Why SGX should review its rules

Letter in the Strait Times from Mak Yuen Teen, Assoc. Prof. at NUS Business School. He often comments on CG issues, more articles of the "Centre of Governance, Institutions and Organisations" can be found here.


I refer to the June 18 letter by Mr Gary Teo ('SGX shouldn't ignore investors' delisting concerns') and the reply by the Singapore Exchange

('SGX explains due diligence provisions in delisting protocol'; last Friday).

These relate to SGX-listed companies which fail to provide an exit offer when they are directed to delist after they fail to satisfy the criteria for removal from the SGX watch-list.

The SGX's reply states: 'In the event that a company faces the prospect of an involuntary delisting, the boards and management should present an exit alternative.

'Where it is not possible to do so, boards and management must disclose the reasons and explain to shareholders.'

However, this does not appear to be what the SGX rules say and what was presented when the SGX consulted the public on the introduction of the watch-list in 2007. Rule 1306 in the SGX rulebook for mainboard companies states that if the SGX exercises its power to delist a company, the issuer or its controlling shareholder(s) must comply with the requirements of Rule 1309.

Rule 1309 requires that a reasonable exit alternative - which should normally be in cash - be made and the issuer should normally appoint an independent financial adviser to advise on the exit offer. There is no provision for the board and management to disclose the reasons and explain to shareholders if no exit offer is made.

In other words, it appears that SGX has relaxed the application of the applicable rules presumably because it now realises that it is difficult to enforce an exit offer when a company is directed to delist.

Indeed, we are seeing repeated cases of companies being delisted without an exit offer.

Allowing the board and management to explain why no exit offer is possible, without additional safeguards to ensure that these reasons are bona fide, can lead to abuse.

Without an exit offer, minority shareholders will be holding illiquid shares in an unlisted company which is subject to far less stringent reporting and accountability requirements, and therefore with relatively little protection for them.

Since the watch-list and directed delisting regime has deviated from what is spelt out in the listing rules and what the SGX consulted on before it was introduced, I believe that the SGX should suspend its application and review the rules.

Link to the Straits Times website.