyers note that in a $1 billion IPO where each senior executive's airfare can run into several hundred thousand dollars, that rule alone can result in several pages of disclosures on travelling expenses. That would only trivialise the prospectus.

Investors now have the equities markets the world over to invest in. To get a fighting chance to compete with far bigger bourses like Wall Street for the world's sexiest IPOs, we should at least ensure our listing documents are just as readable.

And with that conclusion I have to agree full-heartedly. I hope the authorities will take note of the newspaper article and act upon it.


  1. I fully agree with your article. Unfortunately the trend seems to move towards even more documentations (cover asses / reduce liabilities). It is hard to find documents that are written with brevity and also clarity in our exchange. To be on the cynical side, i think it suits some of our corporates to write such thick and useless documents. Less comprehension = less scrutiny.

  2. Thanks for your comment, Shadow.