Is our market at a tipping point?

Published February 12, 2018

By Mak Yuen Teen

Lately, I have been writing a lot about Datapulse Technology, which was super-fast in appointing a board and buying a company from a close business associate of the controlling shareholder without proper due diligence. However, it has been super-diligent in using technicalities to slow down the convening of an EGM requisitioned by shareholders, arguably undermining at least the spirit of the Companies Act which gives shareholders the right to requisition meetings and to remove directors without cause. There have been other questionable disclosures and possible insider trading – disclosure lapses and insider trading often go hand-in-hand.

Before Datapulse, there was YuuZoo, where  a review by a Big 4 firm of issues that have been raised in the media has been ongoing for nearly four months now. I have not forgotten about the company and will be writing more in the near future. As I said before, I have never seen a company quite like YuuZoo and I don’t mean it in a good way.

Then there was SingPost, which culminated in some regulatory action but led many to ask me “Is that all?” and had me wondering if more would have been done if this had happened in another developed market.

In addition, in various commentaries I have written (some with Chew Yi Hong), many instances of non-disclosures and questionable disclosures during 2017 have been mentioned, such as those in our Business Times article “Time for listed companies to weed out untimely information disclosure” (October 19, 2017), which may be indicative of possible listing rule and Securities and Futures Act breaches.

In 2017, we have seen new or continuing issues at companies such as China Sports, DMX Technologies, Emerging Towns & Cities, Epicentre, Fujian Zhengyun, Shanghai Turbo, Trek 2000, Universal Resource & Sves and Yamada Green. And we had a succession of departures of financial controllers from Vibropower, which is a cause for concern notwithstanding the company saying it is due to the “misalignment of expectations between management and the respective financial controllers on their job requirements and performance”. Not to mention of course the Keppel O&M bribery scandal that made it to No. 7 on the chart of highest penalties for US FCPA violations.

Over the past few days, various lapses have emerged at Midas Holdings. Then there is Libra Group, which on February 2, responded to an extensive list of queries from SGX relating to discrepancies in its circular for an acquisition that is an interested person transaction, with various questions also raised about the acquisition. On February 9 it issued a “corrigendum” to its response to the queries, and just 17 minutes later, issued a “clarification” to its “corrigendum”.  In addition to the questions about the acquisition, there are questions about care in making SGX announcements.

Then we have companies which have what I will call dodgy business models that are on my watchlist, which will probably implode in the near future.

Having been involved in corporate governance here for 20 years, I don’t see things improving much. Yes, some companies have become better but I think we have a serious problem in our market. I believe that overall, it has become worse and that it is undermining investor confidence, valuations, and ultimately, the attractiveness of SGX as a listing destination. Our regulators may be trying their best, but perhaps they are under-resourced and the problem has just grown too big.

I was at the symposium organised by the Securities Commission of Malaysia in Kuala Lumpur last week when I heard the announcement about the Bursa-SGX trading link. While this has caused a fair bit of excitement, my immediate reaction was “Is this our revenge for CLOB?”. I am not sure the Malaysian investors would really know what they are getting into. Somehow, our reputation is much better than the reality – although others may be learning more about the reality here based on what I hear.

What has led us to the current state? First, I believe that SGX was demutualised and listed without a proper supporting regulatory infrastructure and eco-system. We did not consider sufficiently whether this is the right model for our market given that our small domestic economy can only provide a limited source of domestic listings. If we look around the world, we see a number of models for stock exchanges – some have not demutualised, some have demutualised but have not listed, and some are like SGX which are demutualised and listed. To me, the primary mission of a stock exchange should be to be an efficient and cost-effective platform for good companies to raise public capital. By demutualising and listing the stock exchange within our context of a small domestic economy and without the proper supporting regulatory infrastructure, it may have set SGX on a path towards chasing foreign listings above other considerations.

Second, we have not been sufficiently robust in enforcement through holding companies and directors that have breached rules accountable. I believe a lack of timely enforcement has created moral hazard. Recently, there was a case of several directors being charged for offences committed between 2007 and 2010 – that’s a long time between breaches and enforcement and will reduce the effectiveness of regulatory actions. If it takes years for investigations to culminate in enforcement actions, how would the market know if the regulators consider certain breaches to be serious enough to warrant action? How would this influence the behaviour of issuers and directors? I think that regulators need to think of better ways to communicate with the market about ongoing investigations on a timely basis – for example, by regularly disclosing how many of different types of cases they are looking into, without naming the companies and individuals. I also believe that regulators need to periodically point out behaviour that they consider to be unacceptable. Perhaps some of the things I criticise companies for is of no big deal to the regulators!

A disclosure-based regime can only work effectively if there is significant legal risk from non-disclosure or false or misleading disclosures. That legal risk must come from regulators and/or shareholders taking action for disclosure lapses. In Singapore, legal action by minority shareholders for disclosure lapses and other wrongdoing by companies and directors is difficult and costly, so strong regulatory enforcement becomes even more important.  There is significant academic research that shows the link between credibility of disclosures and the legal environment, and between enforcement and development of capital markets.

The lack of enforcement against directors has also created a group of independent directors in our market who are contributing to poor corporate governance in companies. One of the “solutions” to corporate governance problems in companies – independent directors – has become the problem themselves. While I know of some excellent independent directors, I know far more that companies should avoid. Just consider how many independent directors have been held accountable over the last 10 years. Independent directors are at least partly culpable in some of the cases mentioned above and, in some cases, there have been clear breaches on their part.  It would be interesting to see whether there will be action against any of them in due course. As they say “spare the rod, spoil the child”.

There is a school of thought out there that argues that stricter enforcement against directors will discourage directors from serving on boards, but poor enforcement will just encourage the wrong kind of directors to serve on boards. I have argued in the past that if this persists, the bad may eventually drive away the good.

There is probably a need for a significant increase in the capabilities and resources of regulatory agencies involved in investigating capital market-related breaches. In this regard, I would like to put on the table once again the proposal I made a couple of years ago – that we should have a separate securities regulator, just like almost every other developed and developing market.  I really think we are long overdue to have a Securities Commission or Securities and Futures Commission, separate from the Monetary Authority of Singapore. And we should look again at whether we should have a separate regulatory subsidiary under SGX, or a totally separate regulator for enforcing listing rule breaches.


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