SINGAPORE (Aug 12): Tan Boon Gin, CEO of Singapore Exchange Regulation (SGX RegCo), believes that upholding the integrity of the local market should take the form of a neighbourhood watch, where members of the community trust and rely on one another to keep everyone safe from harm. According to him, it is “impossible” for regulators to “legislate chapter and verse against every single permutation of conflicts of interest”.
Speaking at the launch of the Singapore Governance and Transparency Index 2019 on Aug 7, Tan says it is time for stakeholders “closest to the ground” to begin playing a more active role. For instance, sponsor firms ought to ensure that Catalist-listed companies consider not just the form but also the spirit behind the rules governing conflicts of interest, he says. Other market stakeholders, such as the auditors, industry associations and other professional bodies, can also do their part, he adds.
“The result of this shift in thinking from ecosystem to community enables the whole mindset to change. Instead of focusing on the transaction in front of us and haggling over the technical rules, we can take a step back and think about the precedent we are about to set, the signal we are going to send to the rest of the market and the long-term impact on our shared goal of a safe and trusted community,” Tan says in his speech as the guest of honour.
As such, SGX RegCo plans to implement new measures that aim to enhance trust and increase collaboration between the stock regulator and market stakeholders, according to Tan. This will also target non-compliant companies and avoid burdening compliant companies unnecessarily with over-inclusive rules that apply across the board. This is because only a “small minority” of the 750 companies listed on SGX are non-compliant, he says.
“In order for us to do this, we need your help, to speak up, on behalf of everyone in the community, to put things in perspective and protect the community from misperceptions and mischaracterisations, and to offer a balanced view on policy issues relevant to corporates and the Singapore market as a whole,” he says.
So, what are these measures?
Partnering stakeholders
In a briefing on Aug 6, Tan told reporters that SGX RegCo will compel the sponsor firms of companies that encounter problems to respond immediately to its disclosure queries or notices of compliance. This is because sponsor firms are the first line of defence for Catalist-listed companies in terms of governance and oversight, he explains. The regulator will query the companies as well.
If the answers received are “not satisfactory”, Tan says SGX RegCo will conduct inspections on the sponsor firms to check if there are gaps in their processes that need to be rectified. Such inspections will span from work conducted at the IPO stage all the way to the company’s continuous listing obligations, he adds.
SGX RegCo will also work with issue managers. Tan says their role is crucial in conducting due diligence on the companies they bring to be listed on SGX. As such, the regulator is looking to expand its supervision on the due diligence process of IMs and the repercussions of failing to meet the standards set by SGX RegCo. “We have consulted on this, and the market can expect the new rules to be announced in the coming months,” he says.
That aside, SGX RegCo will work with the Association of Banks in Singapore to refresh its listings due diligence guidelines, which was last revised in 2016. Tan says it is now “timely” to consider further improvements, especially in the area of internal controls, and financial forecasts and projections.
Furthermore, SGX RegCo will work with independent financial advisers on guidance and standards in respect of their opinions on exit offers. In particular, the regulator will focus on standardising the methodologies for IFAs to determine whether an exit offer is “fair and reasonable”, and where an interested party transaction is concerned, if it is on “normal commercial terms”. “By doing this, we hope to achieve greater clarity and consistency for IFA opinions in general,” says Tan.
Of course, auditors are not to be left out. Tan says SGX RegCo has previously expressed its intention to increase the accountability of auditors. “So, you can expect over the next few months our public consultation on requiring a second auditor in certain exceptional cases, and the appointment of a Singapore-based auditor for listed companies in order to increase regulatory traction,” he says.
In addition, SGX RegCo will consult on a more robust regulatory regime for property valuations. This will include proposals to ensure property valuers are qualified by professional bodies and that valuation reports meet the standards, which are at least equivalent to the Singapore Institute of Surveyors and Valuers. “This is especially important for a market recognised as an international centre for real estate investment trusts,” says Tan.
Whistle-blowing and hearings
On its part, SGX RegCo intends to achieve several things. For one, more hearings against companies can be expected to be brought before the independent Listings Disciplinary Committee (LDC), says Tan. Three such hearings have already been conducted so far this year.
These hearings could result in the first enforcement actions and penalties under the more robust disciplinary action process that was introduced in October 2015, Tan says. This is important, as “wrongdoing must be punished and seen to be punished” to prevent erosion in market confidence, he says. The penalties meted out should also serve as a deterrent to others who may commit breaches against the listing rules, he adds.
While the duration of these hearings may not be a long-drawn affair, the outcome of these hearings will take time, as the proceedings are akin to a court procedure. In particular, extensive documents have to be prepared prior to hearing, and the hearing must be carried out in the presence of lawyers. The formal grounds of decision also have to be written and issued publicly by the LDC.
“The due process is robust and of a very high standard commensurate with the enhanced penalties the [LDC] can impose. In other words, the procedure and the conclusion will take more time in order for justice to be done,” Tan says.
Secondly, SGX RegCo will establish a dedicated whistle-blowing office. This is to assure the market that the regulator takes whistle-blowing seriously and is committed to following up on any information received, says Tan. The whistle-blowing office will be governed by a public policy that deals with, among other things, how it maintains the confidentiality of the information, he adds.
Recalibration of rules
Meanwhile, SGX RegCo will calibrate its market rules to achieve better efficiency. In particular, it will provide updates on the requirement for quarterly reporting, following its consultation with the market. According to Tan, the regulator initially required companies with higher market cap to release their financial statements every quarter because they have the resources to do so. However, upon feedback, SGX RegCo is now considering a risk-based approach as opposed to market cap size. “The framework is currently awaiting regulatory approval, and we target to announce it by the end of 2019,” he says.
SGX RegCo is also reviewing the minimum trading policy, which has resulted in an unintended consequence. Tan says the policy prompted some companies to consolidate their shares to achieve a higher price per share. However, the share prices of these companies subsequently fell, which further eroded their market cap. “We expect to receive a wide range of feedback to any consultations we do on MTP, and we are prepared to go as far as to remove the policy, if, based on the feedback, we feel this is the best way forward,” Tan says.
Finally, SGX RegCo will look into the default by issuers of retail bonds, which Tan acknowledges has become public concern. The regulator will seek public consultation and form a working committee — comprising of itself, industry professionals and investors — to improve disclosures and remedies in the event of a default. “For example, we will look at how investors can better organise themselves, provide more clarity on the role of the trustee, which is required for retail bonds, and, in the context of defaults, to see how investors can better exercise their rights,” says Tan.
