SGX must just hit offenders hard
In her excellent commentary, ‘Why S-chip fraud cases keep cropping up’ (BT, Feb 17), NUS finance professor Qian Meijun identified the local market’s low valuation as one reason for the scandals relating to China stocks that investors have had to endure over the past five years.
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By R SIVANITHY
24 February 2012
In her excellent commentary, ‘Why S-chip fraud cases keep cropping up’ (BT, Feb 17), NUS finance professor Qian Meijun identified the local market’s low valuation as one reason for the scandals relating to China stocks that investors have had to endure over the past five years.
‘A high-quality firm that meets the listing standards of more than one market will naturally choose the one that appreciates its shares more,’ wrote Prof Qian.
‘Low valuation leads to low quality and the low quality confirms the low valuation. It is a vicious cycle.’
She also pointed out that the Singapore Exchange’s conflicting roles as market watchdog and profit-maximising company may have contributed to the problem, since the exchange could in theory have admitted companies that were hastily packaged to meet listing standards on paper but had little real substance behind them.
What can be done to break out of the negative cycle? SGX’s conflict of interest is a controversial subject that has been exhaustively debated over the 12 years that the exchange has been a listed entity.
Checks and balances
The official position is that there are sufficient checks and balances in place to ensure SGX’s objectivity and so there is no need to revamp the present model which relies on market/disclosure-based discipline.
Since the existing regulatory model is here to stay, what might be done within the boundaries of that model to enhance public interest and boost valuations?
A useful starting point might be to acknowledge that even if the exchange had unwittingly allowed sub-standard investment-grade firms to list here, the prime motivation in the first place for those companies to go public and foist their shares upon an unsuspecting and admittedly gullible Singapore public was that they believed that when they were found out, they would probably be able to get away with it.
In other words, companies which had poor fundamentals, questionable accounting and/or lousy governance were happy to list here because the ramifications of being exposed were seen as being negligible.
Such an attitude does not only apply to S-chips, but also to several other questionable companies with less-than-desirable governance.
Many of these firms - some controlled by Singaporean shareholders - are incorporated in tax havens such as Bermuda or the British Virgin Islands and over the years have made announcements of outrageously large contracts that, once the share price has shot up and the relevant parties have bailed out, hardly ever materialise.
Problem is, it looks like there are no checks to see if the original disclosures were bona fide and action taken if they were not.
This has led to the impression of a lax regulatory regime where manipulation is easy. Such a misperception must be addressed.
When share prices shoot up or plunge inexplicably, for instance, querying companies is of limited use because 99.9 per cent of the time the reply is negative and nothing more is heard.
Granted, scrutinising all the trades for dozens of odd price rises or falls is very laborious but in order to send the correct message, why not just pick one or two and focus all energies on those?
Syndicates or ‘operators’, as they are popularly known in local broking circles, always have to accumulate stock ahead of their ramping activities or before big announcements.
Going through trades of just one or two large odd price-movers with a fine tooth comb before, during and after the movement and then coming down hard on any improper practices uncovered would go a long way in sending the necessary deterrent message to the market and would surely help prevent more scandals from emerging.
Stiffer penalties and prompt action are a must. In Australia, the punishment for illegal market activities was raised significantly in 2009, when the role of primary market regulator was transferred from the Australian Stock Exchange to ASIC (the Australian Securities and Investments Commission). Insider trading, for example, can now result in 10 years in jail compared to five previously.
In addition, ASIC this week released a formal document pledging to be more public in warning investors of emerging risks in financial markets as well as detailing the specifics of an investigation if it was in the public interest.
Hardline measures like these are surely worth considering. Augmenting SGX’s market-based regulation with strict penalties, prompt investigation and greater transparency in disclosing the findings of investigations may result in better quality listings - and eventually, higher valuations.