SINGAPORE (Dec 2): The Singapore Exchange RegCo, acknowledging that there are more effective ways to curb share price manipulation, has proposed to scrap the minimum trading price (MTP) framework that has been described by SGX itself as a “blunt tool” that needs to be refined.

“Market manipulation is a serious matter and we are always fine-tuning our regulatory tools to make them more targeted and efficient,” says SGX RegCo CEO Tan Boon Gin at a media briefing on Nov 27.

The MTP requirement of 20 cents was proposed in February 2014 in the wake of the penny stock crash, over which alleged masterminds John Soh Chee Wen and Quah Su-Ling are facing trial. About $8 billion in total market value vaporised in October 2013 upon the collapse of the three stocks involved — Blumont Group, LionGold Corp and Asiasons Capital (now Attilan Group).

In December 2016, the MTP framework was refined to add a market capitalisation criterion of $40 million to address concerns that ultra-low-priced shares were more susceptible to potential market manipulation.

Currently, companies on the SGX Mainboard are placed on the MTP watch list if their six-month volume-weighted average price (VWAP) is less than 20 cents and their six-month average daily market capitalisation is below $40 million. These companies have three years to improve their share price and market capitalisation, failing which they might be delisted. Some companies have consolidated their shares to meet the 20-cent requirement; others took the easy but ignominious way out: downgrading themselves to the secondary Catalist board instead.

SGX has opened a public consultation on its proposal from now till Dec 27 this year. In the meantime, no new companies will be added to the watch list until and unless it is determined that the MTP framework should be retained in its current form. Companies that are currently on the watch list may continue to exit under the existing criteria at the half-yearly reviews.

Better tools available

Tan says that in recent years, the regulators have put in place a more effective multi-stage approach to curb potential manipulation and police the perpetrators. For one, SGX would first issue public queries to a company when abnormal trading activity is detected, serving as the initial “red flag” to investors. This is followed by a “trade with caution” alert, should there be serious concerns on the abnormal trading activity. These second-level TWC alerts were refined in December 2015 to be more detailed and targeted, expanding to include details gathered from SGX’s review of trading activities.

In addition, earlier this month, SGX suspended trading accounts involved in suspicious trading activity that continues or recurs over a protracted period of time. SGX can also issue a so-called “notice of compliance”, compelling companies to take steps such as appointing special auditors.

Externally, SGX is working more closely with other regulators such as the Monetary Authority of Singapore and the Commercial Affairs Department. “Our approach to addressing market manipulation has evolved to be more pre-emptive and targeted,” says Lee Boon Ngiap, MAS assistant managing director. “It is timely for SGX RegCo to take stock and review the regulatory measures that are in place, including the MTP framework.”

SGX RegCo’s Tan says he is willing to listen to feedback and make changes along the way. “We’re always adding to our suite of enforcement tools, and the suite is constantly improving.”

The number of companies on the MTP watch list is not insignificant — 105 out of more than 700 companies listed on SGX. It cannot be assumed, however, that something is amiss with how they are conducting their business; since the list was started in 2016, 92% of these companies have not triggered any alerts.

“If you’re looking at this [MTP framework] as an anti-manipulation tool, then the best option is to have all the companies that are prone to manipulation on this list,” Tan says. However, he admits, the tool “has turned out to be overly inclusive, because a large majority of [the companies on the list] are not triggering alerts”.

Companies have expressed concerns about certain adverse effects of being on the watch list. For example, banks are reluctant to lend them money. “We have been receiving feedback of unintended consequences,” Tan says. “One of the things we realise is that once a company is placed on the watch list, it faces certain constraints.”

Worst of all, the threat of delisting looms over these companies, adding a bigger headache to an exchange that has seen quite a number of privatisation and delistings.

Champagne and kiss

Companies stuck on the watch list are cheering at the prospect of this regulatory change. Kenny Yap, the executive chairman of ornamental fish exporter Qian Hu Corp, claims that the company, which has been on the watch list since June 5, 2017, is operating better than what its dismal share price is reflecting.

