Published August 26, 2009

S-chip issues - crux lies in enforcement

By LYNETTE KHOO
Email this article
Print article
Feedback

THE wide-ranging measures proposed by Singapore Exchange (SGX) last week have driven home a strong message - that the exchange views the failure of issuers and the problems plaguing them with gravity.

Measures such as imposing disclosure of pledged shares and custodising shares of controlling shareholders have plucked right at the heart of issues plaguing S-chips (China-based companies listed in Singapore). It was also comforting to hear from SGX that there is no pervasive fraud risk relating to China companies.

But the jury is still out on whether this move will restore investors' confidence and prevent some issuers from entertaining thoughts to move to other stock exchanges offering better valuations.

This week, Sihuan Pharmaceutical's parent company, China Pharmaceutical, has decided to initiate a move to take Sihuan private, citing thin trading volumes. Just a few days ago, Z-Obee Holdings said that it was looking into the possibility of a dual primary listing on the Hong Kong bourse, shortly after China XLX filed its application for a dual listing there.

It is unclear if these are isolated cases or part of a wider trend of some S-chips seeking greener pastures. There have been market whispers that some S-chips are contemplating such a move if their valuations continue to stay depressed.

The two S-chips eyeing dual listing have cited as reasons a desire to gain access to two different equity markets, to widen their investor base and to raise share trading liquidity.

But there is some speculation that S-chips contemplating a dual listing in both Singapore and Hong Kong could eventually pull out of one stock exchange to avoid paying two separate listing fees. Such a decision would probably hinge on how well the S-chips' shares perform in Hong Kong and how soon Singapore would catch up in the valuation race. All eyes will thus be on how handicraft and furnishing maker Passion Holdings - the first Chinese IPO here this year - will fare on its debut next week.

The latest proposed measures by SGX are a welcome move to instil market confidence. But it would be presumptuous to assume things will look up right away for the S-chips sector. There remains lingering doubts over the listing compliance of some existing issuers and the problem of enforcement. One of the proposed measures is for new listings on the mainboard to appoint governance advisers for the first two years post-listing to help companies institute a robust framework of reporting accountability, internal controls and other components of good corporate governance.

It is good to have an extra pair of eyes on new listings, which are green in the ways of a listed company. Most S-chips tend to head for the mainboard instead of Catalist, which means that future new S-chips will need to appoint governance advisers.

But on practical grounds, it does beg the question of how effective the proposed measures would be for foreign listings. If independent directors here find it hard to oversee companies whose operations are mostly offshore, what more the governance advisers?

Corporate governance concerns about S-chips have not fully blown over yet. Of about 10 cases of listed companies with irregularities since the beginning of 2008, half are Chinese listings, whose problems are still largely unresolved.

At FibreChem, external auditors Ernst & Young could not finalise an audit of its trade receivables and cash balances for the year ended Dec 31, 2008. Until now, it is unable to report its financial results for fiscal 2008 and the two quarters of this year.

China Sun has also faced an accounting mess. But the services of its chairman appeared to be indispensable as after the independent directors suspended him for failing to attend a board meeting to explain missing cash, he was reinstated three weeks later, albeit with conditions.

In the case of Oriental Century, even after police reports have been filed by its board for the massive fraud perpetuated by its chairman-cum-chief executive, the question shareholders like to ask is the outcome of the investigation and the action to be taken.

The proposed measures by SGX are laudable and would strengthen corporate governance here. But enforcement over existing S-chip issues has to be part of the equation to restore faith in this market segment.

SGX's reiteration of high baseline standards as a frontline regulator is assuring, and has been demonstrated in its proactiveness with the planned measures. Having new rules to pre-empt future problems is a good thing, but the heart of the issue is still that of enforceability.