Foreign listings pose challenges in regulatory enforcement and differences in applicability of Singapore company law
By MAK YUEN TEEN 17 October 2008
In 2005, Daka Designs (since renamed Carats) was caught in a scandal. A special auditor’s report on the company published in June 2005 alleged widespread fraud involving several directors. In October 2007, four former directors of the company were arrested by the Independent Commission Against Corruption (ICAC) in Hong Kong.
Daka Designs was a foreign company, incorporated in Bermuda, and listed in Singapore. The Singapore Exchange (SGX) defines foreign listings as those which have their principal place of business outside Singapore.
The Daka Designs scandal was interesting for two major reasons. First, unlike five other scandals which occurred around that time involving companies listed on SGX - ACCS, Auston, China Aviation Oil, Citiraya and Informatics - the enforcement action against the Daka Designs’ directors was taken by an overseas regulator.
Second, the time taken for enforcement action was unusually long - 28 months. In the case of the five other companies mentioned, the time between when the scandal was first disclosed and the filing of charges was between five months and 19 months. In fact, in the case of ACCS, CAO and Citiraya, most of the charges were filed within months. Singapore has often been held up as a model for other countries in terms of timely and effective enforcement actions, by organisations such as the Organisation for Economic Cooperation & Development (OECD).
As at September 2008, 312 of the 775 companies listed on the SGX (40 per cent) are foreign listings. Foreign listings can be companies incorporated overseas, like Daka Designs, or in Singapore, like CAO. If they are incorporated in Singapore, they are subject to the Singapore Companies Act.
Foreign listings, regardless of country of incorporation, are subject to the Securities and Futures Act, and all such companies with a primary listing here also have to comply with SGX listing requirements.
Aside from possible differences in applicability of Singapore company law between foreign and local listings on the SGX, there are also greater challenges in regulatory enforcement in the case of foreign listings, as the Daka Designs case starkly illustrates. Laws are only useful if they can be effectively enforced.
Further issues raised
The recent ruling by High Court Judge Belinda Ang in the Bio-Treat case, as reported in ‘Ex-chairman of Bio-Treat fails in court appeal’ (BT, Oct 6), appears to raise further issues regarding the ability to effectively enforce laws for foreign listings.
In the Bio-Treat case, the former executive chairman had filed a lawsuit alleging that several of Bio-Treat’s directors had conspired to defraud him and his wife of their stakes in the company and the proceeds from the share disposals.
Bio-Treat was incorporated in Bermuda. The judge was of the view that Hong Kong was the more appropriate forum to hear the lawsuit for the following reasons:
# The alleged wrongful acts could only have been committed in substance in Hong Kong, the alleged discussions relating to these acts took place in Hong Kong, and any relevant documents would have been executed there.
# Any losses that could be incurred by the plaintiff would have been suffered in Hong Kong.
# None of the defendants or plaintiffs are Singaporeans.
It is unclear what variations in the above circumstances might have changed her ruling. For example, if the plaintiff was a Singaporean, and the other facts had remained the same, would she still have concluded that Hong Kong was the right place to hear the lawsuit?
Regardless, it is highly probable that any wrongdoing involving foreign listings will involve largely the same circumstances as the Bio-Treat case because foreign listings, by definition, have their principal place of business outside of Singapore.
The Bio-Treat case would appear to further confirm the enforcement challenges regarding foreign companies listed here. It would appear to suggest that legal actions involving such companies will generally have to be taken overseas.
The cases of Daka Designs and Bio-Treat have potentially serious implications for investors in foreign companies listed in Singapore. The barriers against effective enforcement actions for foreign companies create moral hazard. If enforcement actions are difficult, it could encourage foreigners with less than honourable intentions to seek to list companies here, knowing that if they commit any wrongdoing, they will not be charged in Singapore. Although legal actions can still be pursued overseas, especially with the cooperation of foreign regulatory authorities, the cost and difficulty of such actions would likely be much higher.
