Published August 24, 2009

SGX may force lifting of veil on pledged shares

Requirement is among several new rules under consideration in light of recent experience

By JAMIE LEE
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(SINGAPORE) Controlling shareholders may in future be forced to disclose any significant share pledges they have made, based on new regulations now being studied by the Singapore Exchange (SGX).

Such shareholders may also have to custodise their shares in Singapore, said SGX chief executive Hsieh Fu Hua, who was speaking at Invest Fair 2009 on Saturday.

A controlling shareholder - defined as someone who owns at least 15 per cent of the total number of issued shares - must inform investors of the pledged shares if the amount is large enough to prompt a change in control.

This can mean that if a controlling shareholder has pledged shares translating to at least 30 per cent of the firm, he may have to make an announcement. Under current rules, a mandatory takeover offer is triggered when an investor's stake in a listed company hits 30 per cent.

These controlling shareholders must also disclose their share pledges if the seizure of such shares may cause a breach of loan covenants by the company.

This would apply regardless of the size of the loan covenants, SGX's head of issuer regulation Richard Teng told BT.

The company can emphasise that it is not a material event if the share pledge is related to a small loan, Mr Teng added.

In comparison, in the UK, Financial Services Authority rules state that company directors must not deal in any of their company's shares - including shares as collateral against loans - without the approval of the chairman. Directors must also notify the company of share transactions that mainly benefited them and that had a material impact on their interests in the company.

SGX's proposed move follows a recent slew of cases involving S-chips in which controlling shareholders had pledged their entire stake in the company for personal loans and then risked losing control of the company when they failed to pay up.

At Sino-Environment Technology, chairman and chief executive Sun Jiangrong lost the 56 per cent control that he held in the company after he used his shares as collateral for a loan but could not repay in full. His shares were then sold.

Mr Sun's loss of control triggered an early redemption of $149 million in convertible bonds, which the company has defaulted on.

China Sky Chemical Fibre CEO Huang Zhong Xuan also pledged half of his 38 per cent stake in the company to secure personal loans from two lenders. One of the lenders has demanded payment, threatening to sell the pledged shares if the loan is not repaid.

At Beauty China Holdings, founder and chairman Wong Hon Wai pledged his 39 per cent stake to secure credit facilities and later saw his stake cut to about 30 per cent in a series of forced sales. He also tried, but failed, to sell the remaining shares.

Issues over pledged shares are not limited to S-chips. Former group president of Jade Technologies, Anthony Soh, tried to buy up the company but pulled out suddenly after a large chunk of his Jade shares - which were used as collateral for a loan - were force sold by Merrill Lynch. Mr Soh has been censured by the Securities Industry Council for being 'far too casual' in approaching his obligations as an offeror.

Mak Yuen Teen, co-director at the National University of Singapore's Corporate Governance and Financial Reporting Centre, fully agreed that pledged shares should be disclosed.

'The reality is that when it comes to controlling shareholders, it is difficult to separate their personal dealings from the firm's fortunes,' Prof Mak told BT.

Lee Suet Fern, managing partner of Stamford Law Corporation, said that investors have a right to know of these share pledges since they could cause 'a sudden unplanned change in control of the company'.

'This must be a risk that the public would want to factor in before investing in any particular company.'

Co-head of Kim Eng Capital's corporate finance Ding Hock Chai said that such disclosure must not be 'overly burdensome' such that major shareholders lose the motivation to list here.

'You don't want shareholders making announcements every day when there are small margin calls,' he added.

SGX has also proposed that controlling shareholders have their shares custodised in Singapore. This indicates that shareholders would have to hold their shares under the Central Depository here and means that the legal responsibility for the securities is held locally.

'During an investigation of irregularities involving the controlling shareholder, there would be greater regulatory purchase over them,' said Mr Hsieh at Invest Fair, which is co-organised by online trading platform ShareInvestor and The Business Times.

But while the idea of having shares kept in Singapore is appealing, an effective implementation is less straightforward, said Prof Mak, noting that a more detailed study is necessary.

As these proposed changes extend to the Companies Act, they would need to be approved by other authorities such as the Monetary Authority of Singapore.