Cai Jin

It pays to take that SGX query seriously

Its inquiries over unusual trading activity can help investors avoid nasty surprises

There were some red faces among local analysts last week when one of Europe's wealthiest business dynasties, the Reimann family, made a $1.45 billion offer to buy mainboard-listed Super Group, the maker of the three-in-one coffee mix.

As DBS analysts Alfie Yeo and Andy Sim freely acknowledged in a report when the takeover bid was made, it was a surprise to them as they felt that "the founding shareholders have not shown prior indications of selling out".

If only they had made the effort to monitor more closely the queries made by the Singapore Exchange (SGX) whenever the shares of a counter register unusual trading activity, they might perhaps not have been gasping in amazement.

On Oct 5, a month before the takeover announcement was made, the SGX had already queried Super Group to tease out any undisclosed material information after its share price shot up 12.5 per cent to close at 90 cents on a staggering volume of 13.92 million shares.

The explanation given would have afforded any sharp-eyed trader reading it a big hint that something was afoot in the company.

Instead of the usual catch-all phrase that it was unaware of any information that could have led to the unusual trading, Super Group said that it "undertakes strategic reviews of its business and properties from time to time and is in preliminary discussions".

The give-away that a deal was brewing would lie in the choice of words "in preliminary discussions". This is a well-worn euphemism used over the years by companies engaged in takeover discussions.

Had a trader acted on that hunch, he would have been richer for it. At the $1.30 offer made for each Super Group share, this would have worked out to a hefty 44.4 per cent premium over the 90-cent closing price on Oct 5. Quite a tidy profit for an investment barely one month old, considering the moribund state of the rest of the stock market.

To the gatekeepers at the SGX who have been diligently carrying out real-time surveillance and issuing public queries whenever unusual trading activity is detected, surely they also deserve a pat on the back for doing their job well.

It is only right to acknowledge this, considering the brickbats SGX has been getting for either doing too little or too much to uphold the standards of corporate disclosure, depending on who the critic is.

The Super Group example speaks volumes of the importance of the role played by the SGX in requiring listed firms to give an explanation if their share prices or trading volumes are out of the ordinary.

As matters stand, SGX is one of the few stock exchanges in the world to make it a point to ask for such clarifications. This is a practice retail investors ought to be very thankful for, given their limited access to company management or analyst reports, which makes their task of making informed investment decisions all that much harder.

As SGX chief regulator Tan Boon Gin once explained, such public queries serve two purposes: For investors, the query acts as an alert that the trading activity in a particular counter is unusual and that they should trade with care and look out for an announcement.

In the case of the company, the prospect of a public query spurs it to carry out its obligation to monitor trading in its shares and be ready to make a timely disclosure, if necessary, to ensure that investors can make fully informed decisions on their investments.

To this, I would add that to merely insist that a company should make important disclosures in a timely fashion, as in other markets such as the United States, is not enough. This is because time and time again, listed firms have been known to drag their feet in volunteering any information, especially negative material that may hurt their share prices.

Indeed, if not for these ubiquitous SGX queries seeking to ferret out key information, we would find ourselves caught in a bind when we suddenly get news of adverse developments affecting a listed firm. Take marine services firm Swiber Holdings, which took even its principal lender DBS Bank by surprise when it filed a petition to wind up its business on July 27.

In a June 7 announcement - just seven weeks earlier - its deputy chief executive officer Darren Yeo was still crowing about the firm's ability to secure fresh projects, despite the challenging conditions in the oil and gas industry, in a statement that accompanied an announcement that the group had secured three new contracts worth US$215 million (S$298 million).

Investors would also have been none the wiser reading the brief announcement Swiber made one month later on July 8 that a US$710 million contract that it had purportedly clinched in December 2014 had been delayed.

However, if they were vigilant in reading the evasive response which the company gave on July 25 to queries made by the SGX, they would have had a foretaste of the doom about to descend upon it.

One claim which Swiber made in that announcement was that it was weakness in the oil and gas sector, rather than the non-fulfilment of any material conditions in the award letter, that caused the US$710 million deal, making up the bulk of its order book, to be delayed.

In hindsight, going by the formal reprimand meted out later by SGX to Swiber, we now know that the bourse operator was not satisfied with Swiber's reply and pressed it for further information.

This, of course, led to the discovery that what Swiber claimed was a binding order was, in fact, only a letter of intent. This letter listed conditions such as requiring a "contract document" to be formalised between the company and its client and completion of an engineering design study.

Indeed, the whole sorry saga makes us wonder if the company would have stalled even longer and continued to mislead investors, if not for the SGX's vigilance in trying to uncover the truth.

Faith in our disclosure-based stock market regime rests on the all-important principle of requiring listed firms to make important disclosures - good as well as bad - in a timely fashion.

In getting to the bottom of Swiber's misleading disclosures with its queries, the SGX also sent a strong signal to other listed firms that any announcement they make should be fair and balanced. To use the SGX's own words, listed firms should not present favourable possibilities as certain, or as more probable than are actually the case.

Some argue that it is this crucial obligation imposed on listed firms to make good on the disclosure of material information that differentiates the stock market from a casino.

Keep up the good work, SGX.

A version of this article appeared in the print edition of The Straits Times on November 07, 2016, with the headline 'It pays to take that SGX query seriously'. Subscribe