SGX should enlist China’s help and tighten own listing framework
Goh Eng Yeow 1 June 2009
It has been more than 10 years since the Malaysian government declared the trading of Kuala Lumpur-listed shares on the Singapore Exchange’s (SGX) then thriving Clob market to be illegal, as the Asian financial crisis brought the region to its knees.
But the SGX took this potentially lethal blow to regional stock market expansion in its stride, rebuilding itself into the Asian gateway for fast-growing regional companies to list here. It attracted 150 China based firms to list in Singapore, enabling them to raise much-needed capital to make the most of opportunities thrown up by the rapidly growing economy in China.
These counters, known as S-chips, quickly won the affection of local investors, wooing them with ‘sexy’ stories on how they planned to make the most of the huge consumer boom in China and its insatiable demand for everything from beverages to better-quality air.
In recent months, however, that love affair has turned a tad sour. As the region battles another financial crisis, accounting irregularities have emerged at numerous S-chips - causing investors to suffer considerable losses when the counters were suspended from trading.
Given the widespread following of S-chips - some have more than 15,000 shareholders each - it is a serious problem that needs to be tackled urgently. Granted, investors should understand that they should take the risks and rewards in their stride, as there is no ‘sure-win’ gamble when they make bets on S-chips.
But it is clear that any risks they face should be confined to those associated with the normal course of doing business, and not the accounting scandals now being encountered at S-chips.
As an example of what can go wrong, take the case of Singapore-listed China Sun Bio-chem Technology, which has about 6,000 shareholders.
In February, its auditors, PricewaterhouseCoopers, told the board they had discovered about 592 million yuan (S$126 million) missing from the company’s bank accounts. The auditors added that they were unable to find evidence to support the explanation provided by the company’s management that the money had been used to buy raw materials.
Its board then appointed KPMG to complete the audit, only for the new auditors to find that they were being stalled for various reasons, such as the truck, which was carrying data needed for the audit, being stolen while its driver was having dinner.
The subsequent boardroom tussle between China Sun’s chairman, Mr. Sun Guiji, and its independent directors only added to investors’ cynicism. The independent directors had suspended Mr. Sun as chairman after he ignored their summons to attend a board meeting in Singapore to explain the missing cash. But they reinstated him three weeks later, even though shareholders were still clueless on how the accounting mess was going to be sorted out.
China Sun is not the first S-chip to experience a showdown between its recalcitrant management and its independent directors. Five years ago, another S-chip, apple juice producer New Lakeside, had encountered similar problems when an interim audit showed it was running a huge loss only months after it was listed.
Like China Sun, the independent directors then voted to remove the managing director, citing mismanagement. But his hold on the firm was so strong that he was reinstated a month later. The managing director finally left the firm a year later after it experienced more losses - and after the firm’s major shareholder, an overseas Chinese investor, pumped in fresh capital and got down to running the business himself.
But it is too much to hope for a white knight investor to ride to the rescue each time there is an S-chip accounting scandal.
Such problems should also not be left to fester as they may undermine the integrity of the SGX as a marketplace with strong checks and balances in place to protect investors’ interests.
What then should be the appropriate course of action?
For a start, let’s recognise that there are limits to what local independent directors can do in a listed firm if its operations are overseas and the management is determined to stonewall them.
To safeguard its own reputation, the SGX and its regulator, the Monetary Authority of Singapore, should step into the breach and break the deadlock by enlisting the help of the relevant legal and regulatory authorities in Beijing.
True, there are those who believe that China Securities Regulatory Commission - Beijing’s equivalent of the United States Securities Exchange Commission - would not lift a finger to help foreign regulators as its scope is confined to regulating companies listed in China.
But China is an emerging economic superpower whose every action is watched closely. As its global investments grow, it would also want to safeguard them by ensuring that there is fair play both inside and outside its borders. Whether an accounting scam involves a mainland firm that has listed its operations in Singapore or Shanghai, the rule of law in China should be applied just as stringently when wrongdoers are identified.
The SGX could also use the current breather that comes from the recent drying up of new listings to think hard about how its listing framework can be further strengthened to regulate listed firms operating outside Singapore’s shores.
Rather than the ‘softly softly’ approach it adopted in the past, it may have to work out tougher enforcement measures to calm the jitters stirred up by errant S-chips.
