S-chip concerns must be addressed

Last week’s news that China Gaoxian’s auditors have had difficulty verifying some of the company’s accounts takes the total number of China stocks listed here - or S-chips as they are popularly known - to have reported accounting or governance issues to three so far in 2011 and 10 since 2009.

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Guanyu said…
S-chip concerns must be addressed

Last week’s news that China Gaoxian’s auditors have had difficulty verifying some of the company’s accounts takes the total number of China stocks listed here - or S-chips as they are popularly known - to have reported accounting or governance issues to three so far in 2011 and 10 since 2009. This is a worrying trend, not just for the blow to the integrity of the whole S-chip segment, but also because four of the 10 are CPF-approved investments. In response to mounting worries that the remainder of the S-chip segment could be similarly blighted and the consequent effect that these worries is having on investor confidence, Singapore Exchange (SGX) has written to the audit committees (ACs) of these companies urging greater oversight of cash balances and other assets.

Because of difficulties dealing with legal representatives at some of the problematic S-chips, the exchange has also ‘strongly encouraged’ ACs to ensure that articles of association give boards the authority to remove these representatives if deemed necessary. Companies have until the end of May to comply. But the exchange was silent on potential penalties for failure to implement these recommendations before the deadline.

There is little doubt that these moves are long overdue. There is also no doubt that more could be done - especially as there are at least two dozen more S-chips that are CPF-approved stocks. When SGX was courting China listings for much of the past decade, it was never able to fully lay to rest concerns that only substandard companies would be listed here since the better firms would logically prefer to be listed in China or Hong Kong.

In its defence, SGX was merely satisfying market demand for investment proxies for a China that was booming, and at the height of the demand in 2006-7, investor appetite for S-chips ran high.

However, many questions raised then are still valid today - for example, the accountability to Singapore investors of largely foreign and anonymous boards that reside in China, the enforcement of local laws and disclosure standards on companies operating in remote provinces and even the authenticity of assets and operations in those places.

These are issues that the authorities should address now that the segment has been badly tainted by a string of accounting and governance failures over the past two years. In addition, it might be a good idea to review the CPF-approved status of others in the segment, at least until improved checks and balances are in place.

SGX and other regulators should also consider implementing and enforcing a strict disclosure timetable on findings from their investigations so that shareholders are kept informed on what exactly is going on. In some cases, suspensions have stretched back two years with very little news on what has or has not been found. Investors deserve better than to be kept in the dark for such a long period. More can and should be done to restore confidence in S-chips.

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