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Enforcement takes centrestage in regulatory outlook for 2016

Challenge has been growing in prominence since the 2013 penny stock saga.

Enforcement will dominate the regulatory limelight for Singapore's capital markets and listed companies in 2016 even as the rules continue to evolve, lawyers say.

ENFORCEMENT will dominate the regulatory limelight for Singapore's capital markets and listed companies in 2016 even as the rules continue to evolve, lawyers say.

The enforcement challenge has been growing in prominence ever since the 2013 penny stock crash raised questions about whether regulators could have done more to avert the disaster and to bring any perpetrators to justice. Investigations into the penny stock affair are ongoing.

The policy response has been far-reaching. Regulators' enforcement powers have been adjusted and, in certain important ways, increased. The Singapore Exchange (SGX) also has a new regulatory head in Tan Boon Gin, the former director of the Police Force's white-collar crime unit, the Commercial Affairs Department (CAD). Market players will be watching closely in 2016 to see what these changes will mean on the ground.

"Based on recent comments from the regulators at SGX, and the implementation of more wide ranging disciplinary powers, 2016 may see a continued emphasis on regulatory enforcement," said Stephanie Yuen Thio, joint managing director at TSMP Law Corp. "My hope is that this will raise standards of substantive compliance by companies, rather than lead to increased paperwork and a more technical mindset towards rule compliance."

One of the most fundamental changes in enforcement powers is the broadening of the Monetary Authority of Singapore's (MAS) investigative powers to be on par with the CAD, a move done in the hopes of raising the efficacy and efficiency of investigations.

"Historically, from a constitutional law perspective, the police have always enjoyed a particular status in terms of investigative powers, and the investigative powers of statutory boards were not so clearly enunciated," said David Chong, partner at Shook Lin & Bok.

Mr Tan, in his first year manning the watchtower at SGX, has also moved to improve the transparency of SGX's regulatory process. Beyond increasing the level of disclosure surrounding regulatory actions, SGX has also created three independent committees to handle listing, disciplinary and appeal cases, and added a section to the listing manual to clarify its disciplinary powers.

"It creates more certainty for issuers about what actions SGX can take," Mr Chong said of the mainboard listing manual's new Chapter 14. "It's being a bit more robust...I do see that SGX is trying to clarify and create more certainty with its issuer members about what SGX will do."

The possibility that some of SGX's regulatory functions may be shifted to an independent, non-commercial entity remains on the table. Key MAS officials have said in 2015 that there may be scope to review SGX's regulatory role, especially in light of the prospect of competing exchanges opening in Singapore.

Gibson Dunn partner Robson Lee was supportive of separating SGX's regulatory and commercial hats: "It is my hope that there will be policy and regulatory changes to concentrate the regulatory and enforcement divisions of the Singapore market within the MAS.

This may entail, for example, broadening the existing roles of the Securities Industry Council to include being the sole regulator of the Singapore securities market, similar to the Securities and Futures Commission of Hong Kong. Such policy and regulatory changes will enable the SGX to focus its resources to develop the liquidity and attractiveness of the local bourse to attract more foreign issuers with strong fundamentals and who are global brand names."

Minimum trading price

Beyond the enforcement issue, the market will focus on a number of regulations that have already been announced but will only take effect in 2016.

The big fuss over the minimum trading price is expected to continue into 2016, when mainboard companies will have to maintain a six-month volume weighted average trading price of 20 Singapore cents or be placed on a watch-list for possible delisting. SGX has already made a concession to companies that have undergone a share consolidation by extending the implementation date of the minimum trading price to September 2016 from March 2016 for them, but the requirement still draws considerable controversy.

"The minimum trading price requirement is likely to be the most challenging," Mr Lee said. "In the long run, the need to maintain the minimum trading price may affect an issuer's ability to raise capital through the issuance of new shares since doing so may lower the issuer's share price. There are also other practical challenges such as the potential costs in undertaking a share consolidation exercise, the potential difficulties in maintaining an issuer's share price if there is negative market sentiment concerning the issuer, as well as the possibility of investors holding odd-lots of shares following a share consolidation exercise, which may impact their ability to exit from their investments."

A second wave of amendments to the Companies Act will also take effect in 2016. Some of the key changes will include allowing nominee shareholders like the Central Provident Fund to appoint several proxies so that the effective stakeholders in a company can attend shareholder meetings; allowing dual-class shares for public companies; and extending the permitted forms of loans to directors.

"These amendments should bring our company law more in line with the 21st Century," Ms Yuen Thio said.

Comply or explain

The "Comply or Explain" system that Singapore has adopted for the Code of Corporate Governance will also come under scrutiny.

From a practice perspective, the Code's recommendation that independent directors occupy at least half of board seats when the chairperson and chief executive are the same person or where their interests are substantially aligned will take effect from May 1, 2016. That could pose a challenge for some family-controlled listed companies.

"One of the difficulties Singapore has always faced with regards to board composition is the dearth of suitable candidates," Mr Chong said. "There's a very small pool of candidates who make themselves available."

SGX has also commissioned a study to look into how well companies explain non-compliance with the governance guidelines, even as it is urging companies to avoid boilerplate language.

"We won't start seeing many of the changes in annual reports until 2016," Mr Chong said. "One of the things the guidelines stipulates is to avoid template language. Many annual reports are just recycled in a sense, so the guidelines are the right step forward."

The exchange is also in the midst of elevating sustainability reporting from its current voluntary status in Singapore to a comply-or-explain regime. SGX has said it expects to have the new guidelines in place for reporting in financial year 2017.

Robust pipeline

The bond market could also benefit from rules that will make it easier for retail investors to buy corporate bonds from high-grade issuers.

Proposals for a "seasoning" framework that will allow issuers to offer existing wholesale bonds to retail investors and for an "exempt" issuer system to let retail buy directly from a high-grade issuer have already been announced and are expected to come into effect in 2016, Mr Lee said.

"While the debt market in Singapore has continued to grow, corporate issuers have traditionally targeted institutional and accredited investors in bond offerings," Mr Lee said. "Few issuers have tapped the retail market for funding due to the higher compliance costs associated with prospectus requirements. With growing interest in retail bonds, these changes are likely to encourage more retail offerings in Singapore."

The Securities Industry Council (SIC) is also expected to tweak the Takeover Code, but mainly to codify existing precedents, such as the auction process used in the 2012 takeover battle for Fraser and Neave. While that change will have little immediate impact, because the auction was such an unusual process, putting it in the Singapore rulebooks will be of interest to markets around the world, Mr Chong said.

"I think it's absolutely the right thing to do for Council to attempt to codify it. It would be Singapore's contribution to the global mindshare on tender offers," Mr Chong said.