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SGX RegCo sees targeted approach in enforcement, more powerful market discipline

Chan Chao Peh
Chan Chao Peh • 8 min read
SGX RegCo sees targeted approach in enforcement, more powerful market discipline
SINGAPORE (May 27): Tan Boon Gin, CEO of stock exchange regulator Singapore Exchange Regulation, says the market can expect a stronger regulatory presence. “You will see a series of enforcement cases coming up quite soon,” he tells The Edge Singapore.
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SINGAPORE (May 27): Tan Boon Gin, CEO of stock exchange regulator Singapore Exchange Regulation, says the market can expect a stronger regulatory presence. “You will see a series of enforcement cases coming up quite soon,” he tells The Edge Singapore.

Tan’s assertion comes amid significant changes in the market as sentiment remains lacklustre and investors’ expectations change. The local stock market has gone through significant upheaval, not least because of the penny stock crash in 2013 that wiped out some $8 billion in value from the market. The event dented investor sentiment, and the ongoing trial of the alleged masterminds of the market manipulation has laid bare the fact that many in the broking industry bent rules and exploited loopholes. The role and effectiveness of the market’s regulators, along with the emphasis on corporate governance, have taken on a new urgency.

Since the penny stock crash, a series of measures has been introduced to ensure the market functions in an orderly manner. Circuit breakers and “trade with caution” warnings, issued upon detection of unusual trading, were introduced. To deter market manipulation, a “surveillance handbook” has been issued to brokers, clearly listing the typo­logies and possible patterns of market manipulation. SGX RegCo has stepped up engagement with brokers as well. And, a string of companies has become the target of regulatory action taken by the exchange.

Even so, some market observers have asked for the regulator to be given more “teeth”. For example, SGX RegCo can now impose fines on companies, but has yet to exercise this power. When individual company directors are found to be wanting, however, Tan can only issue a public reprimand.

He says the difference is not about being given more powers or the regulator being more prescriptive about how the market and its participants should behave. In any case, reprimands and penalties issued by the exchange have to be approved by an independent listings and disciplinary committee.

In a sense, Tan is working to refine the existing regulatory framework, instead of overhauling it. For years, SGX has relied on a disclosure-based regime as the underlying philosophy of its regulatory approach. The onus is on companies to make timely announcements of material changes or developments.

Ideally, under such a regime, “market discipline” should have punished companies that did not cooperate, but rewarded companies and their shareholders that did. This disclosure-based approach seems to have worked for Western markets as seen in the way many institutional players showed their preference for companies that were doing well by investing in them, and selling their shares if they were not doing well.

There is less institutional participation in Singapore, though. Coupled with the absence of a litigious culture, market discipline is relatively weaker. SGX RegCo has to supplement the disclosure-based regime with regulatory actions.

Indeed, as the frontline regulator, SGX RegCo is the first point of contact when things go wrong. To casual observers, however, its actions when viewed individually may seem isolated and the impact not readily apparent. “We try to be more surgical in identifying and addressing specific issues, specific companies, rather than use an overly blunt instrument that just burdens everybody,” explains Tan.

He also points out that his job as regulator is not just to take care of unhappy minorities. To a certain extent, he has to help companies with a genuine need to raise funds from the capital markets too. “Depending on which part of the ecosystem you are from, you have a different ask, a different priority,” says Tan.

‘Signature cases’

The strict adherence to proper processes suits the legally trained Tan just fine. As director of the Commercial Affairs Department between 2011 and 2015, he held considerable enforcement powers. He could kick down doors and seize evidence and assets. Still, he had to make sure that every decision he made stood up in a court of law. Otherwise, the regulators would have opened themselves up to being challenged — which digital payments firm Wirecard did to CAD in March this year. “It is not a simple decision of whether to go in,” Tan says.

Tan joined SGX as chief regulatory officer in 2015, and was appointed to his current role when SGX RegCo was set up in 2017 as an independently run regulatory unit of SGX.

Tan believes SGX RegCo has made its mark since. For SGX’s FY2014 ended June 30, 2014, a total of 49 market manipulation cases was referred by SGX to the Monetary Authority of Singapore, the higher authority. The number of cases similarly referred dropped to 13 the following year. It rose to 20 in FY2016, dropped to 14 in FY2017 and halved to seven for FY2018. In the first three quarters of FY2019, there were 13 cases. “We are seeing some results,” says Tan.

