Two Weeks Before Registration: Late Due Diligence Findings on a Main Market IPO
Seri Tanjung Precision Bhd (STP) is a Penang precision-engineering group seeking a Main Market listing. The IPO comprises a public issue of 120 million new shares and an offer for sale of 60 million shares by founder Tan Sri Lim at an indicative RM1.10, raising roughly RM198 million; post-listing issued share capital will be 600 million shares. Institutional bookbuilding closed at 1.4 times cover and the retail tranche was 3.6 times subscribed. Two weeks before the date fixed for registering the prospectus with the Securities Commission, your due diligence team reports three matters. First, a pre-IPO investor holding 12% has a put option requiring Tan Sri Lim to buy back its shares at cost plus 12% per annum if listing has not occurred by 31 December. Second, 18% of the group's cost of goods sold comes from a company wholly owned by the managing director's spouse, at prices your benchmarking shows are about 9% above comparable third-party quotes. Third, the largest customer, 22% of revenue, has issued no purchase orders beyond the current quarter. The board wants to keep the original timetable.
1. As the submitting corporate finance adviser, what must you do with each of the three findings before the prospectus is registered? Explain the disclosure and liability logic, not just the action.
Read the worked answer
Treat the three findings differently because they bite on different parts of the prospectus.
Put option over 12%. This is an arrangement affecting the terms on which the offer is made and the stability of the shareholding. A promoter-backed downside guarantee to a pre-IPO investor is exactly the kind of arrangement investors and the SC would expect to see disclosed, and leaving it out creates a real risk that the prospectus is misleading. Preferred fix: procure a documented, unconditional termination or release before registration, with a board minute and written confirmation from the investor, and disclose the historical arrangement and its termination. If it cannot be terminated, it must be disclosed and its effect on the controlling shareholder's resources and on the price explained.
Related-party supply (18% of COGS, 9% above market). This is a related party transaction with a director's close associate. It must be described in the prospectus, flagged as an ongoing RPT after listing, benchmarked, and either repriced or justified. Above-market pricing leaks profit away from minorities and feeds straight into the profit track record the listing relies on.
Customer concentration (22%, no forward orders). This is a risk factor and, more importantly, an assumption behind the working capital statement and any forward-looking statements. Re-test the working capital sufficiency and re-model if the customer tapers.
The governing point: you and the directors must be able to stand behind the prospectus. If any item cannot be resolved and properly disclosed, advise the board to delay registration rather than 'monitor' it.
2. Tan Sri Lim asks whether the put option can simply be 'cancelled by mutual agreement' with the investor the week before registration, with nothing said in the prospectus. Advise him.
Read the worked answer
Cancellation is the right commercial outcome, but 'with nothing said' is not.
Why silence is risky. A prospectus must contain the information investors and their advisers would reasonably require, and must not be misleading by omission. A guarantee that a 12% holder will get its money back plus 12% per annum if listing fails tells investors something real about the founder's commitments and about who is genuinely sharing listing risk. If the arrangement existed during the period covered by the prospectus, its existence and its termination are historical facts about the issuer's capital history and about the founder's financial exposure - precisely the sort of thing that should be described briefly and unemotionally.
What good practice looks like.
- Execute a deed of release or termination, effective before the prospectus date, with no residual obligation, no side letter and no informal understanding that survives.
- Confirm in writing from the investor that no other arrangement exists.
- Disclose the arrangement, the parties, the trigger, the price formula and the termination in the prospectus.
- Record the board's consideration of the item in the due diligence record so that a due diligence defence is available.
What to avoid. A quiet cancellation that is not documented will look worse if it later surfaces than a clean, disclosed termination. If the investor will only cancel in exchange for a new benefit, that new benefit is itself disclosable and probably needs the SC's view.
3. The retail tranche is 3.6 times subscribed while the institutional tranche is only 1.4 times covered. How does the allocation, and the public spread requirement, affect whether the offer can complete?
Read the worked answer
The tranche imbalance is not a problem in itself - a 1.4 times institutional book still places, and retail oversubscription is a good outcome. The problem is the composition of the register against the spread requirement.
The test. A Main Market listing requires a public spread of at least 25% of total issued shares held by at least 1,000 public shareholders, and 'public' excludes directors, promoters, substantial shareholders and their associates. With 600 million shares post-listing, that means roughly 150 million shares in genuine public hands.
Where this deal leaks. The 12% pre-IPO investor with the put option is arguably a person acting in concert with the founder or at least an associate whose shares will not count. The founder's shares and any shares placed with connected parties do not count either. If the 12% block is excluded, the arithmetic moves sharply against the issuer and the retail book may not be large enough to compensate.
What you do.
- Obtain a definitive concert-party analysis for every substantial holder before pricing, not after.
- Reallocate shares into the retail and public institutional tranches, or increase the public issue component relative to the offer for sale.
- Confirm the number of distinct public allottees will exceed 1,000 - this is often the binding constraint, not the percentage.
- Document and disclose the basis of allocation, which must be fair, transparent and applied consistently.
If the spread cannot be demonstrated at completion, the listing cannot proceed on this structure regardless of demand.