SINGAPORE (June 10): Tan Cheng Han, chairman of Singapore Exchange Regulation (SGX RegCo), kicked off the SGX Regulatory Symposium 2019 on May 31 with a retelling of the fairy tale of Goldilocks, the little girl who enters the forest home of a family of bears and sits on their chairs, eats their porridge and finally sleeps in their beds. “Goldilocks had three choices, and on each occasion she only came to what was right for her on the third attempt. It underscores how the right choice is never obvious and requires experimentation, the willingness to try again and the ultimate search for the right balance,” Tan says.
Indeed, Goldilocks had it much easier than market regulators such as SGX RegCo, Tan continues. “She only had three possibilities to consider, and one of them was, as the story goes, exactly the right one for her. Whichever choice she made also did not have any consequences for others, and only affected her for the brief moment it took her to know that it was not the right one for her.”
SGX RegCo operates in a much more complex environment than the home of the three bears. Consequently, it has to act carefully and only after sufficient engagement with the market participants. While regulators may have the best intentions, they are usually working with imperfect information in an evolving situation. “We should be mindful of imposing regulations in haste only to regret at leisure,” Tan says.
As part of the ongoing effort to find the right regulatory approach, the theme of the symposium was “The Market You Want”, and its centrepiece was a round-table discussion featuring key stakeholders from a cross-section of the public market ecosystem, moderated by The Edge Singapore’s editor-at-large Ben Paul.
Associate professor Umakanth Varottil, from the National University of Singapore law school, started the discussion by noting that the disclosure-based market regime that Singapore embraced more than two decades ago has been abused from time to time. “The truth of the matter is that many companies have not been disclosing properly, or not at all,” says Umakanth.
Yet, there is no viable alternative, he adds. In the US, for instance, new regulation has often followed scandals and market turmoil — notably, the Dodd-Frank Act was enacted in the wake of the subprime mortgage crisis, and Sarbanes-Oxley Act was enacted following the collapse of Enron. But the US market is still essentially a disclosure-based system. “In my opinion, the disclosure-based system is here to stay,” says Umakanth.
The disclosure-based system in the US is more vibrant though, because of the presence of big activist investors, and lawyers who are ever eager to organise class action lawsuits. As a result, it is often shareholders themselves that drive proper disclosures by companies in the US. By contrast, such a litigious culture is not prevalent here in Singapore, and lawyers are not allowed to bill contingency fees. As a result, SGX RegCo has a more active role to play as a frontline regulator.
The big question for SGX RegCo is how much and what kinds of disclosure it should demand. “To me, the answer is not so much in terms of how much and when; the answer is quality of disclosure and how accessible it is to investors. And the way investors approach the quality of the disclosure, maybe, really needs to be asked. What exactly is the disclosure to do?” says Umakanth.
Lock Yin Mei, a partner at law firm Allen & Overy, notes that IPO prospectus and shareholder circulars are often daunting for ordinary investors. Apart from being very thick, they tend to be written in hard-to-understand legalese. “I sometimes do a triple, quadruple take before I understand what is being said,” Lock says.
According to her, a key reason these documents have become so enormous is deciding what should be included entails a significant level of judgement, discretion and subjectivity. Without agreed standards of materiality, issuers of securities and their lawyers end up choosing to err on the side of caution. “So, you put everything in and try and make sure that you are in compliance,” she says. “And, that probably accounts for why prospectus and disclosure have become very, very detailed.”
Ismail Gafoor, executive chairman and CEO of real estate agency Propnex, which went public last year, says his business faces regulation on more than one front. Just three days after shares in Propnex started trading last July, the government stunned the entire property market with a new round of property cooling measures. The stock promptly sank 20% below its IPO price of 65 cents, and Ismail found himself being bombarded by angry emails from investors.
Many investors assumed that the government must have given Propnex and other real estate agencies a heads-up before announcing the cooling measures, according to Ismail. Consequently, investors who bought Propnex shares at its IPO naturally looked askance at everyone involved with the listing. “How can our regulators not talk to practitioners?” Ismail says, echoing their sentiments.
With the pressure entrepreneurs like him face from multiple regulators, Ismail asks that SGX RegCo be careful about lumbering companies such as Propnex with onerous compliance requirements. In the end, Singapore’s 742 locally listed companies are akin to the goose that lays the golden eggs. “If those 742 listed companies don’t exist, then we don’t need SGX, then we don’t need investors, and then we don’t need investors to be protected because nobody’s there,” he says.
Ismail goes on to say that he is not against a reasonable amount of regulation. “When the goose is naughty, give it an ‘NOC’ — it’s okay,” he says, referring to a regulatory tool that SGX RegCo calls a Notice of Compliance (see below: “SGX RegCo takes errant companies to school of hard NOCs”). “The whole thing is about balance,” Ismail adds.
Markets and information
Pearly Yap, senior portfolio manager at Eastspring Investments (Singapore), is among the believers in companies having an independent chairman. She says this is essentially to ensure that investors have access to relevant information about the company in order to make good investment decisions. And, once they are invested in a company, institutions such as Eastspring often take a long-term view of their positions. “Often, we vote not with our feet but with our real votes in the company. If we are not happy, with a director, or CEO, there are avenues where we can vote out officials of the companies,” she says.
