Commentary: Singapore Exchange treads a fine line with relaxed reporting rules

SINGAPORE: A huge change went relatively unnoticed on Thursday (Jan 9), when the Singapore Exchange (SGX) announced it will do away with a 15-year-old rule that requires companies with a market capitalisation above S$75 million to file quarterly financial statements from Feb 7 onwards.

In its place, quarterly reporting will only be required of companies without clean audits or whose auditors have highlighted material going-concern uncertainties.

Businesses instead are encouraged to provide voluntary updates to shareholders in a timely fashion, rather than wait for a reporting milestone to release important disclosures.

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SGX Regco – the exchange’s regulatory arm – will also be able to order companies to report quarterly at its discretion. SGX Regco has said it plans to release a list of about 100 companies that will have to continue quarterly reporting once the revised rule takes effect.

About 70 per cent of SGX-listed companies had been required to report results on a quarterly basis previously.

SGX Regco first launched its public consultation on changing the quarterly reporting rules in 2018, and it has taken a good two years for the exchange to finally respond and make its decision in the absence of consensus among market stakeholders and observers.

RELAXED RULES WILL EASE BUSINESS COMPLIANCE COSTS

While some smaller companies that would not have had to report quarterly numbers under the old system may have to do so under the new rules, the net effect of the relaxed regulation is that many more companies are freed from the quarterly reporting requirement.

That push and pull between the desire for more information from investors and the cost of providing that information that companies presents SGX with a tough balancing act.

In evaluating how beneficial these changes are, the most important yardstick is therefore regulatory efficiency: Do the new rules most improve the fairness and orderliness of the Singapore stock market for the lowest regulatory burden.

The review on the quarterly reporting regime based on market cap is timely, because the market cap test was problematic.

The benefit of the old regime is that investors receive financial information from most Singapore-listed companies regularly and at a fairly high frequency.

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But that transparency comes with a compliance cost so high that regulators have had to mitigate it by exempting the smallest companies.

Yet, those are often the riskiest issuers on the market most in need of close monitoring, which means that the market-cap approach is no longer delivering the same level of benefit that it was supposed to.

IDENTIFYING RISK REMAINS CHALLENGING

A risk-based approach makes more sense in theory, because it concentrates the compliance cost of disclosure on companies that pose the greatest risks.

The problem is that an apt risk-based filter is extremely challenging to identify carry out in practice.

Take the example of water company Hyflux, which sought court protection from creditors in 2018, shortly after it announced its first-quarter results.

There is good reason to think Hyflux would not have been required to make quarterly reports if the new rules had been in place at that time, since Hyflux’s auditors had been giving the company clean opinions and SGX Regco was not publicly querying the company’s financials at the time.

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Mandatory quarterly reporting would not have saved Hyflux, even though there is a higher chance investors who bothered to dig deep into the company’s financial statements every three months would have found some clues about the company’s struggles.

And overall, Hyflux’s case suggest the need for tighter regulatory oversight of the market, not less.

CAN SGX SUFFICIENTLY ENFORCE AGAINST ERRANT LISTED COMPANIES?

Relaxed quarterly reporting rules on the Singapore Exchange (SGX) will raise pressure on the market regulator to quickly improve its effectiveness as an enforcer.

The most important actor in the risk-free regime is the regulator itself, who becomes more directly responsible for determining who needs to report more frequently.

To its credit, SGX Regco has been strengthening its enforcement arm over the past few years, with a more targeted public query system and the careful addition of greater powers to order compliance and to issue sanctions.

The regulator has said that it is working to strengthen its continuous disclosure guidelines, and rightly so.

In moving to a risk-based test, SGX must demonstrate that it can adequately identify at-risk companies in a timely fashion even if those companies are no longer disclosing financial results every three months.

Regulators will also have to show that they can curb insider trading risk, and hold miscreants accountable. While SGX Regco has made progress on those fronts over the past few years, its critics argue that there is still much distance to cover in improving corporate governance.

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Still, the exchange will have to show that its risk-based approach and public queries can give the market at least the same level of timely insight into the listed companies as compulsory reporting. That will not be easy.

Adhere too closely to fixed tests and too many issuers will slip through the cracks. But take too much of a case-by-case approach and the regulator risks creating uncertainty and disregarding due process.

Another challenge for the regulator is in deterring bad behaviour in the first place. Relying on an auditor’s opinion may be bureaucratically sound, but for investors this will probably lead to too many cases of too little, too late.

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Deterrence has two aspects. The first is effective surveillance, in that would-be perpetrators should believe that bad behaviour has a high chance of being detected.

Besides the question of whether companies are making timely disclosures, the regulators will also have to better detect insider trading.

The second aspect of deterrence lies with accountability. 

Holding directors legally accountable in Singapore is notoriously difficult, especially after the 2011 and 2013 air cargo logistics firm Airocean’s cases, in which four directors were acquitted of disclosure-related charges when the prosecution could not prove the undisclosed information would impact Airocean’s share price or that the company acted recklessly in not disclosing the information. 

What makes deterrence complicated is that not all of it lies within SGX Regco’s control. The Exchange will rely on the courts and the legal system to carry out due process, since it has no statutory power to obtain evidence or investigate auditors.

SGX Regco will need help from the other regulatory bodies in Singapore’s financial market ecosystem, namely the Monetary Authority of Singapore, the Commercial Affairs Department and the Accounting and Corporate Regulatory Authority.

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SGX Regco’s plan to streamline its rules is well-intended, but it will have its work cut out in ensuring things work as intended.

A study commissioned by the CFA Institute found that most of the London-listed companies that stopped quarterly reporting once their regulator stopped mandating it tended to be the smaller companies that did not provide earnings guidance.

In other words, the companies that are likely to make use of the opportunity to disclose less are precisely the ones who are weakest and probably most at risk.

It is hard to imagine this as the desired outcome for SGX.

Kenneth Lim is a writer who has been covering capital markets in Singapore and the United States since 2003.