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Tougher action needed on errant S-chips
SGX should enlist China’s help and tighten own listing framework
Goh Eng Yeow
1 June 2009
It has been more than 10 years since the Malaysian government declared the trading of Kuala Lumpur-listed shares on the Singapore Exchange’s (SGX) then thriving Clob market to be illegal, as the Asian financial crisis brought the region to its knees.
But the SGX took this potentially lethal blow to regional stock market expansion in its stride, rebuilding itself into the Asian gateway for fast-growing regional companies to list here. It attracted 150 China based firms to list in Singapore, enabling them to raise much-needed capital to make the most of opportunities thrown up by the rapidly growing economy in China.
These counters, known as S-chips, quickly won the affection of local investors, wooing them with ‘sexy’ stories on how they planned to make the most of the huge consumer boom in China and its insatiable demand for everything from beverages to better-quality air.
In recent months, however, that love affair has turned a tad sour. As the region battles another financial crisis, accounting irregularities have emerged at numerous S-chips - causing investors to suffer considerable losses when the counters were suspended from trading.
Given the widespread following of S-chips - some have more than 15,000 shareholders each - it is a serious problem that needs to be tackled urgently. Granted, investors should understand that they should take the risks and rewards in their stride, as there is no ‘sure-win’ gamble when they make bets on S-chips.
But it is clear that any risks they face should be confined to those associated with the normal course of doing business, and not the accounting scandals now being encountered at S-chips.
As an example of what can go wrong, take the case of Singapore-listed China Sun Bio-chem Technology, which has about 6,000 shareholders.
In February, its auditors, PricewaterhouseCoopers, told the board they had discovered about 592 million yuan (S$126 million) missing from the company’s bank accounts. The auditors added that they were unable to find evidence to support the explanation provided by the company’s management that the money had been used to buy raw materials.
Its board then appointed KPMG to complete the audit, only for the new auditors to find that they were being stalled for various reasons, such as the truck, which was carrying data needed for the audit, being stolen while its driver was having dinner.
The subsequent boardroom tussle between China Sun’s chairman, Mr. Sun Guiji, and its independent directors only added to investors’ cynicism. The independent directors had suspended Mr. Sun as chairman after he ignored their summons to attend a board meeting in Singapore to explain the missing cash. But they reinstated him three weeks later, even though shareholders were still clueless on how the accounting mess was going to be sorted out.
China Sun is not the first S-chip to experience a showdown between its recalcitrant management and its independent directors. Five years ago, another S-chip, apple juice producer New Lakeside, had encountered similar problems when an interim audit showed it was running a huge loss only months after it was listed.
Like China Sun, the independent directors then voted to remove the managing director, citing mismanagement. But his hold on the firm was so strong that he was reinstated a month later. The managing director finally left the firm a year later after it experienced more losses - and after the firm’s major shareholder, an overseas Chinese investor, pumped in fresh capital and got down to running the business himself.
But it is too much to hope for a white knight investor to ride to the rescue each time there is an S-chip accounting scandal.
Such problems should also not be left to fester as they may undermine the integrity of the SGX as a marketplace with strong checks and balances in place to protect investors’ interests.
What then should be the appropriate course of action?
For a start, let’s recognise that there are limits to what local independent directors can do in a listed firm if its operations are overseas and the management is determined to stonewall them.
To safeguard its own reputation, the SGX and its regulator, the Monetary Authority of Singapore, should step into the breach and break the deadlock by enlisting the help of the relevant legal and regulatory authorities in Beijing.
True, there are those who believe that China Securities Regulatory Commission - Beijing’s equivalent of the United States Securities Exchange Commission - would not lift a finger to help foreign regulators as its scope is confined to regulating companies listed in China.
But China is an emerging economic superpower whose every action is watched closely. As its global investments grow, it would also want to safeguard them by ensuring that there is fair play both inside and outside its borders. Whether an accounting scam involves a mainland firm that has listed its operations in Singapore or Shanghai, the rule of law in China should be applied just as stringently when wrongdoers are identified.
The SGX could also use the current breather that comes from the recent drying up of new listings to think hard about how its listing framework can be further strengthened to regulate listed firms operating outside Singapore’s shores.
Rather than the ‘softly softly’ approach it adopted in the past, it may have to work out tougher enforcement measures to calm the jitters stirred up by errant S-chips.
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