Market players welcomed a new Singapore Exchange (SGX) proposal that would prompt companies changing their core businesses to get permission from its investors and in particular, minority shareholders.
When a company changes the 'scope and nature of its principal business after it has been listed', SGX said that companies 'should be required to seek shareholders' approval before such change is effected', according to its 100-page consultation paper introduced yesterday.
This would also apply to companies that plan to diversify into new sectors.
While diversification may not mean that companies would abandon their core businesses, such companies can be queried by SGX if there is a 'substantial diversification', said SGX spokesperson Joan Lew.
Even if SGX does not intervene, shareholders can ask for more clarification on the diversification plans, she added.
'We don't advocate for shareholders but we're giving the power back to them,' she said.
The proposed rule would force companies to be more accountable to minority shareholders, said David Gerald, president of Securities Investors Association (Singapore).
'Minority shareholders are usually not privy to the business decisions made in the boardroom,' said Mr Gerald.
'Shareholders invested based on the information originally given. If the company is changing its business, it's only right that shareholders have a say in it.'
This move is likely to affect small-cap companies more since bigger firms tend to own an 'established space' in the respective sectors, said DBS analyst Derek Tan.
'Companies have to commit to the new diversification. This would prevent small businesses from trying to make a fast buck,' said Mr Tan.
And some small-cap companies have changed their core businesses or diversified into new sectors over the last year.
This includes water treatment firm Dayen Environmental, which ventured into the energy sector.
Following its soured mining rights agreement with Indonesia's PT Modal Investasi Mineral in late June that put US$25 million in payment from its Chinese partner in jeopardy, the company has admitted that it had been too hasty in inking the coal mining deal and scrapped its diversification plan.
Dayen has invested at least $10 million in the coal mining business through a 7.28 per cent stake purchase of PT ATPK Resources - the parent of PT Modal Investasi Mineral - while the stock has lost more than half its value since it decided to explore the new sector.
IT company Aztech Systems has also diversified into the construction and building material supply business this year in a big way - in February, it won a $250 million contract to supply building material.
It has also bought four vessels worth $18.3 million over the last few months to facilitate the supply of building materials.
This article was first published in The Business Times in 11 July 2008.
