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Some thoughts on the New Silkroutes incident and MTP
There was a large hue and cry in the local stock market on Wednesday this week when someone sold 51m New Silkroutes shares at the pre-consolidated price of around 1.5c each. To comply with SGX's minimum trading price (MTP) requirement the company had consolidated (or reverse-split if you prefer) its shares in the ratio of 500 into one, which meant that they should have traded for around 50 cents each after consolidation. I can only imagine the chaos and massive losses that would have ensued if the exchange had not cancelled the trades!
What this fiasco illustrates is that when a company consolidates its shares, there should be some kind of signal to investors to be careful and to check exactly how many shares they own before trading. As I suggested in a Hock Lock Siew column a few weeks ago, one way would be to delay trading for a while on the first few days post-consolidation so that the market is alerted to the fact that something has changed. Either that, or a marker or highlight could be placed next to the stock on dealing screens and other terminals to prompt the market to exercise care.
This way, mistakes like that which occurred this week with New Silkroutes should be avoided.
The other issue is of course, the rationale for MTP in the first place. Ciritics have used this incident as ammunition against the initiative, saying that it only goes to show MTP's failings. I don't agree, I think it only goes to show that the market is still relatively inefficient/ignorant. The onus really is on shareholders to follow corporate developments and to take note of significant dates like when their shares are being consolidated. If they then sell the wrong quantities, it really is their own fault. Yes SGX can help by following the recommendations above but it really is up to individual investors to know what they are doing since companies provide them with all the notices when performing consolidations.
As to the effectiveness of MTP, I'd say the jury is still out. The scheme is still in its infancy so I hope critics show a bit more patience. The motivation behind it is sound and if everyone endorses it and works towards making it succeed, I think it will turn out to be a worthwhile effort.