Commentary

For stronger oversight, SGX needs industry's partnership

Singapore Exchange's (SGX's) regulatory oversight of companies occurs at two stages - the first is during admission, when companies seek to list on the exchange, while the second comprises the regulation of listed companies' continuing obligations.

We can improve on both fronts, but we cannot do it alone. We need to work together with industry at the listing and the post-listing stage.

INDUSTRY-WIDE EFFORTS TO ADMIT THE RIGHT COMPANIES FOR LISTING

The listings admission stage is the point at which SGX has, arguably, most control in its oversight of a company; this is when we consider a company's suitability to list. About 40 per cent of companies listed on SGX come from outside Singapore and so we often encounter listing applications from jurisdictions where their regulatory and legal development may differ from Singapore's. We may therefore tighten existing requirements for particular listings due to risks peculiar to the company or its jurisdiction.

Singapore operates a disclosure-based regime and so SGX does not judge a company's commercial merit. We will however, review the company's non-commercial risks in judging its suitability to list. Our assessment is based on the due diligence carried out by issue managers or full sponsors. Issue managers or full sponsors are wholly responsible for the due diligence carried out on the company, including the work done by professionals such as auditors and lawyers.

We therefore cannot make improvements alone; an initial public offering or reverse takeover involves many parties working together and each has an important role to play in the admission process. One example of a collective effort is the new initiative by the Association of Banks in Singapore to enhance guidelines for due diligence activities that its member banks carry out on all companies looking to list on SGX. Key changes in the guidelines include mandating additional queries into resignations of management, directors and controlling shareholders, and extending the scope of checks and enquiries beyond on-site visits to material assets and properties.

Developed with input from SGX and market participants such as auditors, lawyers, local and international banks, and corporate finance firms, the enhanced guidelines reflect the expertise and commitment of industry practitioners. They are also aligned with SGX's experience and expectations with regard to listing application submissions, and include matters which SGX deems important for companies to resolve at an early stage of the process.

On our part, based on the due diligence done by issue managers or full sponsors, we are prepared to reject a listing application should there be fundamental issues affecting suitability in terms of its business model, operations and governance, and the integrity of management and controlling shareholders.

The exchange will also not hesitate to impose certain conditions in order to mitigate potential risks. Take, for example, the "comply or explain" feature in the Code of Corporate Governance - in the event that we have concerns about a certain company, we may remove the option of explaining and, instead, mandate compliance with certain principles of the code as a listing condition.

Other recent regulatory improvements at the admission stage include the creation of the independent Listings Advisory Committee (LAC) comprising leading lawyers, bankers and auditors in October last year, and SGX's two-stage listings review process where deal-breaker matters are raised at the early stage of the review and have to be resolved before the process advances.

The LAC also helps address perceptions of self-regulatory organisation conflicts, or concerns SGX could compromise on regulatory standards to admit companies for commercial benefits.

Developments such as these enable industry professionals to work together with SGX as primary gatekeepers for the quality of listings. This will over the long run ensure the quality of listings in Singapore, and ultimately foster stronger trust in the market.

REGULATING CONTINUING OBLIGATIONS AFTER ADMISSION

In the regulation of companies post-listing, SGX has tightened some continuous obligations. Annual general meetings (AGMs) of all companies must now be held in Singapore unless the company operates in a jurisdiction which mandates that the AGM must be held in its home country. We have also introduced new conditions such as requiring the appointment of an independent financial adviser to review the reasonableness of an exit offer for voluntary de-listings.

With the listings disciplinary and appeals committees in operation, enforcement powers for rule breaches have been expanded to include fines and the "cold shoulder rule" where companies are denied access to the market for fund-raising.

The latest development on this front was the May 12 launch of a new half-yearly report which provides updates on companies whose shares have been suspended for 12 months or more. Shareholders have a right to know what is happening at these companies and this report was put together for this purpose. Central to the report is the provision of information from SGX's engagement with these companies and industry professionals such as judicial managers and liquidators.

Our engagements have sometimes been long-drawn in an effort to elicit one of two outcomes: resumption of share trading or the extraction of an exit cash offer for shareholders. SGX will allow de-listings without exit offers only after it has been firmly established that an exit offer is not possible.

The inaugural report - which showed that 11 of 20 companies are considering a share trading resumption - is a reminder that a share suspension does not always spell the end of a company. We intend to continue engaging with long-suspended companies to try and achieve the best outcome for shareholders.

The significance of this report lies not just in increasing transparency, but is another example of the industry working together with SGX. Shedding light on the financial situations of these long-suspended companies was made possible through the efforts of liquidators, judicial managers and other professionals.

By stepping up to take on the sometimes onerous investigations into the affairs of these companies, these professionals - like issue managers and professionals involved in the listings stage - contribute towards improving the regulation of listed companies.

SGX wants to extend further its work with industry to include listed companies themselves. We have commissioned a review of how mainboard companies have treated Code of Corporate Governance disclosures. The findings of the review will be made public on a statistical no-name basis. The report will also enable SGX to identify areas in which improvements are needed for individual companies. We will use the information to engage companies one-on-one to help them address any shortcomings they may have.

WORKING TOGETHER TO STRENGTHEN THE MARKET

By working together with SGX to raise their corporate governance standards, companies will make themselves less vulnerable to short selling attacks and corporate malfeasance. Similarly, by working together with SGX to conduct proper due diligence at the point of admission, market professionals ensure the information presented to us by companies is accurate and that the right companies are admitted to list. Even if companies are suspended, liquidators and judicial managers will work together with SGX to secure the best outcome for shareholders. With this partnership between industry and the exchange at every stage of a company's life-cycle, investors, market participants and industry will benefit from a more trusted and higher-quality market.

  • Tan Boon Gin is chief regulatory officer at the Singapore Exchange.
A version of this article appeared in the print edition of The Straits Times on June 06, 2016, with the headline 'For stronger oversight, SGX needs industry's partnership'. Print Edition | Subscribe