Published May 13, 2009

Time to review SGX's hybrid nature

By LYNETTE KHOO

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GIVEN the spate of corporate debacles among foreign listings here, particularly S-chips, there is dissatisfaction over the lack of closure in many instances where shareholders remain stuck with suspended shares.

Some envision a tougher and more proactive frontline regulator that is prepared to step in, investigate and penalise the culpable, and get things moving. But the reality is somewhat different.

The legal argument goes like this: SGX's powers are limited, as the higher powers reside with the Monetary Authority of Singapore (MAS) as a statutory regulator.

Some say that the MAS should then consider expanding SGX's powers. But it is unclear if that is possible, given SGX's hybrid nature as both a profit-driven commercial entity and a frontline regulator.

And it may also seem to some as a step backwards from the current disclosure-based regime to the merit-based regime that the Singapore market had so tried to move away from since 1998.

But more importantly, a key question that needs to be answered is this: Would SGX bite if given more teeth?

As things stand, SGX is seen by some market watchers to be reluctant to hit out hard at errant issuers. Despite having limited powers, SGX still has the power to embarrass through public censure. But it is a power that has been used sparingly.

A case in point was China Energy, where a private rap by SGX was turned into a public reprimand in order to 'set the records straight' after the company claimed it was not penalised by SGX after certain payments were found to have been made without board approval.

But since the review findings on China Energy were already made public by PricewaterhouseCoopers, SGX could have made its position clearer.

The Hong Kong stock exchange is seen to be exercising a firmer hand by regularly publishing statements on compliance decisions, including public criticisms of issuers that breach listing rules.

Some argue that since profit and loss is shared by both the regulatory and listing departments, tough decisions against issuers may be weighed against concerns about SGX's attractiveness as a listing platform.

And recent corporate scandals have again raised concerns over whether a demutualised exchange can effectively regulate the market.

Perhaps, the whole regulatory function should go to the MAS, leaving SGX to focus solely on the commercial objectives of attracting listings.

Of course, there are corporate finance players who feel that the present set-up is appropriate, as a regulator sitting next to the listing department may be more in touch with market realities.

This, in turn, raises the issue of whether the regulator is too close to the listing department of the exchange that it starts to think like the listing department.

Clearly, there is no one-size-fits-all solution. It would be great if a balance can be struck. But such an equilibrium is not easy to attain.

To be fair, SGX has sought to strike a balance between both the commercial and regulatory functions. The exchange has reiterated that its regulatory and commercial objectives are not divergent because it recognises that high regulatory standards are key to maintaining market integrity and confidence.

There is truth in that. But a disclosure-based regime also requires the highest standards of disclosure backed up by well-functioning company boards and a robust enforcement regime.

Enforcement over foreign listings remains an uphill task and the many S-chips here need to raise the bar in corporate governance to fit in well with a disclosure-based regime.

Also, not all beleaguered companies have the blessing of having strong independent directors and influential shareholders that could weigh in when something goes wrong.

In the case of China Printing & Dyeing, it was put under judicial management just one month after its CEO and deputy CEO absconded when the parent company went broke.

The swift resolution was probably brought about by the strong experienced hand of a chairman who followed through the process and travelled to China several times after the saga broke.

It may also be interesting to note that among the group's shareholders was New Horizon, which is 50 per cent owned by Temasek Holdings.

Some market watchers reckon that there was also strong government-to-government cooperation in the fiasco surrounding state-owned China Aviation Oil for its former CEO to be brought back to Singapore to face the law.

Without doubt SGX has played a major role in the healing process in some cases. Under its directives, special auditors are appointed and directors who intend to quit at the first sign of trouble are urged to stay on to stabilise the situation and uncover misdeeds.

But as a regulator, it may have to take a stronger line in its responses to corporate failures. Having wider powers may not be the complete answer. A separation of SGX's regulatory function from its market promotion function may be the approach to take. This may pave the way for tougher regulatory actions against errant issuers.