What Rules Apply To Foreign Listings: The Case Of Primary Listings Incorporated in Singapore

Published October 23, 2017

By Mak Yuen Teen

This is the last of my five articles on foreign listings on the SGX that discusses regulatory issues and corporate governance challenges that apply to such listings. In future articles, I plan to discuss further how we can strengthen the regulatory regime for foreign listings.

In my previous article on foreign listings, I talked about overseas companies with a primary listing on SGX which are incorporated overseas. Here I will focus on overseas companies with a primary listing on SGX that are incorporated in Singapore – which make up about 52% of all overseas companies with a primary listing on SGX.

Incorporation in Singapore is important primarily because the Singapore Companies Act – which contains core corporate governance provisions – would apply, which means that if there are breaches of this Act, our statutory regulators are able to investigate and take enforcement actions. For these overseas companies, the corporate governance rules that apply to homegrown listed companies would also apply to them – well, almost.

One related advantage to investors of incorporating in Singapore is that the accounts of these companies have to be audited by a Singapore auditor that is registered with and overseen by the Accounting and Corporate Regulatory Authority (ACRA). For overseas companies that are not incorporated in Singapore, their accounts may not be audited by a Singapore auditor. For these companies, SGX rules require that the accounts be audited either by an external auditor that is regulated by an independent audit oversight body similar to ACRA or by any other auditing firm acceptable to the SGX. Some of these companies are audited by Singapore-registered auditors. On the other hand, there are also some that are not audited by external auditors regulated by an independent audit oversight body. An example is Noble Group, which is audited by Ernst & Young (EY) in Hong Kong. Clearly, this was considered acceptable to SGX even though Hong Kong does not currently have an independent audit oversight body – perhaps because EY is a Big 4 firm.

Coming back to the overseas companies that are incorporated in Singapore, while the corporate governance rules that apply are broadly similar to domestic companies, there are still important differences. In fact, from a practical standpoint, they are much closer to their foreign counterparts incorporated outside of Singapore than domestic companies.

First, only an investment holding company is typically incorporated here. This investment holding company generally owns shares in various wholly-owned subsidiaries that are incorporated overseas – and there could be more than one layer that separates the investment holding company from the ultimate subsidiaries where the business operations are actually conducted. For example, the Singapore-incorporated holding company may hold all the shares in one or more subsidiaries incorporated in British Virgin Islands (BVI), which in turn hold all the shares in one or more subsidiaries incorporated in the People’s Republic of China (PRC). [Of course, overseas companies incorporated outside of Singapore that were discussed in my previous article also often have similar multiple layers of companies].

Let’s take the case of Yamada Green (“Yamada”), a PRC company incorporated in Singapore that has recently been in the news for the wrong reasons. The following is its corporate structure taken from the annual report:

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In Yamada’s case, the investment holding company holds all the shares in two PRC-incorporated subsidiaries, which in turn holds all the shares in 5 other PRC-incorporated subsidiaries, one HK-incorporated subsidiary and 45% of a PRC-incorporated joint venture company – Fujian Tianwang Foods Co Ltd – which in turn has another wholly owned subsidiary. For these subsidiaries and joint venture, company law in PRC and HK would apply. The only real difference between a foreign company incorporated in Singapore compared to those incorporated overseas is at the holding company level.

Second, and related to the first, only some of the audits of the group are generally undertaken by the Singapore auditor. In the case of Yamada, the external auditor for the listed company here is BDO LLP (Singapore), because the investment holding company is Singapore-incorporated. However, the audits of its overseas-based subsidiaries and joint ventures are conducted by BDO China Shu Lun Pan Certified Public Accountants LLP (BDO China in short). For some investors, they may only have become aware of this recently because Yamada – which had been facing accounting-related issues raised by BDO LLP (Singapore), including a report made by the auditor to the Minister here – announced that BDO LLP (China) had been suspended by the Ministry of Finance and China Securities Regulatory Commission in China for about 2.5 months “pending the implementation of certain rectification works” . At this point, it is unclear whether this has to do with the quality of audits conducted by BDO China. However, the point is that the auditor and audit quality may not be the same across the whole group – and financial reporting standards may also differ for the overseas entities. To be clear, the notes to Yamada’s financial statements do disclose the auditors of these overseas subsidiaries and the fact that they follow PRC accounting standards.

Third, for nearly all of the foreign listings here, their principal place of business is overseas – and this is where their key management (and often one or more non-executive directors) are based. This means that business is conducted in accordance with the rule of law, business practices and culture in the overseas country. For example, Chinese companies have a legal representative who can make decisions that bind the company without the approval of the board. The board may have no say in the appointment of the legal representative. There have been cases where this has posed corporate governance problems for PRC companies listed here. Fraud, bribery and other risks may be higher in some overseas countries and enforcement against wrongdoing may be lacking. Therefore, in assessing corporate governance of foreign companies listed here, I do not only look at where they are incorporated, but I also look at the quality of the rule of law in the principal place of business.

The fact that the principal place of business is overseas also affects enforcement. Here I am referring to regulatory enforcement because shareholder enforcement is generally too costly for minority investors in Singapore to contemplate even for domestic companies. I had previously written an article arguing that shareholder enforcement is even more challenging for overseas companies listed here, following the landmark BioTreat Technology case.

If things do go wrong with foreign companies listed here, they will likely go wrong in the principal place of business since this is where business is conducted. Since the key management is based overseas, our Singapore regulators will find it more difficult to take enforcement actions compared to companies whose principal place of business is here.

In summary, when it comes to corporate governance risks for foreign companies listed here, there is probably not much difference between those that incorporate a holding company here and those that are incorporated overseas.

About five years ago, I co-supervised an honours thesis that examined the issue of foreign listings and enforcement. The thesis found that foreign listings have a statistically significant valuation discount (based on Tobin’s Q) compared to local listings. When we looked at just the sample of foreign listings, we found that China listings have a larger valuation discount compared to other foreign listings.

Interestingly, whether the foreign listing is incorporated in Singapore or overseas did not have an impact on valuation. This is consistent with my argument above that in practice, there may be little difference whether a foreign listing is incorporated here or overseas. In order to test the impact of regulatory enforcement, we used the presence of an extradition treaty between Singapore and the foreign country of operations as a proxy and we focus only on the foreign listings in this further analysis (it is acknowledged that this proxy has limitations because extradition is only used in extreme situations). We found that the presence of an extradition treaty is significantly and positively related to the valuation of foreign firms.

As a listed company with commercial objectives and a small domestic economy to draw local listings from, SGX has little choice but to go overseas to attract foreign listings. SGX has strengthened its regulatory enforcement capabilities. However, the reality is that it is competing with major stock exchanges in countries like US, UK, HK and China (yes, Shanghai and Shenzhen exchanges are now undoubtedly major stock exchanges), which often offer better liquidity and valuations. Consequently, finding high-quality foreign listings will continue to be a challenge for SGX and investors therefore need to carefully evaluate the corporate governance risks when investing in such listings.

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