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Singapore has operated a disclosure-based regime modeled after the Western framework for well over a decade. However, the country’s markets and legal system are quite different from those of the United States, where the disclosure-based regime originated.
So the Singapore Exchange (SGX), as the front-line regulator of listed companies, brokers and securities trading, has made some adjustments to ensure the disclosure-based regime works.
For example, private enforcement is easier in the US than in Singapore because of contingency fees and the prevalence of class action suits. The shareholdings in the US are also more dispersed compared to the concentrated shareholdings found in Singapore. To balance out these differences, we require stronger public enforcement in both information disclosure and corporate governance.
The SGX has introduced three new independent listings committees to ensure this takes place. The first is the Listings Advisory Committee, which consists of independent and experienced market professionals who provide advice on disclosure and admission issues arising from listing applications to our mainboard and listing policies. The other two committees – the Listings Disciplinary Committee and the Listings Appeals Committee – will administer new and expanded enforcement powers such as fines against issuers, denying them access to the market, also known as the cold shoulder rule, and suspending the activities of issue managers.
We are reviewing how effectively our listed companies comply with the SGX’s Code of Corporate Governance. The code has a “comply or explain” basis, meaning companies must comply with the code or explain any deviations.
We intend to use the results of the review to work one-on-one with companies that have fallen short to improve their compliance. We will not initially name these companies, but we will take action if a company continues to fall short of requirements despite our efforts to engage with it.
We also need to close the gap in other areas to ensure the smooth running of a disclosure-based regime. For example, we have taken the unprecedented step in Asia of introducing a minimum trading price for shares of companies listed on our mainboard. Such a rule is found in the US and we can see its merits.
At the moment, the SGX has several penny stocks trading at a few cents. A small change in the share price of these stocks can lead to high percentage gains or losses, which encourages excessive speculation and manipulation. To counter this, we are introducing a minimum trading price of 20 Singapore cents (14 US cents).
We are also expanding our market-maker and liquidity-provider programmes to increase the liquidity of our market. Market-maker incentive schemes effectively offer rebates to market makers, provided they provide quotes on both sides of the order book at a minimum spread, depth and period of time.
In contrast, liquidity provider schemes offer traders a rebate for price-making trades, rewarding them every time other market participants hit their prices (this is the opposite of price-taking trades, in which the traders hit the prices of other market participants). This incentivises liquidity providers to set realistic prices, so that other market participants will hit them.
Together, these schemes incentivise a deeper order book, narrower spreads and reflective quotes to facilitate market efficiency, which in turn create more liquid markets.
Finally, we need institutional investors to play their part. We may not be able to increase the percentage of institutional investors overnight to that of the US market, but we can increase the level of shareholder activism by institutional investors. Institutional investors have the clout and resources to push for change and improve governance.
We will look into ways to encourage institutional investors to proactively engage their investee companies and exercise their voting rights appropriately, to encourage sustainable growth and value creation in the common interest of shareholders.
Tan Boon Gin is the chief regulatory officer at SGX
