Tuesday 23 June 2009
Important to guard against overreaction
In Singapore, regulatory authorities are also under pressure to tighten the rules following a disconcerting rise in the number of China-based corporates - or S-chips as they are popularly known - which are reporting accounting irregularities that have cast doubt on whether these firms can continue as going concerns.
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Important to guard against overreaction
23 June 2009
Whenever calamity strikes and investors lose lots of money, the inevitable finger-pointing that follows will usually lead to the public demanding tighter government regulation. So it is that in the aftermath of the US banking collapse, the US government last week responded with sweeping proposals to give its central bank, the Federal Reserve, greater powers to oversee large financial institutions that are deemed too large to fail.
In Singapore, regulatory authorities are also under pressure to tighten the rules following a disconcerting rise in the number of China-based corporates - or S-chips as they are popularly known - which are reporting accounting irregularities that have cast doubt on whether these firms can continue as going concerns.
In addition, S-chips have been tainted by allegations that many had few assets and no major businesses to speak of originally, but had their assets inflated and books cooked by corporate finance ‘experts’ from Singapore to accelerate their listing on the local exchange.
Also being debated in local circles is whether major shareholders should be made to publicly disclose when they pledge their shares as collateral for loans. Opponents of disclosure say it would be an invasion of privacy, while proponents say it is material information in the public interest because if there are defaults, the resultant forced-selling has an adverse effect on share prices.
In all cases in which greater regulation is called for, there is a danger of overreaction. It is important to note that it is only because of a severe bear market over the past two years that there is now a clamour for more rules and greater protection; throughout the best part of two decades previously, everyone was happy with the benefits that deregulation brought.
In the United States, there is valid concern that the new proposals, radical as they are, would impair the Fed’s independence and adversely influence its ability to achieve its primary goal of price and economic stability via monetary policy. More regulation - at least at the central bank level - may not necessarily be the way forward and, hopefully, a judicious middle ground will be found after the proposals are thoroughly debated in Congress.
In Singapore too, regulatory authorities must guard against overreaction while simultaneously ensuring the public interest is safeguarded. Singapore’s corporate sector is small and the stock market, out of necessity, has to rely heavily on foreign listings to sustain growth. In the past few years these have been mainly S-chips.
But there should realistically be no geographical limitations as to who can list here. Tighten too much and potential foreign listings will surely look elsewhere and the local market will lose out; loosen too much and the risk of failures could rise as quality slips. This then is the quandary in which regulators find themselves today. While there are no hard and fast answers, it would be prudent to bear in mind that any changes have to be consistent with the disclosure-based framework that has been carefully installed over the past decade.
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