Monday 25 January 2010
Dual listings: regulatory issues for SGX to clarify
By most accounts, more companies can be expected to go for dual listings on the Singapore Exchange (SGX) and markets such as Hong Kong, Taiwan, and possibly Korea. Fertiliser firm China XLX was a recent trend-setter on this front - at least this year - when it dual-listed some of its shares in Hong Kong this month, sending its SGX share price up almost 100 per cent that day and sparking a scramble among speculators to try to figure out the next successful dual-listing play.
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Dual listings: regulatory issues for SGX to clarify
By R SIVANITHY
28 December 2009
By most accounts, more companies can be expected to go for dual listings on the Singapore Exchange (SGX) and markets such as Hong Kong, Taiwan, and possibly Korea. Fertiliser firm China XLX was a recent trend-setter on this front - at least this year - when it dual-listed some of its shares in Hong Kong this month, sending its SGX share price up almost 100 per cent that day and sparking a scramble among speculators to try to figure out the next successful dual-listing play.
Speculative activity aside, several regulatory issues need to be looked at when it comes to dual listings. Broadly speaking, how exactly should such listings be policed? And who should do the policing?
Consider, for example, a China company listed here (popularly known as an ‘S-chip’) that gains approval to list in a market which, based on conventional wisdom, can command a higher valuation than SGX. Such a market might be Hong Kong, as was the case with China XLX.
Who’s job to ask?
Now suppose that on any given day, this company’s shares suddenly exhibit an odd movement in Hong Kong. Setting aside the administrative difficulties associated with transferring shares between the two exchanges (more on that later), assume this large HK price change causes the same to occur on SGX.
If the HK authorities fail to query the company on reasons for the movement, should it be left to SGX to inquire? Are the two regulatory bodies in communication with each other, or is each expected to operate independently of the other? And if the movement was due to manipulation, which is the appropriate investigating authority?
It isn’t hard to envisage a scenario in which SGX asks a dual-listed company to explain an odd share price movement and the company simply shrugs its shoulders and points to a burst of speculative activity in HK as the only possible reason.
If odd movements originate from local parties on SGX, the exchange can easily unravel the trades and identify the players concerned. But not so when the originators are in Hong Kong. Would the matter then rest there?
Another grey area exposed by dual listings is the need for substantial shareholders to report purchases or sales exceeding 5 per cent. Suppose a dual-listed company has X million shares trading on SGX and Y million shares trading elsewhere. Should the 5 per cent rule apply to 5 per cent of X or 5 per cent of (X+Y)?
Logically, the reporting threshold should be 5 per cent of (X+Y) because the issue is control of the company as measured by the proportion of shares held.
But the question is important because if Y is much smaller than X, anyone purchasing a large proportion of Y to corner the stock on the foreign exchange, so as to manipulate the price in both markets, could well pass under the radar if the purchase is less than (X+Y).
Disclosure rules
Is there, then, a need to modify local reporting rules to make it necessary for dual-listed companies to disclose trades that are 5 per cent or more of the shares traded in any jurisdiction, including SGX, and not 5 per cent of total shares?
As China XLX arbitrageurs would by now know, it reportedly takes up to four weeks to transfer shares between Singapore and Hong Kong. In practice, market players say, the process actually takes around eight weeks. Whether four or eight weeks, the question is why should it take a virtual eternity in market terms to carry out what should be a simple and straightforward transaction between markets in the same time zone?
Allowing a large price differential to develop between two identical assets and obstructing the activity of arbitrageurs with onerous paperwork not only makes for a hugely inefficient market, it opens the door to manipulation - especially by parties looking to exploit the perception that markets in Hong Kong, China or Taiwan command higher valuations than in Singapore.
Surely, if more dual listings can be expected and assuming dual-listed companies want to remain listed on SGX, it’s time the local authorities look at slamming this door shut.
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