For the most part, however, much of this engagement happens behind the scenes. “We do abide by general corporate governance rules, and we interact with company managements. And we do write formal matters to management if we feel that there are issues with running the companies. But sometimes this doesn’t go to the media,” says Yap.
She adds that even with a comprehensive regulatory framework in place, investing is still about taking risks. She concedes that professional investors like herself often make mistakes. But the stock market has to be kept a “neutral” platform for investors to put their views across. “Information disclosed should be proper, relevant, accurate and constant. Information doesn’t have to be what suits you as an investor to make money. You have to pick and buy your stocks accordingly,” says Yap.
If Singapore gets it right, it will have an efficient market serving the needs of companies as well as investors. “If there are more buyers than sellers, the price goes down and vice versa. Not all companies listed are good companies, but all companies listed should have the right price,” says Yap.
Broken English
Stephen Chen, an investor who manages his family money, says a lot can be learnt about a company by simply observing the behaviour of its management and board members at shareholder meetings. For instance, some boards try to wrap things up quickly so that the “chairman’s wife can go shopping”.
He is also suspicious if corporate disclosures appear to be too slick and polished, as it is a sure sign of the company having hired a professional investor relations firm that is skilled in the art of spin. “In that sense, when we see broken English, we are actually a lot more comfortable, as we know the guy did it himself,” Chen says.
He says the effort to build a market that serves everyone ought to include a look at investor education. Anecdotally, he has heard how many retail investors approach share trading with a gambler’s mentality.
“Treating the stock market like Toto is not going to help them,” he says. Eastspring’s Yap agrees that ongoing education is very important. She says continuous disclosure is also crucial. Yap notes that other exchanges have set up online platforms where investors can pose questions, and companies respond — if they want. “It is quite informal, but it is also continuous disclosure, and it is an arena for smaller investors to interact with the companies on a more constant basis,” she says.
As the market develops, new issues will crop up, and the scope of regulation will be forced to change accordingly. Along the way, many different stakeholders will want to make their views heard. Tan Boon Gin, CEO of SGX RegCo, says the regulator will try to take views from them all.
But he warns that the most vocal stakeholders will not necessarily get their way. The “loudest voice” may give the impression that just that one view exists. “It is our responsibility to make sure we hear views from everyone first, and make the call after that. But for those with other views, it is also your responsibility to make yourselves heard if you disagree with the loudest voice in the room,” he says, bringing the symposium to a close.
SGX RegCo takes errant companies to school of hard NOCs
Chew Chin Yee, head of regulatory development and policy at Singapore Exchange Regulation (SGX RegCo), says the frontline market regulator has more powerful tools today to take targeted enforcement action against errant companies. And, it is trying to raise the accountability of various professionals that play central roles in the disclosure-based regime.
Speaking at the SGX Regulatory Symposium 2019, held on May 31, Chew noted that SGX obtained stronger regulatory powers when new listing rules came into effect in October 2015. Among other things, SGX gained the ability to issue a Notice of Compliance (NOC) to direct listed companies to take certain actions. “It’s a very good tool because it enables us to react quickly and calibrate our regulatory response to suit the circumstances of the situation,” Chew says. “This lets us contain developing situations before they become much more serious.”
SGX RegCo has issued 19 NOCs over the past two years. For instance, SBI Offshore and Best World International were told to appoint special auditors that would report exclusively to SGX RegCo. Ayondo, on the other hand, was told to meet certain conditions before the sale of its operating unit could be deemed completed. SGX RegCo also blocked the appointment of directors at Midas Holdings whom it deemed to be an obstruction to investigations.
In some cases, companies have been hit with more than one NOC. Most recently, Allied Technologies, which reported that $33 million of its funds held in an escrow had disappeared along with lawyer Jeffrey Ong, was first directed to appoint a special auditor through an NOC. Another NOC was subsequently issued instructing the special auditor to report its findings solely to SGX RegCo. The regulator also said it would object to the appointment of Ong as a director or executive officer of any locally listed company.
“The NOCs enable us to take a much more nuanced approach when dealing with errant companies, and have enabled us to be much more proactive. Each NOC can be crafted to suit the situation. Each NOC enables SGX RegCo to take swift and targeted action,” says Chew.
SGX RegCo has also been given new powers to slap seven-figure fines on errant companies, Chew says during his speech. Such hefty fines — which have not been levied thus far — have to be approved by the Listings Disciplinary Committee. “The needed due processes prior to enforcement action now takes longer. We are going through a bit of a transition period now. Some of you may have noticed a gap in our enforcement actions. That is because we are transitioning from the old process to the new process,” says Chew.
However, SGX RegCo is conscious of the need to achieve the best possible balance between the diverse interests of all market participants. “In the area of listing compliance, that means we must balance the interest of the over 700 companies that are compliant versus the roughly 5% that are not compliant,” Chew says. In short, it is unlikely that SGX RegCo will ever succeed in reducing the instances of wrongdoing to zero. “We can, of course, seek to do that, but it will come with a price, and the price would be a heavy increase in the compliance cost on the 700 or so compliant companies,” says Chew.
In the spirit of finding the right balance, SGX RegCo formulates its policies by actively asking various stakeholders for their views. “I believe that with input from the industry through our consultation process, we will be able to tweak or introduce policies that address ‘pain points’ without adding to the compliance burden for the majority,” says Chew.
This story appears in The Edge Singapore (Issue 885, week of June 10) which is on sale now. Subscribe here
