By Mak Yuen Teen

I was recently asked by a business newspaper for my views on the state of our equities market. As is often the case,  I provided a very comprehensive response even though I knew that the journalist will only be able to use just a little of what I wrote. In this article, I share more fully my views on the topic.

Recent scandals and problems on the stock market  

In the past, many of the scandals and problems were with S-chips, which were allowed to list without adequate consideration by the SGX and other regulators of their unique governance risks and our inability to enforce rules for such companies. There was also insufficient due diligence by those responsible for bringing such companies to the market. Many investors lost big and the sector has been decimated.

Ten years ago, we had more than 150 S-chips, and today we are down to 71 (it’s now 72 based on the July statistics just released by SGX). Most of them have simply collapsed and delisted, or have been suspended for a long time. The rest are shunned because many investors believe, with justification, that more will unravel. Just over the first 6 months of this year, another 6 S-chips have disappeared. I am not saying they are all going to collapse, but I think we will continue to see more doing so. There has been little accountability for the debacle and investors have had zero recourse.

Unfortunately, the problems have spread to the rest of the market over the last few years – it is no longer just an S-chip problem involving companies such as Midas (remember that one, which was supposed to be one of the better S-chips?). We have had major problems and/or collapses involving non-Chinese foreign listings (e.g., YuuZoo, Ayondo, Spackman, MMP), big companies (e.g., Noble, Hyflux, Ezra group), smaller Singapore-based companies (e.g., Datapulse, Jason Holdings, Epicentre, Trek2000 International,  Allied Technologies) and even a big REIT (EHT). Many have run into trouble soon after listing (e.g., Ayondo, EHT, DLF, Y Ventures, No Signboard). And of course we also had the penny stock scandal. Add to that are many companies engaging in questionable transactions or RTOs, or with serious disclosure lapses – the latest example being Raffles Education which failed to disclose RM410m writs filed against it and two subsidiaries for more than two months.

Who would want to invest in such a market, where bad companies are everywhere, and companies providing big upside returns are so rare? Investors understand that they will have to accept losses due to business risks, but they should not be expected to accept losses due to poor corporate governance or fraud. Caveat emptor does not mean anything goes.

Rebuilding investor confidence

In terms of rebuilding investor trust, I have been saying for years that we must start with strong investor protection. The developed markets understand that strong investor protection is the bedrock of a strong capital market. Even other Asian markets like Taiwan and Malaysia understand that.  Here, we are mainly concerned with how to attract  more listings or to stem delistings. We come up with dual class shares (DCS), discontinuing quarterly reporting, removing MTP watchlist, and now the plan to allow SPACs. Recent listings do not give me much confidence that quality on the whole is improving.

While SGX Regco has strengthened certain rules and improved its surveillance, and there are signs that they and other regulators are stepping up, we have yet to see results. I worry that they will simply be overwhelmed as we have not stemmed the listing of poor quality companies. Over the past 10 to 15 years, regulators have done little to hold directors, issue managers, sponsors, auditors etc accountable. We have also done virtually nothing to improve the ability of investors to take action against issuers and directors.

Certain rules will need to be improved to better protect ordinary investors, and there should be much stronger enforcement and improvements in the ability of investors to seek recourse.

Investors are already investing elsewhere

Both asset managers and retail investors have told me that they are deeply concerned about the state of our stock market. Some have shared about losing their shirts even investing in so-called “blue chips”. One investor told me he will only invest in the bluest of blue chips. Others have simply given up.

Today, investors have plenty of options in terms of where and what to invest in. They can easily invest in overseas stocks. The lack of strong investor protection affects liquidity and valuations, which affects our ability to attract good quality companies .  So, the markets with stronger investor protection ultimately end up with better quality companies on average. Investors here also recognise that they are far more likely to be able to find (or stumble on) an early stage Amazon, Facebook, Apple, etc in those bigger overseas markets than here. Here, they are more likely to stumble on the next Midas or Noble. The risk-reward tradeoff is just better in those markets in their view.

Time is not on our side 

Regulators need to prioritise investor protection and rebuilding investor confidence – if it is not already too late.

They must not forget the lessons of the S-chip debacle, by allowing companies to list without adequate assessment of whether they will be able to enforce rules against them and investors will be adequately protected. I believe we nearly repeated that mistake with DCS – but thankfully, because our regulators were not totally oblivious to the risks and put in many safeguards, it has ironically  made our DCS regime unattractive for companies that want to adopt such a structure. My worry is that they will relax these safeguards and there is a good chance that we will repeat the mistake with SPACs. Secondary listings may become the backdoor for poor quality listings, since these listings do not have to comply with most SGX rules.

We should aim for a market with good quality companies, not aim to increase the number of listings regardless of quality. The KPIs of the management of SGX may warrant scrutiny.

Enforcement actions take far too long and are not sufficiently transparent

Enforcement needs to be timely. I understand the importance of due process but from my analysis of timeliness of enforcement actions in the early 2000s and now, enforcement actions are clearly much slower now. And I am not referring just to overseas companies where there may be cross-border challenges in investigations. If there is a clear breach of listing rules for example, it should not take years for directors to be reprimanded. SGX Regco is still too conservative in using public reprimands against directors, particularly independent directors.

Other types of regulatory actions, especially those involving criminal prosecutions, will understandably take longer but even then, I think they often take too long. There have been cases of directors being arrested, with nothing further heard for years. Presumably in some cases, charges were not filed and the cases dropped. The market is left wondering why. Today, an announcement of an arrest of directors may elicit a response of “we have seen this movie before, nothing will happen”.

In contrast, look at the case of Nikola Corporation in the US where the regulator has announced fraud charges against the founder late last month. The alleged fraud was exposed by a short seller in September last year, less than a year ago. I understand we may not have the resources to be as efficient as markets like the U.S., but enforcement must improve and be more transparent.

Zombieland

There are many companies which have been suspended for a long time and many other companies heading towards zombie status as we can see them just slowly dying. They often do placements/rights issues, drain more cash, and then repeat. Our regulators give too long a leash to many of them, by approving their new shares for listing; giving them extension after extension to get out of the watchlist, announce results,  and hold AGMs; approving a transfer from the Mainboard to Catalist; or allowing them to remain trading despite repeated modified or disclaimer of opinions by auditors. These companies may then try a RTO with a rubbish company.

I know retail investors often want these companies to be given the chance to survive for as long as possible. To me, the endgame is clear for most of these companies – they either get delisted now or they will be delisted in a few years.

I have rarely seen a zombie re-join the land of the living.