SGX RegCo, MAS proposals viewed as positive step forward but inadequate without deeper market reform

[SINGAPORE] The Singapore stock market will need deeper structural reforms to address longstanding challenges, market watchers told The Business Times.

While market participants were mostly positive about proposals unveiled by Singapore Exchange Regulation (SGX RegCo) and the Monetary Authority of Singapore (MAS) on Thursday (May 15), they said that these might not be enough to revive the local equities market.

Among other things, the proposals sought to facilitate more listings on the Singapore Exchange (SGX). There is also a proposal to do away with putting loss-making companies on the financial watch list, which helps to alert investors to the risks of investing in these businesses.

As the listing process becomes streamlined, market watchers said attention must be paid to the level of investor protection.

David Gerald, president of the Securities Investors Association (Singapore) said: “Investors will have to do their homework before investing, mindful of the developments in the company.”

Tay Hwee Ling, accounting and reporting assurance leader at Deloitte, also stressed the importance of strengthening safeguards to protect investors and ensure meaningful recourse when needed, particularly as issuers assume more responsibility for disclosure quality.

“Investors would have to be more discerning in focusing on the material information disclosed within the prospectus, quality and growth prospects of each company,” she added.

In this respect, Tay emphasised that the whole capital market ecosystem has to work together and support a culture of transparency, trust, and informed engagement between issuers, investors and the market.

Tham Tuck Seng, capital markets partner at PwC Singapore, emphasised the collective responsibility of SGX RegCo, issue managers, lawyers, and auditors in ensuring complete and accurate disclosures. “This will maintain investors’ confidence in SGX, which is known for its high corporate governance standards,” he noted.

Calls for lowering of profit threshold

As part of its shift to a more disclosure-based approach, SGX RegCo is also proposing changes to its qualitative and quantitative mainboard admission criteria, with a particular focus on calibrating the profit test.

Professor Lawrence Loh, director at the Centre for Governance and Sustainability at NUS Business School, supported this streamlining approach, stressing that it is “the way forward for mainboard admission without losing sight of basic investor protection, particularly in ensuring the good quality of issuers”.

To be eligible for a listing currently, an applicant must have a minimum consolidated pre-tax profit (based on full year consolidated audited accounts) of at least S$30 million for the latest financial year, and an operating track record of at least three years.

SGX RegCo is seeking feedback on whether this criteria should be changed. If the threshold is lowered, SGX RegCo has mooted a a range of S$10 million to S$12 million.

Carol Fong, group CEO of brokerage CGS International, agrees that a lower level may attract more growth companies, suggesting a threshold of S$10 million.

She noted that in recent years, this criterion is rarely used on its own for mainboard admission, as many companies more readily qualify through alternative benchmarks such as a minimum market capitalisation of S$150 million at the point of listing.

Sias’ Gerald echoed this view, noting that the profit criterion should be tailored to accommodate a broader range of companies at different stages of their business life cycle.

“The S$30 million profit criteria might be challenging for some and should hence be calibrated to enable access to public funding by companies from different stages of their business cycles,” he said, adding that smaller SMEs could instead consider listing on the Catalist board.

Gerald expressed doubt that many companies, if any, still rely on the profit test to enter the market, noting “it is timely to relook at this test”.

He added: “Companies that can meet the profit test would almost always already meet the other criteria in place today – we need to continuously relook our rules for relevance and usefulness.”

He also pointed out that many companies with strong investment potential may be loss-making, stressing that investors should be empowered to make informed decisions based on accurate information.

Instead of looking at profits, Luke Lim, managing director at brokerage Phillip Securities and chairman of Securities Association of Singapore, called for investors and brokers to consider a range of other factors, such as growth potential, business model resilience, quality of management, corporate governance, and the strength of cash flow.

He pointed out that “some high-potential companies – particularly in emerging sectors – may not yet meet traditional profit benchmarks, but still present compelling long-term value”.

Loh similarly observed that showing profits can be challenging for some emerging companies, even if they have strong potential to turn profitable shortly after listing.

He added that this can sometimes create “a catch-22 situation as some good companies may not be profitable unless they list, yet they cannot list unless they are profitable”.

Lee Ooi Keong, managing director at board advisory firm Clover Point Consultants, raised another issue: that of “the inability of many SGX-listed companies to maintain their share price over the longer term”.

He pointed out that out of the 620-plus listed companies on the SGX, only about a third trade above their book value. “This is more a reflection of poor fundamentals and growth potential for many listed companies on the SGX,” Lee said.

He suggested separating market-making and enforcement responsibilities into independent bodies.

Further measures on how shareholder value can be improved for existing listed companies are expected to be unveiled later in the year.