Malaysia’s regulator released a consultation paper on October 15 seeking feedback on proposals it hopes will better govern IPOs from the MOG sector. The move comes amid increasing interest from such companies, either for listings or reverse takeovers of listed firms.
“The SC is a forward-looking regulator and the new rules show it is trying to keep in step with market developments internationally, especially similar guidelines that were put place in Hong Kong, Singapore and London,” said Sue Wan Wong, a partner with law firm Wong & Partners.
The existing rules pigeonhole companies by requiring them to meet stringent profit or market capitalisation tests, which is particularly challenging for MOG firms given the capital expenditure-heavy and high-risk nature of their operations, she added.
Existing rules curtail the growth of companies in the MOG sector with requirements including at least one full financial year of operating revenue and positive cash flow from operations.
The SC is now looking to take a fresh approach to regulating MOG companies, which will involve vetting not only the business operations of the IPO candidate, but also whether its board and auditors have sufficient industry experience, according to a second Malaysia-based lawyer.
Under the new guidelines, the SC will allow firms whose primary activity is MOG, and those that are in late stage exploration or early stage production, to apply for a waiver from meeting the financial requirements of market capitalisation or profit tests.
This will only be possible if certain criteria are met, including proof that the IPO applicant has an adequate portfolio of at least contingent resources or indicated mineral resources and is able to substantiate this with an independent report. The applicant also needs to show that it has majority control over the assets.
The SC says that while, generally, control of an asset is defined as holding more than a 50% stake, it could consider, case-by-case, ownership of between 33% and 50%. But this is only the case if the applicant can show it has sufficient influence over decisions such as budget and remuneration.
Not enough
Ashley Wright, a partner with Norton Rose Fulbright in Singapore, believes the guidelines do not go far enough. The SC is likely to structure the rules this way because it does not want to expose shareholders to excessive risk, he said.
“But oil and gas is at the risky end of the investment spectrum. If you can’t accept this as a regulator, you may end up overprotecting investors and constraining growth in the very companies you are trying to encourage,” he added.
The proposed rules also apply to IPOs of special purpose acquisition companies (Spac), which have proliferated in Malaysia in recent years, mostly in the oil and gas space.
Spacs have no assets or operations at the time of their IPOs, but are holding companies set up to make acquisitions, relying solely on the strength of their management. This means investing in a Spac is risky because of the absence of an operating history or track record.
“The main difference between a MOG and Spac listing is the downside protection one gets from a Spac,” said an ECM banker in Malaysia. “Spacs are risky, but an investor can retrieve his cash if he doesn’t agree with the acquisition, so that at least gives him capital protection.”
For an MOG company however, the risks are the same but without the guarantee that investors get their money back, he added.
The banker reckons that the regulator may be worried that the influx of oil and gas Spacs, coupled with the downturn in oil prices, may end in tears for investors, which was what led it to create new rules for MOG companies. “All it takes is for one bad apple to spoil the bunch. The SC wants to pre-empt that,” he said.
Oil price key
The SC has not been above shelving applications for Spacs from the MOG sector, with companies including Matrix Capacity Petroleum, TerraGali Resources and Australaysia Resources & Minerals refused in the past.
According to Wong, there isn’t a big pipeline of MOG companies waiting to list, but interest is expected to be huge once the new rules take effect, given how important the industry is to Malaysia’s economy, and the number of Spacs that have sought IPOs.
Still, such trades will depend on the direction of oil prices, which will be a bigger factor in whether MOG transactions make it to the market.
“Even the best IPO will struggle to excite the industry right now,” said a market observer. “No one has any appetite for MOG at the moment.”
And if Singapore’s example is a guide, then it will take more than regulatory changes to move the needle, say market watchers. There was no appreciable difference in the number of MOG listings on the Singapore Exchange after rules governing their IPOs were amended in 2013.
Feedback on the SC’s proposals is due on November 13. Bursa Malaysia, the bourse operator, will be issuing a consultation paper separately on the additional post-listing obligations for listed MOG companies.