Jurisdiction - Singapore
Reports and Analysis
Singapore – SGX Regulatory Enhancements To Strengthen Securities Market.

19 February, 2014

 

Legal News & Analysis – Asia Pacific – Singapore  Capital Markets

 

Introduction

 

The Singapore Exchange Limited (“SGX”) has announced that it is enhancing its regulatory regime for the maintenance of orderly, fair and transparent trading in its securities markets.

The enhancements will take effect on 3 March 2014 and form part of SGX’s regular improvements to its regulatory regime. They were issued following a joint review by SGX and the Monetary Authority of Singapore (“MAS”) on the securities market structure and practices in Singapore.

 

The latest enhancements are targeted at heightening SGX’s surveillance of trading activities and comprise the following measures:

 

1. SGX will enhance its public query process by providing guidance and examples of what could be the possible causes of unusual trading activity and the company’s response will now need to be approved by the company’s board of directors;

2. SGX will issue a “Trade with Caution” announcement when companies are unable to sufficiently explain the unusual trading activity; and

3. there will be a new requirement for companies to notify SGX of discussions or negotiations which are likely to lead to a takeover, reverse takeover or very substantial acquisition and to also maintain a list of persons privy to such transaction.

 

These measures are applicable to both Mainboard and Catalist listed securities. Companies which have securities listed on the SGX should take note of these developments, especially in relation to responses and notifications which they need to make to SGX.

 

Enhancement To The Public Query Process

 

SGX is currently already issuing queries when its surveillance system indicates unusual trading activities in a company’s securities. This query is meant to extract undisclosed price-sensitive information of the company which may be leaked and thereby explain the unusual trading behaviour.

 

SGX will post its queries on SGXNet (a portal where SGX-listed companies post corporate actions and news to update its investors) as well as email the queries to the company in question. As part of the enhancements, SGX has issued a new template for the public query, which is in the form of a sample letter containing an example of the questions which SGX may ask. The sample letter is available at SGX’s website here. The intention of the letter is to draw the listed company’s attention to the unusual price movements and get it to thoroughly consider whether there is any undisclosed information which could account for the price movements.

 

Currently, most companies will obtain their Board of Directors’ approval when sending out their replies to SGX on any queries regarding unusual trading activities. SGX has now codified this good practice such that Board approval is now mandatory and the company has to state so in its announcement. As the directors of the company are required to collectively and individually take responsibility for the accuracy of the replies provided to SGX, they would be expected to exercise diligence and make their own internal inquiries before endorsing the response, which is often prepared by management.

 

This requirement should not come as a surprise to directors, as many of them would already be consulted if the company needs to make an important disclosure or reply to SGX. The challenge for most boards, however, may be to deal with transactions which are currently undergoing negotiations but with no certainty that they will close. Very often, companies who are involved in such negotiations would simply say that they are not aware of any specific reasons for the unusual trading activity (presumably taking the view that the deal has not been firmed up) but would now need to consider whether to provide more information, with the appropriate qualifications.

 

”Trade With Caution” Announcement

 

SGX may issue a “Trade With Caution” announcement in situations where a company has been queried and has responded that it is not aware of any reasons for the unusual trading pattern in its securities. The “Trade With Caution” announcement serves as a reminder to shareholders and potential investors to exercise caution in dealing with the securities. The announcement can be viewed under the “Company Announcement” page on SGX’s website.

Currently, SGX already has the power to designate a stock when it observes that there are trading anomalies. Since 2002, SGX had designated five stocks (namely, Dayen, Jade Technologies, Blumont, Asiasions and LionGold) and subsequently lifted such designation when the trading of these securities had become more stable and normal trading conditions could be resumed.

 

The new “Trade With Caution” announcement is additional to SGX’s power to designate a stock and will supplement the current set of regulatory tools used by SGX to maintain an orderly, fair and transparent trading environment. The “Trade With Caution” announcement could be a precursor to the designation of a stock if the unusual trading pattern continues without reasonable explanation. However, unlike the case of a designated stock, it is currently unclear whether SGX would issue any further announcement if there are subsequent disclosures, or if the circumstances which led to the initial announcement cease to exist. Hence, there may be a risk that the company may continue to be plagued by an earlier “Trade With Caution” announcement without appropriate sunset provisions.

 

Notification Of Likelihood Of Takeover Or Very Substantial Acquisition

 

A new notification requirement will be implemented to facilitate SGX’s closer monitoring of trading activities. A listed company will be required to notify SGX without delay when the Board of that company is made aware of discussions or negotiations on a potential proposal, or is in discussion or negotiation on an agreement or document which is likely to result in a takeover or reverse takeover of that company or a very substantial acquisition by that company. Such notification obligation is also applicable to controlling shareholders of a listed company where negotiations or discussions are carried out by such controlling shareholder without the knowledge of the listed company.

 

It is understandable that companies may be apprehensive in providing such information, especially in situations where there are other listed companies involved (some could be listed in foreign jurisdictions) or in the case of a competitive takeover. However, it is noted that under the format prescribed by SGX, the notification is required to cover only (i) name of issuer, (ii) type of transaction, (iii) target company (if applicable), and (iv) details of the contact person. In particular, the company would not be required to disclose the commercial terms of the transaction. This would help to mitigate the above concerns.

 

In addition to the above, SGX will also require the company to maintain a list of names of persons who are privy to the transaction (“privy list”). Such persons are required by law not to transact in that security whether in their own name or in the name of a third party. SGX reserves the right to ask to see the privy list as and when it deems necessary.

 

SGX has stated that information in both the notification and the privy list will be kept confidential. Templates for the notification and the privy list are available in SGX Practice Note 7.2 and SGX Practice Note 7B respectively for Mainboard and Catalist companies.

 

Further Changes Expected

 

Apart from the changes enumerated above, SGX and MAS have also issued a joint consultation paper setting out further proposals to improve the securities market in Singapore. These proposals include: setting a minimum trading price for SGX Mainboard securities, imposing collateral requirements for securities trading, implementing a short position reporting regime, improving the transparency of trading restrictions imposed by securities intermediaries, and reinforcement of SGX’s listings and enforcement framework. Our firm is following these developments closely and will issue an update on them shortly.

 

References

 

1. SGX Media Release titled “SGX Enhances Regulatory Tools”

2. SGX Practice Note 7.2 (for Mainboard companies)

3. SGX Practice Note 7B (for Catalist companies)

 

Rajah & Tann

 

Chia Kim Huat, Partner, Rajah & Tann

kim.huat.chia@rajahtann.com

 

Evelyn Wee, Partner, Rajah & Tann

evelyn.wee@rajahtann.com

 

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