In the context of the collapse of some emerging market issuers (albeit not in Australia) and following the lead of overseas regulators, on 27 August 2013 the Australian Securities and Investments Commission (ASIC) published Report 368 "Emerging market issuers", addressing the challenges faced by emerging market issuers and risks to retail investors, particularly in relation to corporate governance and disclosure.
While it will continue to work within the current regulatory framework, ASIC intends to shine a light on Australian companies (or Australian listed companies) that have significant operations in emerging markets.
What is an emerging market issuer?
ASIC considers that an emerging market issuer is a company with material assets (including subsidiaries) in, or revenue streams from, emerging markets. Emerging markets include Asia and the Pacific (excluding New Zealand, Singapore, Japan and Hong Kong), Africa, Eastern Europe, South America and the Middle East.
ASIC identifies approximately 760 emerging market issuers listed on ASX (approximately 36% of all companies listed) with more than half involved in the extractive (minerals and oil & gas) industries.
ASIC reiterates that the primary regulation of emerging market issuers in Australia in terms of corporate governance and disclosure is through the Corporations Act and market listing rules (eg. the ASX Listing Rules). This regulatory framework sets out how emerging market issuers can raise money and conduct other transactions, and the corporate governance and reporting obligations that apply to them.
ASIC in not proposing to revisit, or introduce, any regulation specifically aimed at emerging market issuers. However, it is clear that emerging market issuers have been put on notice and should be particularly vigilant in relation to the specific challenges (or areas of concern) that ASIC has identified.
ASIC's key observations of emerging market issuers
ASIC identifies the following key challenges for emerging market issuers:
challenges in implementing good corporate governance and management systems often due to board structure, financial resources, disclosure policies and the difficulties surrounding operating in a foreign jurisdiction;
complex ownership or contractual arrangements (often to accommodate restrictions on the foreign ownership of assets);
reliance on the guidance and connections of one or two key individuals located outside of Australia (and in the emerging market jurisdiction);
high incidence of related party transactions with those key individuals (ASIC observed a high level of concentrated ownership, often with parties associated with a related party director); and
difficulty in accessing or verifying reliable information about an entity's operation and performance.
ASIC concluded from its review that almost a third of emerging market issuers did not make frequent or meaningful continuous disclosure. Also, in many cases, companies did not seek shareholder approval for related party transactions.
While reviewing disclosure documents lodged with ASIC by emerging market issuers, ASIC has secured additional or corrective disclosure with respect to the matters identified above.
ASIC's recommended response to those challenges with emerging market issuers
ASIC's report recommends that emerging market issuers respond to these challenges by implementing effective internal controls and risk management systems. ASIC wants entities to focus on making appropriate disclosures to investors consistent with exchange listing rules and ASIC's regulatory guidance. Emerging market issuers must ensure that they and their key personnel are fully aware of their relevant legal obligations in Australia.
Risks to retail investor
ASIC identifies maintaining investor confidence through compliance with the Australian regulatory system as an important factor for emerging market issuers.
It urges retail investors to consider the risks before investing in an emerging market issuer, particularly where the emerging market issuer is listed in Australia but incorporated abroad (thereby not being subject to the Australian Corporations Act and the protections it affords).
Emerging market issuers must provide adequate description of key risks faced by operating in emerging markets. This includes ensuring that investors know that:
- they may not have the same protections when investing in an emerging market issuer that is listed in Australia but incorporated abroad (eg. related party transaction provisions, takeover laws, financial reporting obligations); and
- enforcement of Australian regulatory requirements may be more difficult in overseas jurisdictions.
ASIC also noted the work done by overseas regulators (in Canada, UK, US, Hong Kong and Singapore) with respect to emerging market issuers. In particular, the Ontario Securities Commission and Toronto Stock Exchange have issued guidance and consultation papers on emerging market issuers.
The challenges identified by overseas regulators are similar to those identified by ASIC.
However, overseas regulators were also concerned that listing standards were not being met in reverse takeovers involving emerging market issuers. ASIC distinguished this point, noting that Australia does not face the same challenges with back-door listings as other overseas regulators because of ASX's administration of its guidance note on "Significant changes to activities", and its discretion under ASX Listing Rule 11.1.3 to require a listed entity facilitating a back-door listing to re-comply with the admission requirements.
What should you do?
ASIC has flagged that it will use its surveillance and review powers to ensure adequacy of disclosure and corporate governance of emerging market issuers. ASIC will also continue to focus on its audit inspection program. With that in mind, emerging market issuers should consider the following steps in response to ASIC's review:
- ensure a thorough understanding of the Australian regulatory regime and, in particular, how it interacts with relevant overseas legal regimes or practices. Be proactive and prepared in respect of identified areas of tension;
- review disclosure policies, both the terms and the practice (with particular focus on systems that are in place to ensure that information that must be disclosed to the market is communicated promptly to the board and other persons authorised to disclose);
- to ensure a disclosure document is not misleading and provides an accurate reflection of the business undertaken by the entity and the risks involved, involve jurisdictional experts and undertake adequate verification of assets and ownership as part of fundraising due diligence programs;
- put in place "foreign corrupt practices" policies relevant to the jurisdictions in which the issuer operates;
- with assistance from jurisdictional experts (legal and otherwise), consider what unique risks overseas operations pose and ensure these are disclosed at appropriate times (eg. when raising funds, during M&A activity etc);
- develop effective strategies to deal with these unique risks; and
- ensure transactions involving connected/key personnel are subject to a legal review under the related party transaction provisions and to robust consideration by the board – when in doubt, it is usually appropriate to put the matter to shareholders for approval.
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