In response to the opening up of emerging markets, in 2012 to 2013 the Australian Securities and Investments Commission (ASIC) reviewed and reported on the impact of ‘emerging market issuers’ on the integrity of Australian markets. Since then, ASIC has continued to monitor the activity of these issuers and the gatekeepers who are responsible for advising and assisting them.
ASIC’s latest findings on emerging market issuers are set out in Report 521 Further review of emerging market issuers (REP 521). Chief among these is the observation that ASIC continues to see emerging market issuers who appear to be insufficiently aware of their legal obligations under the Corporations Act, particularly relating to corporate governance, conflicts of interest, disclosure and financial reporting.
What is an ‘emerging market issuer’?
ASIC considers an ‘emerging market issuer’ to be any listed entity that is incorporated in an ‘emerging market’, or has a significant exposure or strong connection to an ‘emerging market’ through its business operations, shareholders, or its board or management.
An ‘emerging market’ includes Eastern Europe, Africa, South America, Mexico, Central America, the Caribbean, the Middle East, or Asia and the Pacific (excluding Singapore, Hong Kong, Japan and New Zealand).
ASIC continues to see the key challenges arising in relation to emerging market issuers as relating to:
- implementing good corporate governance in light of a geographically scattered board with limited financial resources;
- implementing effective internal controls and risk management systems where operations are geographically diverse;
- operating through complex ownership or contractual arrangements in response to laws in some jurisdictions that limit the ownership of assets by foreign entities;
- relying on one or two key individuals located outside Australia, which raises the risk of substantial transactions benefiting those individuals; and
- verifying or assuring information or opinions about the issuer’s operations and performance provided by foreign experts or professionals.
Initiatives to address challenges
The report summarises the regulatory initiatives undertaken by ASIC to address some of the challenges facing emerging market issuers, with a focus on fundraising disclosures and general corporate governance. These include:
- Conducting surveillance on due diligence practices in initial public offerings to ensure that all material disclosure is given to investors;
- Engaging with the board of an emerging market issuer so that, following a number of board vacancies, the newly appointed board members had the appropriate experience and expertise to manage an Australian-listed entity;
- Commencing civil proceedings against ASX-listed Sino Australia Oil and Gas Limited for breaching its continuous disclosure obligations, and its former chair (who was found to have breached his duty of care – for more on this refer to The Boardroom Report, Volume 14 Issue 8, Lessons for directors from the Courts);
- Taking action against three companies listed on SSX for allegedly failing to comply with continuous disclosure obligations; and
- Addressing the use of complex corporate structures such as variable interest entity structures by emerging market issuers from China.
The role of directors
With regard to the corporate governance challenges facing emerging market issuers, the report observes that directors ‘play an important ongoing role as gatekeepers of transparency and accountability in the major financial and business dealings of an entity’.
ASIC reminds directors of emerging market issuers that this means they must ‘remain active, informed and competent in the oversight of an entity’.
The role of other gatekeepers
Due to the heightened risks associated with emerging market issuers’ substantial exposure to an ‘emerging market’, the report stresses that a significant part of the gatekeeper role of legal and financial advisers, auditors, exchange operators, sponsors and market participants is to guide these issuers on the law and market expectations of their behaviour.
The report provides a summary of key regulatory initiatives undertaken by ASIC in relation to the conduct of such gatekeepers. It also makes a number of observations on how the various gatekeepers can tackle the issues raised by emerging market issuers, particularly in the context of IPO due diligence and market, listing standards, trading and auditing of financial reports.