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MTP: Quality should be raised right from the listing stage
I wrote in a Hock Lock Siew column last week that SGX's minimum trading price (MTP) which kicks in next March may be painful to many people, but it's necessary to take the market forward since its goal is to raise the quality bar. I said that meeting the 20 cents MTP is not a static exercise but a dynamic one - if companies' shares drop below the MTP for a prolonged period, then they run the risk of a delisting. The onus is therefore on them to ensure they are profitable year-in, year-out, or if they are loss-making, then at least they are taking active steps to turn things around.
A reader emailed me to remind me of something that I should have included in that column - that quality should begin at the listing stage and that the exchange should ensure the quality bar is set reasonably high right from the start. The negative examples cited were S-chips, several of which failed because of poor governance and possible fraud. I agree totally, in an ideal world, only top-quality investment-grade companies should be allowed to list and take the public's money. Moreover, some of those failed S-chips were CPF-approved, and I wonder how much retirement money has been lost. So, yes the screening and admittance of companies to the mainboard should be more stringent. In fact, I'm pretty sure the exchange knows this and may already be working towards this goal. It won't always be possible to admit big names or sound companies and the occasional dud will slip through but this should be exception and not the norm.
I also understand the resistance to MTP - that in order to satisfy it companies have to undergo share consolidations which may prove to be cosmetic exercises in futility if the price once again drops below 20 cents. Critics have pointed out several real-life, current examples of firms which have consolidated their shares and seen prices drop again.
I believe SGX is prepared for this, and even the extreme possibility that companies may have to consolidate time and again. In essence, SGX is saying to companies "You can't expect to list, take the public's money and allow your shares to drop to 0.1 cent (which is the lowest permitted price) and to leave it there to languish for years on end. If you want to do this, you will run the risk of being delisted. So you jolly well get your act together and put into place plans to turn things around or else''.
It's an extreme form of financial Darwinism if you like, shape up or be shipped out. Of course there's always the option of downgrading to Catalist where there's no MTP yet but I think in time to come, even Catalist should have an MTP. Now there's a though eh - raise the quality bar for Catalist as well! And why not?