SGX to firms: Factor in prevailing conditions when making disclosures

Singapore

WHEN in doubt - disclose. That was the key message delivered by Singapore Exchange (SGX) chief regulatory officer Tan Boon Gin in an address to company directors on Tuesday.

"The fundamental determinant of materiality is whether the information will be useful to your investors in making their decisions. And the cardinal rule is - when in doubt, disclose," Mr Tan said in prepared remarks at an event organised by the Singapore Institute of Directors.

Listed companies should consider prevailing economic conditions in determining whether a piece of information is material and should be announced, and boards should err on the side of disclosure when there is doubt, he advised.

In the wake of criticisms about Swiber Holdings' disclosures leading up to its winding-up application, which Mr Tan alluded to but did not specifically mention, Shenton Way's sheriff said that companies should not adopt an overly narrow or prescriptive definition of materiality.

"When the industry is humming along, the macro-economic environment is stable, and there is no real volatility in your business, what might be considered material could be quite different from information investors might need when your industry is going through extreme volatility and/or a protracted down cycle, such that the financial position of your company is at risk of deteriorating quickly."

In adverse economic conditions, companies may need to inform shareholders about delays in large projects on their order books. Letters of demand may start at small amounts, but could escalate quickly if banks are overexposed to a particular sector or cross-defaults are triggered. Timely disclosure is therefore important.

Mr Tan sought to clarify SGX's role in companies' financial health.

While SGX can and does ensure that companies are in a healthy financial position when they are seeking to make an initial public offering on the exchange, once a company is listed, its financial strength is a matter for the company, its board and its shareholders to look after. SGX's role after a company has listed is mostly in terms of ensuring that the issuer meets disclosure requirements.

"Our review of financials post-listing therefore focuses on whether the company has provided the disclosures required under the listing rules rather than the company's financial health. I want to state in no uncertain terms that SGX will strictly enforce compliance with this requirement as it is fundamental to our disclosure based regime."

While SGX will use its full array of enforcement options to ensure that disclosure rules are being followed, the exchange would rather prevent lapses before they happen, Mr Tan added. "Our preference as always is to take preventive measures. SGX will query the company and require a public response to tease out material information where necessary."

Nevertheless, companies should not depend on SGX's nudges to fulfil their obligations.

"The listing rules require companies to make an immediate announcement where these events lead to them facing a cash flow problem," Mr Tan said. "While SGX can and indeed has posed queries to companies on disclosures, to wait for such queries, rather than disclose with full transparency, is venturing into dangerous territory."

Lawyer Adrian Chan of Lee & Lee, who sits on the boards of a number of listed companies, said that the need to disclose a piece of information is necessarily subject to a qualitative test, not a quantitative one.

"Probably with good reason, as it is difficult to measure the impact of all possible events or circumstances by a numerical test as some consequences cannot be easily assessed, some may not have an immediate financial impact and some just cannot be readily pigeon-holed at all."

He agreed with Mr Tan's exhortation to disclose when in doubt. "The truism does hold true - when in doubt, directors should err on the side of caution and disclose. In a disclosure-based regime, this is the bedrock to ensure that there is a level playing field for all capital markets participants, and Boon Gin's reminder is a timely one for us all."