Companies should comply with SGX's MTP as soon as possible

FROM March 2, companies whose shares are listed on Singapore Exchange's (SGX) mainboard will have to comply with the requirement of a minimum trading price (MTP) of 20 cents for their shares. After a one-year grace period that extends to March 2016, companies that do not satisfy the MTP requirement will be placed on a watchlist for three years, during which their shares will not be eligible for investment under the Central Provident Fund Investment Scheme.

Beyond that, non-compliance with the MTP could result in a delisting, though this is likely to be a last resort as the option exists for a transfer to the second board, Catalist, where there is no MTP.

In an update this week, SGX pointed out the easiest means of meeting the MTP would be via share consolidations and urged companies with upcoming annual general meetings to use the opportunity to also hold extraordinary general meetings where the relevant shareholder approvals could be secured for such exercises.

Of all the measures proposed last year to improve the local stock market, the MTP is perhaps the most contentious. Critics argue that forcing companies whose shares trade below 20 cents to undertake a capital consolidation would be a waste of time as it is a cosmetic exercise that does not alter corporate fundamentals. If so, then all it does is render companies vulnerable to selling pressure and, in time, share prices will once again fail to meet the MTP requirement. Moreover, consolidations are expensive and reduce free floats, and this could then lead to lower liquidity.

These are valid worries, but the alternative is to persist with a market in which a large number of stocks trade at low absolute prices - as at Tuesday's close, of a total of 768 mainboard stocks, 248 or about one-third trade below 20 cents, including 157 or 20 per cent below 10 cents. This has led to the Singapore market sometimes being labelled a "penny" market, a description that implies cheapness and a lack of quality. Allowing such a reputation to persist would be a mistake as it adversely affects the overall market's valuation, which in turn has negative consequences for its capital-raising and capital-attracting abilities. Having an MTP would therefore be a first step in countering this reputation.

It would also align practices here with those in other developed markets such as the United States, where NYSE-listed firms have to observe an MTP of US$1 or run the risk of being delisted. There are also other benefits - the MTP can add greater precision to price discovery and as SGX noted in its update this week, higher-priced shares tend to enjoy more liquidity and are less susceptible to speculative bubbles - and hence volatility - and manipulation.

However, companies must also play their part by being more proactive in engaging the investment community if there's a danger of the price falling below the specified threshold. Brokers too should expand their research coverage to unearth undervalued gems and, in so doing, help raise the profiles of the lesser-known mainboard constituents. So far, the signs are encouraging - the exchange this week said that, of the affected companies, at least 80 per cent have said they are prepared to take the necessary steps to comply. The faster this is done, the better.