The warnings may have been tucked away in the fine print but that is no consolation for badly burnt investors.

Retail investors with little access to professional research on a listed firm must rely on documents such as prospectuses and annual reports in order to make informed investment decisions. They carry out their own research as best as they can with these publicly available documents.

In recent years, that task has become slightly easier. Listed firms, to their credit, have begun to release a lot more business information about themselves.

Investors are invited to air any concerns they may have about an IPO hopeful while its listing prospectus is posted on the Monetary Authority of Singapore's Opera website.

So it is disturbing to find that despite such safeguards, investors were still badly caught out by plunges in the share prices of China New Town Development and First Resources.

Their sharp falls were directly linked to risks highlighted in their listing prospectuses.

This begs the question: Are investors sophisticated enough to evaluate the risks involved in investing in untried and unfamiliar foreign firms planning to list on the Singapore Exchange (SGX)?

After all, these firms operate in countries where the business terrain may be unfamiliar to investors in Singapore.

Is merely disclosing the risk factors in an IPO prospectus adequate? Can more be done by the sponsoring merchant bank to ring- fence the problems highlighted in the document to protect investors' interests?

Before turning to possible answers to these questions, it is instructive to recount what went awry with China New Town and First Resources.

Citigroup was a joint sponsor of the China New Town listing with Deutsche Bank, and the sole sponsor of the First Resources IPO.

Since its listing last November, China New Town has tumbled by 68 per cent to 26.5 cents, from the IPO price of 83 cents. This has caused the company's market value to drop by $791 million.

Yet, before its listing, it was literally the toast of investors, described by one financial magazine as 'not your usual developer' because it clears and prepares state- owned land for new town projects before this is sold to third-party developers.

In China, where guanxi or official connections are all-important, many had considered the firm as a win-win since it worked closely with the local government - except for one snag apparently.

As China New Town would have been treated as a foreign firm in China after it listed in Singapore, it needed Beijing's blessing for a massive 1.17 billion yuan (S$228.5 million) property project.

As it recounted in its prospectus, it had done the necessary legwork, submitting the project proposal to the Shanghai branch of China's Ministry of Commerce.

But for reasons that were not explained satisfactorily, the Shanghai branch did not pass the proposal up to Beijing for approval.

As one rueful trader noted, this is like a person confessing to his friends that he has bought a car but he does not have the licence to drive it yet. Small wonder then that investors should get jittery and vote with their feet.

As for First Resources, it was smooth sailing at first. The share price soared by nearly 77 per cent from the IPO issue price of $1.10, after the listing debut in December.

But on March 7, the stock suddenly tumbled by up to 42 per cent, following reports that the Indonesian government wanted to auction off some of the company's plantation land to pay for a penalty imposed on founder and former shareholder Martias.

Investors would have to plough deep into what First Resources' prospectus had to say about risk factors to find out that Martias had been convicted of corruption, and that this conviction could have adverse consequences on the firm.

Another vital piece of information was a brief disclosure that Martias' children 'directly or indirectly owned all its shares' before the IPO. His son, Ciliandra Fangiono, is First Resources' chief executive.

The company clarified that Martias was no longer involved in the company's affairs, and that the land in question did not belong to him.

But given widely held perceptions that in a country such as Indonesia, it is common for family and business to be closely intertwined, this is scant consolation for investors.

The firm got a reprieve only last Friday, after reports that the fine had been paid. The stock rose 18 cents to $1.13 for the day.

With hindsight, one question which investors must ask themselves is whether they could have been spared the anguish triggered by the problems experienced with China New Town and First Resources.

IPO delay can help

SURELY, both companies should have delayed the launch of their IPOs until these specific risks had been resolved satisfactorily, many would argue.

What more can be done?

Some observe that, even though a disclosure-based regime has been put in place, the onus still rests on the Singapore Exchange (SGX) to vet IPO hopefuls with care.

Relying on the merchant bank may not be enough, even with the greater accountability that now comes from requiring a sponsor's name to be placed on all the announcements of a newly listed firm for two years.

Instead, SGX could act as as gatekeeper and challenge the merchant bank about the risks highlighted in the prospectus and how these might affect the IPO hopeful later on.

And SGX should be prepared to delay the listing process if it does not get a satisfactory reply.

As one SGX director noted candidly some years ago, a nightmare feared by all market professionals is suffering the horrendous consequences of listing a company that unravels later on.

The risk to reputation alone is enough to make one shudder.

engyeow@sph.com.sg

Safeguards

WHAT'S BEEN DONE

SGX could take on a gatekeeper role to challenge the sponsoring merchant bank about risks highlighted in the prospectus.