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R Sivanithy
23 May 2014
It is slightly more than two months since Singapore Exchange (SGX) introduced its “Trade With Caution” (TWC) warning notifications, which are sometimes issued when companies are unable to explain odd activity in their shares.
The number of TWCs handed out in recent weeks has dropped off sharply from the early days, suggesting that the exchange has become more circumspect when wielding its new regulatory tool. This is welcome because too many TWCs in circulation would dilute their usefulness.
However, if the entire querying/TWC warning mechanism is to serve its intended purpose of improving disclosure governance and discipline, the process should be improved. As it stands now, unusual activity typically triggers a query, followed by a reply which may or may not convey explanatory information, followed sometimes by a TWC and then the matter ends there.
Visible action
Is this good enough? Or should there be follow-up action, visible to the entire market, that would ensure that companies properly discharge their duties and responsibilities as required by a disclosure-based regime?
Consider, for example, companies that reply after SGX queries with possible explanations. In the past week there have been two such instances - Stats ChipPac and RH Petrogas. Both were asked to account for their share price movements and both said a possible explanation could be that they might be involved in takeovers.
Here, the next logical question for which the market would like an answer would be exactly when their takeover notifications were received. If it was early in the day of the activity or in the day(s) before, then more questions are possible, such as why trading was not halted and why no announcement was made.
By the same token, consider the example of companies who say they have no knowledge when approached by SGX, yet a few weeks later either make a material announcement or are the beneficiaries of a significant industry makeover.
In the latter category are transport companies such as SMRT, which a month ago was asked by the exchange to account for a sudden surge in its share price and replied that it did not know of any possible reasons for the move.
This was immediately followed by SGX issuing a TWC on trading of SMRT’s shares. If the intention was to warn the public to exercise caution, it didn’t work - the rail operator’s shares continued rising, jumping sharply again earlier this week before the government on Wednesday announced landmark changes to the transport industry that would clearly benefit SMRT. In all, the stock has risen just under 50 per cent in about a month.
In a similar vein to cases where companies offer possible explanations, more questions are possible. For example, who were the main buyers throughout the past four weeks? When exactly was the company informed of the changes to the transport landscape?
It is possible that SGX’s account managers in its regulatory and supervisory departments, whose task it is to oversee these companies, are asking precisely these questions but rather than keep the answers/findings private, they should be shared with the public.
To ensure greater transparency, the exchange should consider setting up a Queries/TWC (QT) watchlist, much like its present Watchlist. The latter contains names of loss-making companies who are in danger of losing their listing status, and the former should carry names of companies who have been queried and may or may not have TWCs issued.
There should be a QT icon on the exchange’s homepage on its website that shows the QT list every day. Like short-selling data, weekly summaries can be compiled to help the market keep track of which companies are being queried, whether they have answered and what those answers were.
The current practice is to lump queries together with all sorts of company announcements every day, making it very difficult for investors to sift through this information.
The QT list should also give details of follow-up action if warranted, in the case of companies who reply only after a query with material information, or if they had replied in the negative but later made a significant announcement.
TWC was a decent addition to the exchange’s signalling mechanism but details of follow-ups would be even more welcome.