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Regulatory policy-making: shaped by feedback and long-term objectives, formed by due process
EVERYONE has a view on what is important and urgent when it comes to making policies. But the two should never be confused. For Singapore Exchange Regulation (SGX RegCo), the goal has always been to take action first where the outcome is undeniably far-reaching and where previous developments have shown that inaction, or the wrong type of action, can have long-lasting effects on the market.
Over the past three years, SGX RegCo has poured its energies into tackling three main issues: strengthening our gatekeeper role for the listing of companies on SGX, dealing with market misconduct, and enhancing the transparency of our decision- and policy-making. Market feedback has shaped our focus on these issues above all else. Our over-arching approach for the first two matters is to act pre-emptively so as to prevent wrongdoing and minimise harm to investor interest.
For example, in terms of trading misconduct, which caused the December 2013 rout of a number of low-capitalisation stocks and a multi-year decline in investor confidence and participation, our clear priority has been to prevent a repeat of such an incident. We have done so through a number of initiatives. The first was the fine-tuning of our "Trade with Caution" (TWC) alerts to state that signs of a potential false market had been spotted. This essentially discouraged retail investors from entering these stocks, thus foiling the plans of those behind the wrongdoing.
We have also taken this further by enlisting the help of member firms in the prevention of market misconduct. We have done so by launching the Trade Surveillance Handbook, which describes in great detail the type of market activity which may lead to wrongdoing such as spoofing, layering and marking the close. In addition, we have also released to each member firm a Member Surveillance Dashboard, which details trades of each of their trading representative (TR) or dealer which would have triggered surveillance alerts at the exchange. The provision of these details put members, TRs and dealers on notice that such activities are closely monitored. This can have a deterrent effect on potential wrongdoers. TRs and dealers can also in turn tell their customers to avoid such trading behaviour.
The Trade Surveillance Handbook, which has had a second series, is a public document and retail investors and members of the public can therefore access it. We have also spelt out in a Regulator's Column the factors that we will consider when taking a decision against false trading. The column provides out-of-bounds (OB) markers such as volume traded by an individual as a proportion of total market volume for the counter, thereby making it transparent to all market participants exactly what could get them into trouble. All these efforts have resulted in a 70 per cent decline in trading queries issued by the SGX surveillance team for unusual share trading over the past six months to June 30, 2018 from a year earlier. The Handbook, Regulator's Column and regular engagements with the media are among SGX RegCo's initiatives to bring more transparency and clarity to our processes and decision-making.
Turning now to an issue that is more current is the case for fine-tuning the delisting process for listed companies. Many have argued that SGX Listing Rules enable the delisting of a company to take place more easily than in other markets because controlling shareholders are not prevented from voting for a privatisation. Others have argued the prices are too low. It is important to understand why a number of other related matters must first be tackled before these issues are considered.
First is that SGX would have to deal with any potential self-regulatory organisation (SRO) conflict where our regulatory decisions might have been questioned in light of possible commercial motivations. It is only too easy to postulate that the SGX is making delistings more difficult in order to retain listings and prevent the erosion of the total capitalisation of the market. In other words, if we had rushed in and made delistings more difficult, we would have to answer for a potential SRO conflict. That would have been the case in 2016. Since then, an independent regulatory subsidiary, SGX RegCo, has been formed to address all conflicts situation such as this one. This allows SGX RegCo to then proceed with regulatory decisions and initiatives free of the possible profit-and-loss considerations the previous structure might have suggested.
Second is the risk of interested person transactions (IPTs) escalating ahead of a difficult delisting. Research has found that prior to a delisting proposal, controlling shareholders may resort to IPTs that serve to strip the company of its most valuable assets and businesses by, for example, buying assets and businesses from the company below market prices, thereby diverting value from the company. Such a situation would consequentially create a perception that the exit offer made by the controlling shareholder is higher than what it actually is, had the IPTs not taken place. One of the objectives of the public consultation we launched in late 2017 is to strengthen the framework for dealing with IPTs. The outcome of that consultation will depend on market feedback which SGX RegCo is currently evaluating.
REASONABLE DELISTING VALUE
Finally, there is the question of whether an exit offer for a delisting is fair and reasonable with regard to the valuation of the company and the comparison with recent market transactions. The rules only require that the delisting value be reasonable. While independent financial advisers are appointed to opine on the fairness and reasonableness of the offer, minority shareholders have often disagreed with the valuation offered for the company's shares in a delisting on grounds that the discount to net tangible asset is too high, or that the premium to the most recent trading price of the shares is too low. We have taken the first step in enhancing the valuation regime by collaborating with the Singapore Institute of Surveyors and Valuers (SISV) in the improvement of valuation methods and reporting. The SISV last month released its Practice Guide on Valuations for Reits and IPOs which contains input from SGX. We will now look into how the Guide and related matters such as the qualification of valuers can be included in the SGX Listing Rules. Any rule change will have to follow a due process including a consultation of the public.
It is important for me to make clear that any amendment to our rules will take time and require a public consultation process. The existing rules will unequivocally remain in place until any amendments are made; to do anything else will create market uncertainty and set an unhealthy precedent for all other proposed rule changes.
- The writer is the chief executive officer of Singapore Exchange Regulation