(SINGAPORE) The decision by a Catalist sponsor to take shares as payment for sponsoring a recent listing has spawned a debate in market circles over a potential conflict of interest.

At the centre of the controversy are the shares PrimePartners Corporate Finance took in Healthway Medical Group for sponsoring its listing in June - making it the only Catalist sponsor so far to have done this. But PrimePartners has defended its move, saying the share payment model is a preferred model for many companies and that it helps to align the interest of the sponsor with the company.

The sponsorship system is key to Catalist, the Singapore Exchange's (SGX) platform for smaller firms, and requires all its firms to have professional financial advisers known as sponsors not just to list them but also to keep watch over them after listing - a role highlighted recently when Stamford Corporate Services brought to light the issue of missing funds at contact lens maker Oculus, a former Sesdaq company which transferred to Catalist.

Healthway, which declined to comment on the matter, had paid out 7.56 million shares to PrimePartners, according to its IPO prospectus. This is in addition to a cash payment. The shares represent 0.56 per cent of the company.

Several IPO bankers and Catalist sponsors - who spoke to BT on the condition of anonymity - questioned if a sponsor can remain objective if it owns shares in a company. 'Wouldn't the sponsor be tempted to cover things until his exposure period is over or until he has realised the value of his shares?' said one IPO banking veteran.

The share-payment model is likely to have been inspired by reverse takeover transactions, in which shell companies offer shares to issue managers in lieu of cash. Companies listing on the main board have also used this payment method. But bankers point out that unlike reverse takeovers or mainboard listings that are monitored by the SGX, Catalist listings rely mostly on sponsors' supervision.

'For a mainboard issue manager . . . big brother is looking at you to check that everything is in line,' said the IPO banker. 'If you are a sponsor, you're the final arbiter. That's why auditors do not accept shares. If auditors are not doing it, why should the sponsors be doing it?'

Another IPO banker pointed out that pricing offer shares low would mean more shares and upside - but also a potential conflict of interest for sponsors.

Certainly, shares for payment is a win-win arrangement for both sponsors and companies - companies need not fork out money as fees, while sponsors can potentially get a higher return. Assuming that sponsors charge the market rate of about $600,000 for IPO services and adding up continuing fees that could work out to an average $100,000 per year, Catalist sponsors on a cash payment scheme can earn up to about $1 million from one listing on the new junior board.

Based on Healthway's IPO price of 36 cents, the share payment to PrimePartners was worth $2.72 million. The stock has however since fallen, and closed yesterday at 12.5 cents. There is no cashflow impact, so the issuers are willing to give more, said a banker. But the share payment will eventually hit the company's profit-and-loss account and its shareholders.

PrimePartners' director of corporate finance Mark Liew said the firm is acting within the SGX guideline that a sponsor may hold an interest in a Catalist company so long as it is capped at 10 per cent. It is also stated in Healthway's IPO prospectus that PrimePartners would not sell, transfer or otherwise dispose of at least 50 per cent of its shareholdings until six months after its listing date.

'The fact that you do have some shares in the company creates a better alignment of interest,' Mr Liew told BT, adding that some smaller firms also cannot afford the sponsorship fees.

'The reality is that a significant number of the companies we take public prefer to pay us in shares. Of course, as a firm, we would prefer to receive our fees in cash but in lieu of that, we'll take the shares,' he said, noting that PrimePartners does not push the share payment model over cash payment. More of its future IPO deals would take on the share payment scheme, he added.

Stamford Law Corporation's director Yap Lian Seng said it is a Catch-22 situation. Despite the potential conflict from issuing shares to sponsors, such a payment scheme helps to make Catalist 'more accessible', he said. 'Most companies looking for Catalist listings are likely to be small and would have limited access to capital. That is why they are looking to list.'

A SGX spokesperson said rules such as the 10 per cent shareholding limit act as a safeguard.

Added Robson Lee, partner in law firm Shook Lin & Bok: 'Sponsors are unlikely to risk their market reputations for any form of remuneration.' Stamford Law's Mr Yap suggested having independent continuing sponsors to work with the prime sponsor to monitor the listed entity to mitigate 'potential conflicts'.

Still, of all the other bankers that BT spoke to, just one was open to a share-payment structure. Despite the pluses, most others felt it would be too hard to resolve potential conflicts.