Ditching MTP rule is about listening to the market

IT'S not often that the Singapore Exchange reverses a rule it deemed necessary just a few years back.

On Thursday, Singapore's frontline market regulator conceded that the minimum trading price (MTP) rule for mainboard-listed companies should be scrapped.

Singapore Exchange Regulation (SGXRegco) chief Tan Boon Gin did not consider the MTP a mistake, but he acknowledged market feedback that had highlighted its shortcomings. He said the MTP has been a "blunt tool" that created various "unintended consequences" for issuers and shareholders.

Indeed, it is hard to see how the MTP rule - introduced in the wake of the October 2013 penny stock crash that wiped out billions of paper gains from Asiasons, Blumont and LionGold - has fulfilled its intended purpose of improving the quality of mainboard listings.

Specifically, the thinking by SGX five years ago was that penny stocks are more prone to manipulation by syndicates, whereas "higher-priced shares have better liquidity" and are less vulnerable to speculation.

So when the MTP of S$0.20 a share was introduced in March 2015, SGX urged issuers to "take action as soon as possible" to consolidate their shares, to avoid being placed on the MTP watch-list. Watch-listed issuers are forced to delist if they fail to comply at the end of a three-year cure period.

It soon became clear that a stock's price would not hold firm if the company's business fundamentals remain poor after a share consolidation. Higher share prices, without any improvement in fundamentals, simply induced fresh selling, SGX has observed.

The MTP quickly became an unpopular rule.

In response to the unhappiness of stakeholders, a refinement was made in 2016 in that issuers with a six-month volume-weighted average price below S$0.20 would not be placed on the MTP watch-list unless their six-month average daily market cap fell below S$40 million as well.

Since June 2017, a total of 100 issuers have been placed on the MTP watch-list. There are 734 securities listed on the SGX.

None has made a successful exit, SGX said.

Issuers like Allied Tech, Hatten Land, Matex and Nippecraft chose to escape the MTP watch-list by taking an alternative path that the SGX had opened up, that is, downgrading to the Catalist board so as to avoid the MTP requirement altogether.

This, too, created unintended consequences, summarised by Mak Yuen Teen and Mark Lai in a report in January that asked if such migration patterns risk turning the Catalist board into an "intensive care ward" for struggling companies, instead of the platform for growth companies it set out to be.

Capping the end of a five-year journey, SGX said on Thursday that 92 per cent of companies on the MTP watch-list have not been shown to be susceptible to manipulation, so delisting them "will not serve the objective of reducing the risk of manipulation in our market".

In fact, of the 40 issuers that SGX has slapped with trade-with-caution alerts since June 1, 2017 - when the MTP rule was refined - only six were issuers on the MTP watch-list.

Of the remaining 34, seven were Catalist listings.

Get over it

Hopefully, the removal of the MTP rule will end a long and unhealthy fixation with a corner of the Singapore market that does not really represent what the rest of the companies listed here have to offer.

Nowhere else in the world does the regulator throw the spotlight on micro-caps the same way that SGX has done.

But once a company makes its debut on the SGX, there is only so much that a regulator can do if the owners or managers turn out to be incapable or disinterested in making money for its shareholders.

It's a shame that companies that are cheaper than a Singapore landed property (China Haida, market cap S$1 million) or a Good Class Bungalow (Sakae Holdings, market cap S$10 million) can remain listed, but their problems may be better addressed by corporate governance or management fixes.

Meanwhile, there are other ways that SGX can shed its penny stock image.

As Goh Eng Yeow, my former colleague at The Straits Times, suggested in 2016: "Instead of trying to make recalcitrant companies conform to a minimum threshold price, let's try to encourage listed firms to aspire to the lofty heights achieved by names such as Singtel, DBS Group Holdings and Singapore Airlines - the type of companies that does the SGX proud."

SGXRegCo is already moving in the right direction.

Last year, it launched the SGX Fast Track programme to reward companies with good corporate governance. The incentive comes in the form of prioritised clearance for selected corporate-action submissions to SGX RegCo.

Some 36 companies made their debut on the Fast Track earlier this week.

SGX could have given the group a stronger name - "Fast Track" calls to mind a picture of small kids being streamed in primary school.

In any case, it looks like SGXRegCo's Mr Tan, the de facto discipline master, has won the hearts of the parent groups by looking seriously into their concerns about unworkable rules, while being supportive of his star pupils.

Marissa Lee, Business Times

29 November 2019