By Mak Yuen Teen
Of the 753 issuers listed on the Singapore Exchange (SGX) as at August 2017, 274 or 36% are foreign listings. Of these foreign listings, 110 or 40% are from China. Among the major stock exchanges around the world, SGX has the highest percentage of foreign listings – which is hardly surprising given Singapore’s relatively small domestic economy compared to many other countries. In fact, the percentage of foreign listings, including listings from China, has been even higher in the past. Back in February 2009, 301 (40%) out of the 757 issuers were foreign listings, with 150 or half of these foreign listings from China. As we can see, the net number of China listings has fallen by 40 since 2009, more than offsetting the net increase of 13 foreign listings from other countries. Many of the China listings have been engulfed in accounting and corporate governance scandals, often involving incidents that seem to afflict only them, such as financial records being stolen or destroyed by fire or bank confirmations obtained directly from banks being falsified. While accounting and corporate governance scandals are certainly not limited to China listings, there is no doubt that such listings have been disproportionately affected.
Copyright for cartoon belongs to Mak Yuen Teen. Not to be reproduced without permission.
Foreign companies listed on the SGX may not be subject to certain rules that apply to local companies. But the greater issue is the ability to enforce rules when things go wrong. In almost all cases where accounting and corporate governance scandals have occurred in foreign companies, including serious fraud, SGX and other regulators have been powerless in holding those responsible to account. Needless to say, minority shareholders can do nothing except watch their investment go up in smoke. The combination of inapplicability of rules and difficulty of enforcement reduces the accountability of directors and management of these companies.
Challenges in enforcement for foreign listings are by no means limited to Singapore. All markets face difficulties to a greater or less extent when it comes to regulatory and shareholder enforcement for foreign listings. However, where a market is able to attract higher-quality listings, for example through more stringent admission requirements and stricter due diligence by regulators and market intermediaries prior to listing, this will lower the corporate governance risks of foreign listings. Regulators in the U.S., in particular, also tend to have greater extra-territorial reach when it comes to enforcement. For example, the U.S. requires public accounting firms auditing financial statements of foreign issuers to be registered with them and it conducts inspections of foreign auditors, although it has so far not been able to do so for countries like China. There is academic research evidence that shows that audit inspections by U.S. regulators, including of foreign auditors, improve financial reporting quality of foreign listings. This is hardly surprising as auditors are less likely to put commercial interests before their fiduciary responsibilities to shareholders if their work is subject to regulatory scrutiny.
Investors should therefore recognise the additional risks that often come with investing in foreign listings. They should ask themselves some basic questions first, including:
- Why is the foreign company choosing to list on SGX?
- What is the quality of the rule of law in the country in which it operates?
- What rules is it subject to as a foreign listing?
- Are our regulators able to enforce those rules if they are flouted?
- Is the work of the external auditor under the purview of the Accounting and Corporate Regulatory Authority (ACRA) here, or of another reputable statutory regulator in cases where the auditor is not based in Singapore?
- Do the culture and business practices in the country pose special challenges for directors, auditors and other gatekeepers in discharging their responsibilities?
In subsequent posts, I will discuss these issues in more detail.
