Commentary: SGX RegCo’s harder stance signals its independence

Date: May 2, 2018

First published in Straits Times on 2 May 2018

Over the past few weeks, the Singapore Exchange’s regulatory subsidiary RegCo has issued strongly worded notices of compliance to three listed companies – Midas Holdings, Datapulse Technology and YuuZoo Corp – while also releasing a regulatory announcement on Noble Group.

Most recently, it has also suspended trading in YuuZoo and then referred its concerns to the Commercial Affairs Department.

These interventions were found necessary by RegCo for a variety of reasons – for example, in Noble’s case, it was to urge a rethink of a controversial debt restructuring that could see shareholders lose their stakes if they don’t approve the plan; while in Midas’ case, SGX called for the resignation of two top executives and simultaneously banned them from holding similar positions for three years. Meanwhile, it has ordered Datapulse to appoint a truly independent financial reviewer to report on certain contentious actions that the company is taking and to deliver an evaluation on Datapulse’s internal controls.

The force and frequency of these actions – which have come in addition to routine queries to other companies on odd price movements – are unprecedented as far as the local market is concerned. More importantly, they should go a long way towards addressing longstanding criticism of SGX, namely that its regulation is not sufficiently independent of its commercial units.

This criticism first arose when the exchange was formed some 18 years ago as a listed entity and has persisted throughout its lifespan. The main objection has been that regulatory action tended to be arguably too light and sometimes too late, prompting accusations that the exchange was reluctant to punish its customers on whom it relies for revenue, though in SGX’s defence, much of the perceived reluctance and leniency was because the scope of its enforcement powers was probably not as wide as critics believed.

Still, greater independence, firmness and timeliness when it comes to regulation are essential and it was encouraging to see the authorities respond by forming RegCo last year as a separate, independent unit, and even more heartening to note the signal that is now being sent – strong regulatory action will be taken as soon as possible if RegCo sees fit.

The latest actions represent the logical evolution of the “risk-based” approach to regulation adopted by SGX many years ago that was born when the Corporate Finance Committee in 1998 signalled a shift from a merit-based to a disclosure-based regime and said that under the latter regime, the principal function of the exchange is to provide a fair, orderly and efficient market for the trading of securities.

In a February 2004 Practice Note, SGX then said that “greater regulatory attention would be focused on areas that pose significant risks and where market transparency, integrity or investor protection may be compromised if the risks materialise”.

In the case of the four companies on the receiving end of RegCo’s actions these past four weeks, most observers would agree that if the relevant issues are not addressed, risks could very easily escalate, orderly trading of their shares might be compromised and shareholders would be the losers.

Also in that practice note 14 years ago, the exchange said that in order to focus on risky areas, it would spend less or no time on routine paperwork such as circulars for takeovers, certain disclosures and changes in substantial shareholder interests. The announcement recently by RegCo of a Fast Track programme for companies with a good record of corporate governance to obtain quicker clearances for such low-risk areas is a welcome new development, as it not only rewards good corporate conduct but also complements the original intention of freeing up more resources for regulatory oversight.

An important component of that oversight process involves taking pre-emptive action when corporate governance lapses are identified and to deal with them as early as possible, instead of waiting until their effects are manifested, by which time it may be too late.

This arresting of the problem early is prudent and has been demonstrated by the exchange’s issuance of its Trade With Caution notices over the past two to three years. These were released as soon as certain trading anomalies were detected that indicated possible trouble later and, like the compliance notices issued this year, are akin to early warning signals that worked to reduce the risk of subsequent damage.

What all of this means for listed companies is that it is now even more important for them to take corporate governance seriously and to ensure they do not breach the Listing Manual, as they could fall foul of a RegCo seemingly more determined than ever to ensure companies comply.

They are also strongly advised to observe the Code of Corporate Governance, bearing in mind that the Code recommends that “there should be a strong and independent element on the Board, which is able to exercise objective judgment on corporate affairs independently, in particular, from Management”.

By its recent actions, RegCo has signalled that it too is independent of SGX, a development that, from a governance perspective, is clearly a step in the right direction. This must surely translate to improving the confidence of our investors in the market.

David Gerald
Founder, President & CEO
Securities Investors Association (Singapore)