Further, few countries have legal systems that are as effective as Singapore. Even if enforcement actions can be taken here, there is still the issue of whether Singapore regulators would be able to extradite the wrongdoers to face such actions. Investors would need to take this into account when deciding whether to buy shares in foreign listings.
Regulators should also seriously consider if it is necessary to have a different regulatory regime for foreign listings. With the introduction of the Catalist board and the requirement for such companies to have sponsors, we already have a dual regulatory regime on the SGX. While I applaud the recent enforcement action against directors of the listed Singapore company Chua Soon Huat, I also wonder if similar enforcement action would have been possible if it had been a foreign listing.
I believe that regulators should consider increasing the level of scrutiny of foreign companies before they are admitted for listing in Singapore, perhaps even something close to the former merit-based regime.
To be fair, the SGX has been trying to diversify its foreign listings by attracting companies from a large number of countries, and also targeting larger companies. However, those initiatives are unlikely to address the issues which I have raised. Enforcement challenges will apply whenever a company has a principal place of business overseas. And the increasingly rich global history of corporate scandals tells us that crooks do not only run small companies. In fact, more will suffer when large companies fail.
While regulators may insist that caveat emptor applies to investors in foreign listings, there is a risk of significant reputational damage to the SGX and to Singapore’s reputation as a world-class financial centre if they do not exercise greater care in admitting foreign companies for listing.
The above cases, coupled with recent problems surrounding foreign companies such as Ferrochina and China Printing & Dyeing Holding, may make a review of the regulatory regime for foreign companies a matter of some urgency. Such a review, however, will not solve the problem of current enforcement challenges for foreign companies which are already listed here. Perhaps for these companies, it will have to be caveat emptor.
We may also need to rethink the benefits and costs of attracting more foreign listings, as opposed to more foreign investment, which is not the same thing. However, that will have to be the subject of another article.
The author is co-director of the Corporate Governance and Financial Reporting Centre of the National University of Singapore Business School and regional research director (Asia-Pacific) at Watson Wyatt Worldwide. The views in this article are his own
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Different Regime for Overseas Firms?
Foreign listings pose challenges in regulatory enforcement and differences in applicability of Singapore company law
By MAK YUEN TEEN
17 October 2008
In 2005, Daka Designs (since renamed Carats) was caught in a scandal. A special auditor’s report on the company published in June 2005 alleged widespread fraud involving several directors. In October 2007, four former directors of the company were arrested by the Independent Commission Against Corruption (ICAC) in Hong Kong.
Daka Designs was a foreign company, incorporated in Bermuda, and listed in Singapore. The Singapore Exchange (SGX) defines foreign listings as those which have their principal place of business outside Singapore.
The Daka Designs scandal was interesting for two major reasons. First, unlike five other scandals which occurred around that time involving companies listed on SGX - ACCS, Auston, China Aviation Oil, Citiraya and Informatics - the enforcement action against the Daka Designs’ directors was taken by an overseas regulator.
Second, the time taken for enforcement action was unusually long - 28 months. In the case of the five other companies mentioned, the time between when the scandal was first disclosed and the filing of charges was between five months and 19 months. In fact, in the case of ACCS, CAO and Citiraya, most of the charges were filed within months. Singapore has often been held up as a model for other countries in terms of timely and effective enforcement actions, by organisations such as the Organisation for Economic Cooperation & Development (OECD).
As at September 2008, 312 of the 775 companies listed on the SGX (40 per cent) are foreign listings. Foreign listings can be companies incorporated overseas, like Daka Designs, or in Singapore, like CAO. If they are incorporated in Singapore, they are subject to the Singapore Companies Act.
Foreign listings, regardless of country of incorporation, are subject to the Securities and Futures Act, and all such companies with a primary listing here also have to comply with SGX listing requirements.
Aside from possible differences in applicability of Singapore company law between foreign and local listings on the SGX, there are also greater challenges in regulatory enforcement in the case of foreign listings, as the Daka Designs case starkly illustrates. Laws are only useful if they can be effectively enforced.
