Regaining investors' confidence

One of the reforms in place pertains to SGX’s delisting rules. Exit offers in conjunction with voluntary delistings now must not only be “reasonable” but also “fair”. The offeror and parties acting in concert with the offeror must also abstain from voting on the voluntary delisting resolution. While the approval threshold was maintained at 75% of total number of shares held by independent shareholders present and voting, the 10% block was removed. These changes have given better protection to minority shareholders.

Another reform is the widening of the scope of responsibility of sponsor companies in their governance and oversight of Catalist-listed companies. SGX RegCo will be looking to the sponsors for “immediate answers”, as the latter are the “first line of defence”. If the answers are not “satisfactory”, SGX RegCo will inspect the sponsors immediately to check if there are “gaps” in their processes that need to be rectified. Such inspections will span work at the IPO stage all the way to the company’s continuous listing obligations, according to SGX RegCo.

Other reforms to come are establishing a dedicated whistle-blowing office and enhancing the valuation standards of real estate and land. A proposal to scrap the minimum trading price (MTP) rule of 20 cents is now open to market feedback till Dec 27. Altogether, these measures are aimed at improving the corporate governance and listing compliance of Singapore-listed companies in the hope of enhancing investor confidence in the local stock market. Most market observers who spoke to The Edge Singapore say they are positive on SGX RegCo’s efforts.

“Generally, SGX is perceived by market participants as a well-regulated market. The new measures implemented are widely seen as a consistent response by SGX [RegCo] to continually improve corporate governanceand increase investor confidence in the local stock market,” says Perry Yuen, partner at Pinsent Masons.

Stefanie Yuen Thio, joint managing partner at TSMP Law Corp, commends SGX RegCo for being bold to change the way it operates. In particular, the consultation paper on scrapping MTP reflects an “openness” of the regulator to do a “180-degree turn” when a listing rule has resulted in unforeseen negative outcomes. “That sends a strong message that SGX [RegCo] is not afraid to reverse tack when it’s the best thing for the market — a mature and confident signal,” she says.

Vocal corporate governance advocate Mak Yuen Teen sees the changes to delisting rules as the “most significant” in shoring up investor confidence. “[It] was the best thing to have happened this year because it makes [delistings] more difficult for major shareholders to privatise companies cheaply,” says Mak, who is associate professor of accounting at National University of Singapore Business School.

Lack of enforcement

While market observers have given the thumbs up, there is still room for improvement. The biggest weakness, Mak says, is the “lack of enforcement”. He urges SGX RegCo to be more vigorous in pursuing enforcement action and on a timely basis. By comparison, Hong Kong’s and Malaysia’s stock exchanges and market regulators are more active in taking action, including against independent directors, he points out.

Indeed, the last time SGX RegCo took action was on Oct 15 last year, according to its filings, when Seow Jin Yuan, a UOB Kay Hian trading representative, was sanctioned based on several charges with two fines totalling $25,000 and a requirement to attend an investor education programme.

Prior to that, the sanctions taken by SGX RegCo throughout 2018 had been mostly against S-chip companies and their respective directors and management. They were backpack manufacturer Dapai International Holdings and steel trader Oriental Group, which have since been delisted; Jason Holdings underwent a reverse takeover and evolved into REVEZ Corp, a provider of creative information technology solutions.

So, what could possibly prevent more enforcement actions from being taken? Mak believes the Listings Disciplinary Committee has been a “hindrance” to effective enforcement. The LDC, which comprises bankers, lawyers and other market professionals, is one of three independent listing committees formed in 2015 to improve SGX’s regulatory functions as a commercial entity. The LDC decides on the appropriate sanction based on charges established by SGX RegCo. These sanctions include reprimands, fines, restrictions or conditions on activities, suspensions and expulsions.

While due process and natural justice are important elements leading to enforcement, Mak reckons that the entire process has become more bureaucratic than required. As a result, there is not much action, he says. “I am also concerned about conflicts of interest for members of the LDC or risk aversion — that is the fear of being challenged when they take enforcement actions — undermining its effectiveness,” he adds.

Moreover, the LDC has little accountability as it does not have to account for its actions or inaction. This has negative repercussions for the stock market regulator. “It is SGX RegCo [that] bears the brunt of criticism from commentators like myself when there is a lack of enforcement — when in reality, we don’t know whether it is SGX RegCo [that] is reluctant to enforce or the LDC that is pushing back,” says Mak.

He believes a viable alternative is to take away from the LDC the responsibility of enforcement actions against issuers and directors, and give SGX RegCo the necessary teeth. “With the separation of the regulatory role of SGX under SGX RegCo, which has its own board of directors, I don’t see the need to have the LDC involved in enforcement actions [against them],” he says.

On a separate issue of enforcement, TSMP Law Corp’s Yuen Thio says there should be a greater joint effort by other regulators with SGX. They include the Monetary Authority of Singapore, Accounting and Corporate Regulatory Authority and Commercial Affairs Department of the Singapore Police Force.

Although each agency has a different but overlapping jurisdiction, as a joint investigating team, their first response will give them the ability to move, investigate and enforce beyond their individual jurisdictional borders. “In price-sensitive situations, the speed of response is critical to protecting shareholder value and limiting downsides,” she says.

Review sponsors, empower minorities

Regulatory enforcement issues aside, Yuen of Pinsent Masons says the sponsor model needs a review. This is because the competitive manner in which continuing sponsors are engaged and paid by the listed companies (listcos) is producing a negative outcome. In particular, there is skewed incentive for a registered professional to “go easy” on the listco client so that its continuing sponsor — for which the registered professional works — can secure a renewed term, which can be a steady source of recurring income for the professionals.

“Under such business pressure, some [registered professionals] would want to be perceived as business-friendly and one who would not stand in the way of the business of the listco in the name of strict adherence to all applicable regulatory and compliance requirements that the listco is subject to,” says Yuen.

Mak of NUS Business School shares a similar view. “We have seen a number of listings that have run into problems or controversies within one to two years of listing. Senior finance or other key personnel [have also resigned] not long after [the] IPO. This is especially so for Catalist listings. I think the whole sponsor-based regime needs a review,” he says.

Yuen recommends that the continuing sponsors model take a leaf from SGX RegCo on how it was formed. “Just as how SGX [had] hived off its regulatory functions to SGX RegCo, the [continuing sponsors] regime should be given a fundamental relook so as to split [its] business end from [its] regulatory functions,” he says.

TSMP Law Corp’s Yuen Thio, on the other hand, says she would like to see the law amended to put power in the hands of minority shareholders, since the regulators keep saying that retail investors should not expect the government to bail them out when corporate failures happen. The regulators also say that retail investors should arm themselves with more investor knowledge so that they invest in securities of the appropriate risk profile.

“All that is true,” she says. “But when things go bad, such as when there are defalcations by top executives or the board has been derelict in their duties, let’s empower minorities to go after them. We need to change the law to give them access to company information in order to evaluate and take legal action. We should also allow class-action lawsuits.”

While these suggestions to improve the corporate governance and listing compliances of companies are commendable, it may not be enough to inspire investor confidence in the local stock market.

Yuen, for one, thinks the more problematic issue with SGX is “the market perception that [it] lacks liquidity, especially for companies with high-growth prospects”. He notes that SGX has not had significant success in attracting high-quality companies with good growth prospects in recent times. “Will increasing investor confidence lead to attracting such high-quality growth companies to list in Singapore?” Yuen asks, before answering the question himself, “Recent listings suggest that this correlation is low.”