Helping S-chips regain their mojo

Singapore

CHINA companies seeking to raise funds by listing in Singapore will soon have to rope in state-owned enterprises (SOE) or mainland cornerstone investors, as Singapore Exchange Regulation (SGX RegCo) tries to win back the lost trust in S-chips.

For future initial public offer (IPO) applicants, the regulator will see if they have Chinese cornerstone investors, preferably institutional investors, and whether or not they are being brought in by Chinese investment banks.

Cornerstone investors are usually institutions that commit in advance to invest a fixed amount of money or shares in an IPO. They include sovereign wealth funds or state-linked investment vehicles and tycoons. The presence of this investor class is typically sought in markets like Hong Kong for their halo-effect on IPOs to entice retail investors.

However in Singapore, the move is part of the solution to what SGX RegCo believes is the crux of issue involving S-chips, Chinese companies listed in Singapore but with operations in the mainland.

This is namely the jurisdictional gap that makes it difficult to investigate fraud or governance failures that originate outside Singapore, and the enforcement challenge against culprits who remain in China.

"For Singapore-listed S-chips, it is complicated because of jurisdictional issues. We need the help of the Chinese authorities. We can't do it alone," Tan Boon Gin, chief executive officer of Singapore Exchange Regulation (SGX RegCo), told The Business Times (BT).

"The reality is the shareholders are in Singapore, they are not in China. We need to solve this issue of alignment of interest," Mr Tan said.

Once actively pursued by SGX in the late 1990s to boost Singapore's capital markets and to provide local investors the opportunity to tap China's economic growth, S-chips were often the darlings of investors on the exchange in the early 2000s.

But things went awry towards the end of the decade, resulting in a heartbreaking experience for many Singapore investors. Confidence in S-chips took a beating, thanks to a few black sheep. These included the default on loans by steelmaker FerroChina just weeks after announcing that its quarterly earnings tripled in 2008; the spectacular accounting intrigues in Sino Techfibre; and missing assets of China Sun Bio-Chem.

While the problem of S-chips are multi-faceted, the main grouse has been the lack of accountability and regulatory reach, ZICO Insights Law LLC's managing director, Yap Lian Seng, as well as counsel and deputy head of its China desk, Qiu Yang, told BT.

"To elaborate, the vehicle listed on SGX is typically a pure investment holding company, or you may call it a 'shell'. Any attempt to impose sanctions or regulatory penalties on the shell is likely to affect the innocent minority shareholders mainly based in Singapore adversely, while the majority shareholders who are usually the original owners remain free to continue their business as usual in China.

"It is an uphill task to enforce any regulatory sanction imposed by the Singapore authority against a responsible person for a breach of Singapore law while the offence was committed in China where, technically speaking, no Chinese domestic law is breached,'' they explained.

The tarnished reputation of Chinese companies listed overseas is not unique to Singapore. Many Chinese companies listed around the world are still beleaguered by a widespread lack of confidence among foreign investors and regulators.

When there is corporate malfeasance, Mr Tan reckons two things need to be achieved in order to get a good outcome: "One is the trading resumption, so we can recover value for shareholders. The other is to ensure the matter is properly investigated and if there is any enforcement action that needs to be done, it is done in China. These are the two outcomes we want."

Mr Tan believes that a state-owned enterprise (SOE) is well-placed to achieve the two outcomes in times of conflicts.

Dr Qiu and Mr Yap agree, and welcome SGX RegCo's proposed move.

"Chinese SOEs and/or large institutional investors' participation in the future Chinese companies' primary listing in Singapore will definitely help address to a large extent the issue of lack of accountability and regulatory reach.

"SOEs and large institutional investors typically have better defined operational advantages, better-structured internal control/risk management procedure and more willingness to comply for the sake of guarding their reputation. This will also give investors a certain level of assurance with regard to the quality and reputability of the Chinese company looking to list on SGX,'' they said.

Take the China Aviation Oil (CAO) saga as an example, they added. A key factor in CAO Singapore's successful rescue and restructuring after its trading on SGX was suspended is that CAO was part of a large state-owned enterprise in China. CAO's parent company voluntarily backed the restructuring plan, and was prepared to send its ex-CEO, the key man directly responsible for the crisis, back to Singapore to face the music.

More recently, the independent directors of China Fibretech, whose shares remain suspended from trading since November 2015, roped in six new shareholders, including a unit under Beijing State-Owned Assets Supervision and Administration Commission, which have agreed to fund a special audit and inject fresh funds to rejuvenate the S-chip.

Hopefully, with this in place and the tighter due diligence required of issue managers, more quality Chinese listings will be seen, and investors' confidence will return.