The Ontario Securities Commission released last week its Emerging Markets Issuer Review. An Emerging Markets Issuer is defined as an Issuer whose mind and management are largely outside of Canada and whose principal active operations are outside of Canada, in regions such as Asia, Africa, South America and Eastern Europe. But don’t be fooled by the definition; this is a Chinese targeted initiative arising out of various allegations of fraud, such as with Sino-Forest.
According to the OSC stats, Emerging Markets Issuers make up roughly 16% of the TMX Group, calculated by market capitalization. Predictably, more than half are in mining and oil and gas sectors.
The four principal concerns discovered in the review are:
- the level of governance and disclosure
- the adequacy of the audit function for the issuer’s annual financial statements
- the adequacy of the due diligence process conducted by underwriters in offerings of the securities
- the nature of the exchange listing approval process
It was noted that a central concern was an apparent “form over substance” approach to governance (a peculiar observation, one could argue, since the OSC is regularly criticized for regulating almost entirely on form over substance).
Speaking of substance, what will be the substance of this review, if any? Our bet is an effort to increase regulation and enforcement of auditors and underwriters. The result will be increased professional fees for all issuers, a growing unwillingness to underwrite Chinese and other Emerging Markets issuers, a resultant reduction in the importance of the TSX Group in this category and less investment opportunities for Canadians.
The entire report can be found HERE.
Lastly, if you are hopeful the OSC has included a review, mention or recommendation directed at the more damaging side of the Emerging Markets Issuer problem – market manipulation by short sellers who allege fraud from anonymous platforms – you will be disappointed. Coincidently, HERE is an excellent recent article in Canadian Business on this topic – as experienced by Silvercorp Metals.
Posted by Scott Sinclair
Range Corporate Advisors provides multidisciplinary solutions to medium and small businesses requiring transitional, transactional or management assistance.