Published March 19, 2009

Deter disclosure lapses with fines

By R SIVANITHY

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THE Singapore Exchange's reprimand of Neptune Orient Lines (NOL) for poor disclosure delivers a much-needed warning to all companies that when disseminating potentially price-sensitive information via public announcements, it is vital to be as open and transparent as possible in order to preserve market integrity and minimise investor uncertainty.

To have a lasting imprint ... it's better to have in place financial penalties for repeated or serious disclosure breaches.

In NOL's case, the company was deemed to have been too vague in a March 10 response to rumours of an upcoming rights issue that had placed its shares under tremendous selling pressure.

Because this response did little to quell the fund-raising speculation, NOL had to issue a second, definitive announcement on March 13 that it is not undertaking a rights issue. Its share price then recovered.

SGX said that NOL had breached Rule 703 and Corporate Disclosure Policy of the Listing Manual because its March 10 release was not sufficiently frank or explicit, nor did it make reference to the object of the rumour, which was a rights issue.

In other words, announcements have to be clear and as far as possible should say something, particularly when a specific rumour is circulating, or else a reprimand or public censure will be forthcoming.

This marks a significant step forward for the exchange since companies previously were allowed to make lengthy, carefully worded announcements that sometimes skirted the issues at hand.

More, however, can be done. Although the NOL reprimand and a March 11 declaration by the exchange that it is looking into whether information relating to certain fund-raising exercises was leaked are welcome, these moves should be viewed as being only the first steps in a tightening of the rules that should involve, above all else, stronger deterrent measures for repeat offenders or for serious breaches.

The Listing Rules should be amended to grant SGX a range of penalties, from a reprimand which is appropriate in NOL's case to punitive fines for more serious or persistent lapses. The reason for this is that reprimands, even those made publicly, are tantamount to just slaps on the wrist. True, they generate a fair amount of negative and unwelcome publicity for the company concerned and give the public relations machinery, lawyers and senior management a headache for a few days; but the market's memory of these things is usually short and in a couple of weeks, reprimands or censures are quickly forgotten.

To have a lasting imprint, both on the firms concerned and the market's memory, it's better to have in place financial penalties for repeated or serious disclosure breaches, possibly incorporating a scheme where the quantum can rise exponentially.

The Australian Securities and Investments Commission, for example, has penalties in place that progressively become more severe, starting from a private caution to public censure (a yellow card) and ultimately to monetary fines.

The latter depends on the company's market capitalisation, ranging from A$33,000 (S$33,200) for firms below A$100 million in size, to A$100,000 for entities with capitalisation above A$1 billion.

The UK regulatory framework also provides for fines in cases of tardy disclosure, though the sums can be much larger - in one case, although the errant company was found not to have acted recklessly or deliberately but merely coming to the wrong conclusion about what was material information to be properly disclosed, the fine was still a very painful £450,000 (S$959,500).

To the best of our knowledge, local listing rules do not currently provide for fines on companies that either seriously or persistently breach the disclosure rules, or at least if they do, SGX is not empowered to enforce them.

This is an omission that should be addressed as soon as possible in order to give the exchange teeth in its present drive to come down hard on disclosure breaches.