In nod to market, SGX seeks to scrap minimum trading price rule

THE Singapore Exchange Regulation (SGX RegCo) is formally looking at scrapping the minimum trading price (MTP) rule, confirming a report by The Business Times earlier this year.

The move, coming more than three years after the rule was implemented, would affect the status of about 100 companies now languishing in the SGX watch list for falling short of the MTP of S$0.20 a share.

Under the rules adopted in 2016 and then modified and effected the following year, a mainboard-listed company must maintain a six-month volume-weighted average share price of at least 20 Singapore cents, and a six-month average daily market capitalisation of at least S$40 million.

Companies that do not meet these criteria are put on the SGX watch list. Once there, these firms have three years to raise both their share price and their market cap, failing which, they are delisted.

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The proposal to scrap the MTP has been put up for public consultation till Dec 27; a decision is expected in the first half of 2020.

That a public consultation on the issue will pave the way for an eventual U-turn of the share-price hurdle was first reported in The Business Times in July.

Pending the outcome of a decision, a moratorium has been placed on the three-year period for delisting companies now on the watch list. Also, no new entrants will be added to the list for now.

Before the announcement on the consultation, nearly a dozen companies were headed for the watch list in the next review scheduled for early next month, based on data by SGX as of Nov 28.

Despite extensive feedback gathered before the MTP was imposed, there were two things the regulator could not foresee, SGX RegCo chief executive Tan Boon Gin told reporters.

"We did not know how the implementation of MTP will play out. Since then, we have seen the unanticipated consequences that have affected companies and therefore, shareholders.

"Second, we have since developed tools and solutions that are much more effective in addressing possible market manipulation."

The initial intent of the MTP had been to address concerns that low-priced securities were more susceptible to manipulation, especially following the penny stock crash that wiped out billions of dollars from the Singapore stock market in 2013.

But SGX has recognised that the MTP framework "is a blunt tool in addressing the risk of manipulation".

Based on the regulator's review, 92 per cent of companies on the watch list have not been subjects of the "Trade with Caution" (TWC) alert, and neither have they been referred to the Monetary Authority of Singapore (MAS) for suspected stock manipulation.

The rule reversal will enable the market operator to avoid delisting up to 54 companies come June 2020. In the consultation paper, SGX noted that "delisting all companies on the MTP watch list is excessive and may be detrimental to investor interests".

Mr Tan, explaining why it may be challenging for companies to exit the watch list, said: "One of the things we realised is that once you're placed on the watch list, you face certain business constraints, such as difficulties borrowing from banks and developing business relationships."

"And there is always the real threat of delisting," he added.

As a result, no company has managed to exit the list by raising its share price.

That said, however, based on SGX's review dated Nov 28, Mirach Energy will be able to make an exit - though it will stay on the financial watch list, which puts companies with three straight loss-making years and a market cap below S$40 million on notice.

And then there are four companies which exited the MTP watch list by moving to SGX's sponsor-based Catalist board: Hatten Land, Matex, Allied Tech and Nippecraft.

In place of the MTP, the enhanced tools SGX has acquired to detect and prevent manipulation in a more targeted manner include "trade with caution" alerts and a members' surveillance guidebook and dashboard developed to detect manipulation risks.

For instance, SGX collaborated with MAS to publish the Trade Surveillance Practice Guide to set out principles on trade surveillance operations to help firms curb misconduct as early as possible.

Lee Boon Ngiap, assistant managing director of MAS, said: "Our approach to addressing market manipulation has evolved to be more pre-emptive and targeted."

In response to whether regulatory U-turns would affect market confidence in regulators, SGX RegCo's Mr Tan said: "I think what is important is that when measures do not work the way they were intended to work, we are willing to make changes along the way."

Associate Professor Lawrence Loh of the Centre for Governance, Institutions and Organisation of the National University of Singapore, said: "Retracting rules will elevate confidence even more, as market participants will appreciate the boldness of regulators in proactively adapting to changing circumstances."

Many market watchers are also in favour of the proposal to ditch the MTP.

Stefanie Yuen Thio, joint managing director of TSMP Law Corp, said it is "about time" to scrap it, given that the initiative was not successful.

"I think it's also good that the regulators, in addition to beefing up their own surveillance, have rolled out measures to improve stockbroking houses' awareness of the kinds of trades that are likely to indicate market misconduct."

But corporate governance advocate Mak Yuen Teen highlighted that it is still necessary for a mechanism to remove very poor companies from the exchange or risk being labelled a penny stock market.

"It is odd that before the three-year cure period is up since the rule became effective, it is being withdrawn," he said.

"I hope companies will not adopt a wait-and-see attitude in the future, when there are rules with long cure or transition periods," he added.

Having said that, the elimination of rules does not mean that companies will have it easier. On top of its tools, SGX RegCo is refining its financial watch list - and Prof Mak said he would be "more supportive of dropping the MTP rule if it is replaced with a more comprehensive financial watch list".

The removal of the MTP watch list and threat of delisting will come as a relief to the affected issuers, said David Gerald, founder and chief executive officer of Securities Investors Association Singapore. Despite this, "companies are still kept on their toes and must meet their financial obligations under the SGX rules", he added.

As market risks evolve along with rules, regulations have to be progressive, said Adrian Chan, senior partner and head of the corporate department at law firm Lee & Lee.

"This calls for regulators to continually keep their ears close to the ground so that they can listen for potential tremors in the market and spot trends and actively engage with market players and participants."

Claudia Tan, Business Times

29 November 2019