Talks to merge watch lists for market value, MTP and profitability

From March 1, firms whose six-month volume-weighted average trading price is below 20 Singapore cents may be put on a watch list and given three years to raise their share prices or face delisting.
From March 1, firms whose six-month volume-weighted average trading price is below 20 Singapore cents may be put on a watch list and given three years to raise their share prices or face delisting.PHOTO: ST FILE

SGX, industry explore possibility a firm isn't put on watch list just because of MTP failure

SINGAPORE - Singapore Exchange (SGX) and industry professionals have had discussions exploring the possibility of changing the listing rules such that falling below the minimum trading price (MTP) by itself will not relegate a company to a watch list, market sources told The Business Times.

The sources, who declined to be named, said the discussions were exploratory in nature.

One of the key mechanisms being discussed would be to merge the watch lists that SGX uses to mark Mainboard-listed companies that are at risk of being delisted due to failure to meet certain continuing obligations.

When the new MTP requirement comes into force on March 1, Mainboard-listed companies whose six-month volume-weighted average trading price is below 20 Singapore cents may be placed on a watch list and given three years to raise their share prices or face delisting.

That watch list will be separate from, and in addition to, an existing one that is based on profitability and market value. That older "financial entry" watch list, which continues to be in force, marks Mainboard-listed companies that incur three straight years of losses and whose 120-day daily average market capitalisation is below S$40 million, and gives each of those companies two years to return to compliance.

A key suggestion that has been discussed is to merge the two watch lists into one. Mainboard-listed companies will then be placed on the watch lists only if they breach at least two of the three listing requirements on MTP, profitability and market value.

The sources said the suggestion is unlikely to advance through the regulatory pipeline in time to affect Tuesday's implementation of the MTP rule, and if SGX does take the suggestion further it will have to go through a public consultation process that will take time.

Asked about those discussions, an SGX spokesman said: "From March 2016, the SGX watch-list will have two criteria. There will be companies admitted under the minimum trading price requirement and companies admitted under the financial entry criteria.

"We realise that we need to clearly distinguish between the two types of companies, the different cure periods before and after March 2016, and highlight that there are companies that meet both criteria.

"We will closely monitor market feedback and may take action if necessary. If a change in the watch-list is considered, there will be due process including a public consultation."

Proponents of the suggestion said making such a change would remove the confusion of having two separate watch lists that operate on two separate timelines.

Combining the watch lists' triggers would also address criticism that, on its own, the trading price of a stock is not a very meaningful indicator of quality.

"Navigating around two separate watchlists is messy and onerous," one industry professional said. "I would support a rationalisation of this. That would also send the market a message that the SGX is serious about substantive compliance, and is looking for areas of real weakness to address."

But not everyone supports the change.

One critic said the two watch lists addressed matters with fundamentally different levels of severity and should not be mixed. The financial entry watch list with its profitability and market value tests is aimed at companies that are facing "impending financial failure", whereas the MTP watch list is intended more to improve market quality.

"This objective is clearly not linked to any financial failure of a particular listed company and has nothing to do with underlying business fundamentals," said one industry veteran, who declined to be named because of sensitivities in commenting about regulations. "It is focused on overall market quality. So combining the two watch lists would unfairly penalize those companies which are not guilty of financial failure, not at risk of financial collapse, just in the name of improving overall market quality. This is like changing the rules of the game and moving the goalposts at the same time, after the game has started."

Combining the watch lists will also raise the question of whether Catalist can be used to cure the breach. Currently, companies on the profitability and market value watch lists are not allowed to move to the secondary board in order to escape delisting, but those on the MTP watch list may do so if they can find a sponsor.

"The second watch list had offered companies the option of electing to go down to Catalist, since there was no risk of financial failure," the industry veteran said. "That was consistent with the second board being designed for smaller, growth companies. The first watch list had no such option and the SGX expressly prohibited any such company on the original watch list to elect to descend to Catalist as these were deemed to be patients on the verge of death or insolvency and they should not be allowed to contaminate Catalist. For them, delisting was the only solution. So merging the two watch lists seems to create more problems than it solves."

Fund manager Mano Sabnani said it made sense to take a more comprehensive view of the quality of a listed company, but added the implementation of a combined watch list would be challenging.

While a two-out-of-three trigger may make it harder to get on a watch list, it would also make it harder to get off the list.

"Some companies that haven't met the minimum trading price but at the same time their market cap might be below S$40 million, now they may have to rectify both, which is going to be complicated for them," Mr Sabnani said.

A simpler way to ease confusion may be to simply call the list of MTP breachers something other than a watch list.

"Call it the minimum trading price non-compliance list or something," he said.

The MTP requirement has been a magnet for controversy since it was first proposed in 2014 in the wake of the 2013 penny stock crash. The reason given for the rule was that lower-priced shares were more vulnerable to manipulation.

But among the biggest complaints are that broad market volatility can cause stock prices to fall even for fundamentally sound companies. Concerns have also been raised about the large number of companies that are trading below the hurdle and which therefore face delisting.

Data compiled by The Business Times after the market closed on Feb 26 showed 142 companies whose share prices and six-month volume-weighted average trading prices are still below the 20 Singapore cent trigger. That is almost one-fifth of all Mainboard-listed companies.

"I've never thought that having an arbitrary minimum trading price was a good solution to the problems of the market," lawyer Stefanie Yuen Thio of TSMP Law Corp said. "I know there have been market studies which suggest that a low trading price indicates a weak company, but the penny stock price could be a result of a company's bad performance, rather than the other way round. A trading price is just a number; it's infinitely better to fix what ails the company's business performance than tinker with the effect of that performance."

SGX has previously shown a willingness to make accommodations in the MTP regime in response to market feedback and events. The exchange has delayed the implementation date for companies that have recently completed share consolidations and that have been hit by recent market volatility, and has adjusted its formula for calculating the six-month volume-weighted average price of a stock to adjust historical prices for share consolidations and splits.