SGX suspends minimum-price rules, wants to add market-cap test

Singapore

THE Singapore Exchange (SGX) is suspending its minimum trading price (MTP) rules to consider the possibility of adding a minimum market capitalisation criterion.

Under its proposal, for which the market regulator is seeking public feedback, Mainboard-listed companies will no longer be added to the MTP watch list and face potential delisting simply because their six-month volume-weighted share price falls below 20 Singapore cents. Companies whose share prices are too low will be added to the MTP watch list only if their market capitalisation is also below S$40 million.

SGX is also proposing to lengthen the review frequency for both the MTP watch list and the Financial Entry watch list, which puts on notice companies with market caps of below S$40 million and which report three straight years of losses. The two watch lists will remain separate.

Assessing entry and exit from both watch lists will take place twice a year instead of quarterly under the proposal, in order to align the timing of the reviews with their six-month look-back periods.

The public consultation is open until Sept 23. If the proposals are accepted, SGX expects implementation to take place by June 2017.

During the consultation, SGX will not add any new entrants to the MTP watch list; the scheduled September review will therefore be put on hold for watch list additions.

Companies already on the MTP watch list will not face delisting while the moratorium is in place. If the proposals are implemented, companies that remain on the MTP watch list will have their cure deadlines reset to 36 months from the implementation of the new criteria; if the proposals are rejected, however, the clock for exiting will resume for existing MTP watch list companies once the moratorium is lifted.

SGX will continue to assess existing MTP watch list companies for exit eligibility based on current rules on a quarterly basis during the moratorium. The Financial Entry watch list will continue to operate as normal.

Under SGX's current rules, Mainboard-listed companies are placed on the MTP watch list if their six-month volume-weighted average price is below 20 Singapore cents when a quarterly review takes place.

A separate watch list, the Financial Entry list, is for Mainboard-listed companies that report three straight years of losses and whose market cap is below S$40 million.

Companies on either watch list have 36 months to resolve their status, or they could face delisting.

SGX cited the changes as an attempt to fine-tune the controversial MTP requirement. SGX chief regulatory officer Tan Boon Gin said in a statement: "The MTP requirement remains relevant to addressing the risks associated with lower-priced securities.

"We have been considering market developments and feedback in the implementation of the requirement and made refinements along the way. We are now proposing further refinements to make it more targeted and effective."

SGX said that an analysis of historical data showed that among the companies with a six-month volume weighted average share price of less than 20 Singapore cents, those with a market value of at least S$40 million "showed better liquidity characteristics and lower volatility" than those whose market cap fell below that threshold.

"This thus suggests that the market capitalisation test as an MTP entry criterion will complement the existing requirement to more precisely achieve the goal of reducing excessive speculation and potential manipulation," SGX said in a statement.

The moratorium will bring respite for an estimated 125 companies that are expected to be on the MTP watch list if the review were to take place as scheduled in September. Of those, 53 have already been on the list since it was created in March 2016.

If the new proposals were in place as at Aug 1, 16 of the 55 companies now on the MTP watch list would exit the list, including two that are expected to exit anyway in the coming September review, for having managed to raise their share prices sufficiently. Overall, 56 companies that are already on the watch list or with too-low share prices could benefit because their market cap is at least S$40 million.

However, 39 of the companies currently on the MTP watch list will not be able to exit the list simply by raising their share prices; they will have to raise their market caps as well.

The proposals received largely positive response from market observers and professionals.

Monetary Authority of Singapore assistant managing director of capital markets Lee Boon Ngiap said in a statement: "The MTP requirement was introduced in March 2015 to address the susceptibility of low-priced stocks to excessive speculation and market manipulation. This policy remains sound. We support SGX's latest proposals, which seek to refine the MTP watch-list criteria to achieve the same policy objective in a more targeted way."

David Gerald, president of the Securities Investors Association of Singapore, noted that market conditions have been tough since the MTP rules took effect earlier this year.

"Global economic conditions and the volatility in the markets have not been favourable...to achieve the 20 cents MTP rule. It is, therefore, encouraging to see the regulator taking a flexible approach by introducing another criterion, which no doubt will help companies not get into the watch list so easily," he said.

Lawyer Stefanie Yuen Thio of TSMP Law Corp, agreed that the changes would target the more susceptible segment of the market.

"I've always thought that the MTP was too blunt an instrument to regulate the market," she said. "First, a share price is a number and therefore subject to mathematical manipulation. In addition, share prices are always at the mercy of market forces. A share's trading price is not necessarily an accurate indicator of the quality of a company's business or management."

Lawyer Adrian Chan of Lee & Lee said the proposal will create a clearer distinction between the Main board and the junior Catalist board as market value plays a bigger role in watch list assessment.

"The Main board will be more quality, Catalist more caveat emptor," Mr Chan said. "It adds a lot of premium to the Main board."

As many others mentioned, the proposals will help to reduce an emphasis on share price and shift some focus back to the company's business, said lawyer Robson Lee of Gibsun, Dunn & Crutcher.

"A company with declining market cap can only achieve a sustainable and effective turnaround via a real improvement in its business fundamentals. Any quick fix without addressing the fundamentals and without breaking any listing rule can at best create a 'dead cat bounce' effect," he said.