Governance code review, dual-class debate point to more changes in 2017

Singapore

IMPROVING access to products and capital while strengthening disclosure and accountability formed the main thrust behind a particularly eventful year for market regulations, and those themes are expected to remain dominant as the changes continue to come in 2017.

"2016 has been a busy year for regulations," Wong Partnership deputy chairwoman Rachel Eng said. "Against a fast-changing environment, the regulations initiated this year appeared to have tightened the compliance and governance requirements for financial institutions and licensed entities but relaxed some of the rules to offer investors a wider range of investment opportunities."

One of the most fiercely debated issues in 2016 was the introduction of the 20 S cent minimum trading price for mainboard companies. The change was aimed at improving market quality, but critics said it was too blunt of a tool that threatened to knock out innocent companies along with the undesirable ones. The Singapore Exchange (SGX) heard the cries, suspended the rule as it contemplated making tweaks, and has introduced an amended version that adds a market capitalisation test as another axis of assessment.

"The new changes encourage companies to make longer-term plans rather than focus on the three-month review," said Sin Boon Ann, Drew and Napier's deputy managing director of corporate and finance.

A proposal to allow the listing of dual-class shares looks primed to take over the crown of controversy in 2017, with strong voices on either side of the issue already making themselves heard. SGX is expected to launch a public consultation in the early part of the new year.

For Mr Sin, the dual-class share debate shines a spotlight on the question of how to ensure good governance and control. Options such as a class-action framework should be explored, he said.

"One of the key reservations about dual-class shares is that the minority is entrenched in control... The counter is that if the shareholder is not happy, they can always sell. But there's loss of shareholder value by that time, and shareholders suffer," he said. "I think the question of fiduciary duty and accountability on the part of the minority yet controlling shareholder must be raised."

The Code of Corporate Governance, which was last updated in 2012, is also set for a review, although the Monetary Authority of Singapore (MAS) has not provided any updates on timing. One matter that has already been highlighted is the question of how to improve board diversity. The Diversity Action Committee has already recommended that all companies should disclose their diversity policies, set targets and provide updates on achieving those targets.

Singapore's bond markets are also getting a closer look after a number of defaults and restructuring exercises in 2016. Already, private banks are now required by the industry practice code to disclose rebates that they receive from selling bonds.

The role of trustees might need some clarification as well, after some noteholders encountered problems in trying to accelerate their bonds.

"For the trustee to act on their behalf, they had to get a certain threshold percentage of noteholders to approve," Mr Sin said. "We need to be clear on how bond trustees should act."

Regulators are paying more attention to innovations and disruption. MAS has created a financial technology regulatory "sandbox" in which certain rules can be relaxed to facilitate experimentation, and new rules have been put in place to tighten and streamline securities crowdfunding.

"We are starting to see some initial activities in the crowdfunding space, but the amount of funds raised are currently small and this is unlikely to replace the fundraising on the public markets in the medium to long term," Ms Eng said.

A new bond seasoning framework also allows companies to sell retail bonds without a prospectus, as long as the bonds have already been listed for wholesale for six months, and a review of venture capital is in the works to explore lowering barriers to new venture fund managers.

Disclosure requirements are also being tweaked. Sustainability reporting on a comply-or-explain basis will kick in for currently listed companies for fiscal years that end on Dec 31, 2017 and after, which means that companies will have to begin putting systems in place to get ready for the change. SGX has also indicated that it is planning to review the current requirements for mandatory quarterly reporting to see if there is a way to ensure timely and accurate disclosures in less burdensome ways for companies.

Sustainability reporting will raise the profile of SGX companies among investors, who are increasingly paying heed to companies' environmental, social and governance efforts, Ms Eng said.

"There is now consensus all over the world that global warming is the cause for major climate changes," she said. "While the implementation of sustainability reporting will give rise to increased costs, it is imperative that companies gear up for this or risk being left behind by increasingly environmentally conscious investors."

The pace of change is something that market participants are acutely aware of.

"While it is challenging for individual investors to keep up with the pace, it is absolutely important and necessary for Singapore to ensure that the laws and regulations regulating our markets and our market participants keep pace with, or are ahead of, other markets," Ms Eng said.

Mr Sin, however, said that the new rules invariably come with a cost.

"Every layer of regulation costs the company," he said. "Everyone is for protecting investors, but are we also protecting businesses to allow them to compete out there."

Yet, there is no question that as markets change, so must the rules.

Said Ms Eng: "Governments all over, including Singapore, will need to be much more nimble in the way laws and regulations are used. For any breach or non-compliance that are extra-territorial, I would encourage governments to work together to locate and punish the culprits. On the positive side, in order to encourage innovation and creativity, governments should try to be courageous and visionary in providing waivers for noncompliance, or guidance for compliance, with the black letter laws."

Stefanie Yuen Thio, joint managing director at TSMP Law Corp, said there was an opportunity for Singapore to shine in today's volatile world. "With countries all over the world turning more nationalistic and protectionist, Singapore should take the opportunity to be the neutral, safe and well-governed international financial centre that is open for business," she said. "This will require us to strike a balance between enough regulation to maintain order but not so much that we become too expensive to do business in."