Qian Hu reported earnings of $0.3 million for 3QFY2019 ended September, up 72% y-o-y. Its share price, however, closed at 15 cents on Nov 28, down 21% year to date. “The company’s fundamentals remain strong, and our shareholders are quite understanding as they realise our share price is certainly beyond our control,” says Yap.

Out of the three local banks that Qian Hu has dealings with, two brought up the watch list, asked some “disturbing” questions, but agreed to lend more money anyway after they got a better idea of the company’s strategy and were satisfied with its corporate governance, says Yap.

If the watch list is scrapped, Yap says he will celebrate with a bottle of champagne, and run out and “kiss anyone on the streets”. The way he sees it, the watch list has done enough damage. “Qian Hu was lucky to escape without much damage, but I can’t say the same about other companies,” he says.

Seafood producer Oceanus Group was placed on the watch list in December 2015 after the bulk of its abalone stock died. A long restructuring exercise and turnaround bid followed — the key of which was a recapitalisation that involved a massive quantum of new shares issued to creditors and new shareholders that included new CEO Peter Koh. That caused the company’s share price to collapse although its balance sheet strengthened.

“We recognise that the watch list serves as a red flag for investors to exercise caution when investing in such companies [and] also helps in keeping companies and their management teams accountable for their performance and future direction,” says Koh. However, he adds, one of the consequences is that investors may “immediately perceive companies on the MTP watch list to be ‘low quality’ companies, when in actual fact the low share price may be attributed to non-business-related factors”.

He says SGX RegCo should consider adding qualitative factors such as corporate governance and business fundamentals, both existing and near-term, as opposed to solely quantitative factors such as share prices, in its assessment for companies entering or exiting the watch list.

Short-term pain

According to SGX RegCo, there are commentators who prefer the MTP retained as a gatekeeper to ensure a certain standard in the Mainboard. “What we’ve learnt is that our tools need to be better calibrated. Compared with just a mere 20-cent threshold, the newer tools are better calibrated to a specific type of manipulation that SGX is trying to prevent,” says Tan.

“Overall, we believe that manipulation risk is sufficiently managed in our market,” he adds, citing an independent study conducted by CFA Society Singapore, a professional body of investment and fund management industry practitioners, which highlights that there is no evidence of broad-based manipulation on SGX based on data collected from 2011 to 2016.

Vocal corporate governance academic Mak Yuen Teen believes that the MTP framework is useful for keeping the SGX Mainboard at a certain level of quality. “I support [the framework] as there are far too many stocks with very low prices on the Mainboard, which has led to SGX’s commonly being referred to as a ‘penny stock market’,” says Mak, an associate professor of accounting at the NUS Business School.

Commenting on the effectiveness of the MTP rule thus far, Mak adds, “Do I see notices of compliance and queries as having reduced the risk of manipulation of stocks? My answer is no. I think they achieve different objectives. Is our market rid of the ‘penny stock market’ label? Clearly no, because most of the stocks on the MTP watch list have not been able to get out and have not been delisted yet.”

He is concerned that SGX appears to have “lost its nerve and is now having second thoughts” at the real prospect of a wave of delistings due to the strict criteria of the MTP framework.

An industry player who requested anonymity told The Edge Singapore that SGX should consider phasing out the MTP over time, given that the bourse has an active market surveillance team that utilises more direct indicators of potential market manipulation, including data analytics and algorithms.

Yee Chia Hsing, head of Catalist at CIMB Bank, says there are “no easy solutions” to fight market manipulation. “I think the real solution is to go back to fundamentals and for SGX to make it easier for these companies to find new investors and diversify into more profitable businesses,” Yee says. “Initially, the first batch of companies were happy to follow the rule and went ahead to consolidate their shares. Unfortunately for most of them, the move is seen as valuedestroying, with market cap dropping following the share consolidation.”

Mak, meanwhile, believes some tough love is needed to improve the market’s overall health. “We must be prepared [to accept] bitter medicine and short-term pain if we want to have a sustainable equity market in the long term,” he says.