Published April 6, 2009

Fixing the faults with foreign listings

By R SIVANITHY

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CHINA stocks listed here, or S-chips as they are popularly known, have come under unwelcome scrutiny in recent months following revelations of accounting irregularities, doubts over whether some can continue as going concerns (as expressed by their external auditors) and, in some cases, outright fraud.

In a regime which ultimately relies on companies and their agents to be transparent ... reprimands should be followed by hefty financial penalties and, in extreme cases, possible suspension of trading in the shares of errant firms.

To some observers, this only confirms suspicions held years ago that mainly second-rate foreign companies would list here, the better ones preferring instead to list either on their homeland's exchange or in the case of S-chips, in Hong Kong where valuations are usually higher.

Does this mean the Singapore Exchange (SGX) should rethink, or perhaps abandon the strategy of attracting foreign listings? No. Just as in the case of new instruments such as warrants, extended settlement contracts - and possibly options - the exchange has no choice but to press ahead or find itself left behind in a hugely competitive environment.

Yet, it's clear that somewhere along the line the system has cracked, allowing an alarmingly large number of arguably sub-standard S-chips to slip through the cracks. What might be the appropriate responses to patch these cracks?

On Friday, the exchange said that it has stepped up efforts to uphold its standards by constant reminders to market players about their roles. SGX has also stepped up its monitoring of the market and urged audit professionals to spend more time on high-risk areas like cash balances.

More, however, can be done. Assuming quality is an issue, our view is that steps should be taken to ensure foreign - not just China - listings are of a certain minimum investment-grade. Granted, the exchange has long moved away from its previous merit-based approach and does not have the resources to monitor the quality of potentially dozens of new foreign entrants every year, so a possible compromise is to extend the present Catalist-originated sponsorship requirement to all foreign listings for a minimum compulsory period, say two years.

This is because the sponsor framework recognises that the authorities have only a minimal role to play in deciding on the investment merits of a new listing, and that issues of quality are best left to market players or sponsors.

So it is that Catalist, formerly known as Sesdaq, now operates under this regime where sponsors bear the responsibility for introducing companies to the market and so have a vested interest in ensuring everything is - as far as possible - above board. Extending this scheme to foreign listings thus assumes that it is the sponsor - who would probably also play the role of underwriter for the public listing - who will perform the necessary checks and balances on the company, providing the public with at least some assurance that there would be no nasty accounting/governance shocks later.

The drawback of this suggestion is that the sponsorship scheme is proving unpopular with Catalist-listed firms, many of whom are dragging their feet over sponsor appointments either because of perceived high costs (around $90,000 per year) and/or a reluctance to have an additional level of oversight, on top of having to answer to the exchange and Monetary Authority of Singapore.

Making it mandatory for new foreign listings to have approved sponsors could therefore result in a drying up of new foreign entrants which would then be detrimental to SGX's strategy of building an Asian gateway, or so the argument goes.

The rejoinder to this is that if the public continues to perceive foreign listings as being mainly 'junk grade' (one wit recently referred to S-chips as 'scam-chips') then the strategy is under threat anyway, so why not try?

Other alternatives worth studying are whether foreign companies electing to list here should occupy a separate board where the listing rules are more stringent, possibly with regard to past profits and/or an expanded board of directors that includes more than the two local independent directors provided for under current rules.

Finally, a point made before in other columns - the need for the authorities to come down hard when the rules are breached, particularly for repeat offenders. In a regime which ultimately relies on companies and their agents to be transparent when their natural inclination is otherwise, reprimands should be followed by hefty financial penalties and, in extreme cases, possible suspension of trading in the shares of errant firms.