Further issues raised
The recent ruling by High Court Judge Belinda Ang in the Bio-Treat case, as reported in ‘Ex-chairman of Bio-Treat fails in court appeal’ (BT, Oct 6), appears to raise further issues regarding the ability to effectively enforce laws for foreign listings.
In the Bio-Treat case, the former executive chairman had filed a lawsuit alleging that several of Bio-Treat’s directors had conspired to defraud him and his wife of their stakes in the company and the proceeds from the share disposals.
Bio-Treat was incorporated in Bermuda. The judge was of the view that Hong Kong was the more appropriate forum to hear the lawsuit for the following reasons:
# The alleged wrongful acts could only have been committed in substance in Hong Kong, the alleged discussions relating to these acts took place in Hong Kong, and any relevant documents would have been executed there.
# Any losses that could be incurred by the plaintiff would have been suffered in Hong Kong.
# None of the defendants or plaintiffs are Singaporeans.
It is unclear what variations in the above circumstances might have changed her ruling. For example, if the plaintiff was a Singaporean, and the other facts had remained the same, would she still have concluded that Hong Kong was the right place to hear the lawsuit?
Regardless, it is highly probable that any wrongdoing involving foreign listings will involve largely the same circumstances as the Bio-Treat case because foreign listings, by definition, have their principal place of business outside of Singapore.
The Bio-Treat case would appear to further confirm the enforcement challenges regarding foreign companies listed here. It would appear to suggest that legal actions involving such companies will generally have to be taken overseas.
The cases of Daka Designs and Bio-Treat have potentially serious implications for investors in foreign companies listed in Singapore. The barriers against effective enforcement actions for foreign companies create moral hazard. If enforcement actions are difficult, it could encourage foreigners with less than honourable intentions to seek to list companies here, knowing that if they commit any wrongdoing, they will not be charged in Singapore. Although legal actions can still be pursued overseas, especially with the cooperation of foreign regulatory authorities, the cost and difficulty of such actions would likely be much higher.
Further, few countries have legal systems that are as effective as Singapore. Even if enforcement actions can be taken here, there is still the issue of whether Singapore regulators would be able to extradite the wrongdoers to face such actions. Investors would need to take this into account when deciding whether to buy shares in foreign listings.
Regulators should also seriously consider if it is necessary to have a different regulatory regime for foreign listings. With the introduction of the Catalist board and the requirement for such companies to have sponsors, we already have a dual regulatory regime on the SGX. While I applaud the recent enforcement action against directors of the listed Singapore company Chua Soon Huat, I also wonder if similar enforcement action would have been possible if it had been a foreign listing.
I believe that regulators should consider increasing the level of scrutiny of foreign companies before they are admitted for listing in Singapore, perhaps even something close to the former merit-based regime.
To be fair, the SGX has been trying to diversify its foreign listings by attracting companies from a large number of countries, and also targeting larger companies. However, those initiatives are unlikely to address the issues which I have raised. Enforcement challenges will apply whenever a company has a principal place of business overseas. And the increasingly rich global history of corporate scandals tells us that crooks do not only run small companies. In fact, more will suffer when large companies fail.
While regulators may insist that caveat emptor applies to investors in foreign listings, there is a risk of significant reputational damage to the SGX and to Singapore’s reputation as a world-class financial centre if they do not exercise greater care in admitting foreign companies for listing.
The above cases, coupled with recent problems surrounding foreign companies such as Ferrochina and China Printing & Dyeing Holding, may make a review of the regulatory regime for foreign companies a matter of some urgency. Such a review, however, will not solve the problem of current enforcement challenges for foreign companies which are already listed here. Perhaps for these companies, it will have to be caveat emptor.
We may also need to rethink the benefits and costs of attracting more foreign listings, as opposed to more foreign investment, which is not the same thing. However, that will have to be the subject of another article.
The author is co-director of the Corporate Governance and Financial Reporting Centre of the National University of Singapore Business School and regional research director (Asia-Pacific) at Watson Wyatt Worldwide. The views in this article are his own
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