He is also pleased with certain “signature cases” and “landmark policies”. For example, when Vard’s controlling shareholders tried to buy out minorities on what were clearly unfair terms, SGX RegCo responded by revising rules, giving minorities better protection when similar circumstances arise in the future.

In another high-profile case, Stamford Land accused one of its shareholders of making defamatory remarks at its annual general meeting. Tan intervened personally and got both sides to settle. Like a parent seizing on a “teachable moment” for his child, SGX RegCo then partnered with Securities Investors Association Singapore, representing shareholders, and Singapore Institute of Directors, representing directors, to come up with a best practices guide on how to conduct AGMs. “It is fair to say that, for these cases, we have tried to intervene as quickly as possible, as robustly as possible. And when we feel that we need to acknowledge that the rules require some sort of review, I think we have done so,” says Tan.

He declines to name the companies and directors being put through the process by SGX RegCo. “Maybe the only indication I can give you is to read some of Mak Yuen Teen’s articles,” says Tan, referring to the vocal business professor who specialises in corporate governance issues and who has no qualms about skewering both companies, such as Datapulse Technology and YuuZoo Networks Group, and regulators alike.

Still, some market players have also grumbled that while SGX RegCo has come down hard on companies such as YuuZoo, it has not gone after bigger companies in the same way. Tan disagrees. “I’m not sure that’s fair. It is quite important to stress that we are even-handed; we don’t distinguish between the big boys and the small boys.”

Carrots, too

SGX RegCo is not all about sticks; Tan has dangled the occasional carrot as well. In April 2018, a “Fast Track” list was introduced. The 60 companies on the list — a second batch will follow soon — are deemed to have a good corporate governance record. When they have deals that require SGX’s green light, they will be given faster approval.

Still, Tan’s goal is for the market itself to play a bigger role. “What we are hoping to see is, as market discipline develops and becomes stronger, and together with our regulatory discipline efforts, we will have a more robust system.”

For instance, the recent rash of large-name M&As and privatisations has stirred up controversy, with a number of offers deemed “unfair”. Tan believes whether deals are fair to all shareholders is more of a commercial judgement than a regulatory matter. “What we try to do is make sure that the valuations are robust, so that shareholders as well as the market can make the judgements and you can see true price discovery,” he says.

Indeed, how a company’s assets are valued — with a certain level of assumptions — is not a 100% objective measurement. The inherent ambiguity, however small, has been exploited. In one notable example, ISR Capital tried to tack overinflated valuations to an asset it wanted to buy. Its share price surged in tandem with the acquisition process. This drew SGX’s scrutiny and the company was forced to eventually make do with a valuation of US$48 million instead of more than US$1 billion previously.

Similarly, Sabana Shariah Compliant Industrial REIT drew the ire of minority shareholders for acquiring assets at questionable valuations. That got them organised and while they failed in their bid to oust the real estate investment trust manager at an extraordinary general meeting, the CEO of the manager quit not long after.

Early this year, SGX RegCo tackled the issue of valuations by starting to work more closely with professional valuer bodies to introduce guidelines for both property and business valuations, and to also put in place a referral process so concerns can be flagged more easily.

Complete circle

On May 31, SGX RegCo will hold a regulatory symposium with the theme “The Market You Want”. Professor Tan Cheng Han, chairman of SGX RegCo, will be giving the opening address. Chew Chin Yee, head of regulatory development and policy at SGX RegCo, will give an update on the regulatory landscape.

There will be a panel discussion involving Lock Yin Mei, partner at law firm Allen & Overy; Ismail Gafoor, CEO of PropNex; Umakanth Varottil, associate professor at the National University of Singapore; Stephen Chen, a full-time retail investor; and Pearly Yap, senior portfolio manager at Eastspring Investments. The discussion will be moderated by Ben Paul, editor-at-large of The Edge Singapore. “We want to complete the circle of view, remind everyone what the function of capital markets and regulators is,” says Tan.

This story appears in The Edge Singapore (Issue 883, week of May 27) which is on sale now. Subscribe here

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