Singapore's penny stock mystery increases pressure on exchange

SINGAPORE (Reuters) - Singapore Exchange's role as the city-state's equity market regulator is coming under increasing scrutiny in the fall-out from a penny stock crash earlier this month.

The sudden implosion of Blumont Group, LionGold Corp, and Asiasons Capital - after huge run-ups in their share price earlier in the year had turned them briefly into billion dollar companies - left many in the market mystified and raised question marks over whether the exchange missed red flags and was too slow to act.

The Monetary Authority of Singapore (MAS) has now stepped into the fray and confirmed on Thursday that a review into what went on was taking place.

Experts say one thing it should look at is whether the bourse is able to manage conflicts of interest between its role as both market operator and watchdog.

"The exchange has to focus on profit for shareholders, meaning they have less time for regulation," said Mr Jimmy Ho, president of the Society of Remisiers who works for brokerage UOB Kay Hian.

The saga also poses a threat to the exchange's long-running push to increase revenue by boosting its trading volumes among retail investors.

"It will basically deter people from investing in this asset class (the penny stocks) for now at least," said Mr Kevin Scully, executive chairman and founder of equity research firm NRA Capital.

Blumont, Asiasons and LionGold have all denied any wrongdoing and there are no allegations of fraud in their cases.

The most actively traded stocks are often the penny stocks which attract little institutional interest. At the same time, SGX has not seen many major big-ticket listings for a number of years and the growth of Singapore's equity market has lagged the growth of the city-state as a major wealth management, foreign exchange and commodities trading hub.

That has led to concerns that the exchange could face pressure to lower standards in order to boost its bottom line.

MAS said last week that it and SGX would look into wider issues that have surfaced regarding "market structure and practices". The central bank did not elaborate on what that would involve, but said it would issue a public consultation if it decided to make any changes.

Many countries including Hong Kong, Australia and the United States have an independent securities regulator overseeing the stock market, a separation aimed at ensuring potential lost revenue is not a consideration when enforcing rules.

In Singapore, SGX performs the front-line regulatory role and the bourse in turn is regulated by MAS. The exchange has a special committee to deal with conflicts of interest its dual role can pose.

SGX said earlier this year that it believed the current system was best for the local market and its proximity to the market helped it understand its users' compliance issues.

It has responded to some of the criticism facing it, saying that it deployed a series of tools to restore stability to the market when the stocks began to fall and that it uses separate measures to investigate possible wrongdoing.