Knowledge Highlights 19 May 2020

Singapore Exchange Regulation (“SGX RegCo”) is removing the minimum trading price (“MTP”) rule for Mainboard issuers with effect from 1 June 2020. The MTP watch-list will cease to exist on 1 June 2020 and Mainboard companies on the list will no longer need to satisfy the exit criteria and apply for removal from the MTP watch-list. All issuers that are currently on the MTP watch-list will be removed from the MTP watch-list on 1 June 2020.

The removal of the MTP framework follows broad support from market participants during the public consultation on the “Review of the Tools Used to Deal with Market Manipulation Risk” SGX RegCo conducted from 28 November 2019 to 27 December 2019 (“Consultation”). SGX RegCo has issued a response to the Consultation and consequential amendments to the SGX Listing Rules (Mainboard) (“Listing Rules”) to effect the removal of the MTP framework which will take effect on 1 June 2020. Key takeaways of the response and amendments to the Listing Rules are set out below.

Removal of MTP framework

Singapore Exchange Limited (“SGX”) notes that a majority of respondents supported removing the MTP framework.

In response to feedback that the MTP framework may serve as a safeguard to alert retail investors of the risks of investing in low-priced shares, SGX reiterates that as set out in the Consultation paper and supported by other feedback received, there is evidence that the MTP framework is overinclusive, capturing many issuers that are not prone to manipulation. SGX also highlights that share price information is publicly available for individual investors to make their investment decisions. On the other hand, issuers placed on the MTP watch-list are stigmatised, face various challenges and see business prospects limited, resulting in a real impact on shareholders.

SGX reiterates that it has developed other more targeted and effective approaches to deal with market manipulation, noting a decline in the number of manipulation alerts triggered on the market after implementing the anti-manipulation tools. SGX will continue to monitor the market closely and enhance its tools to prevent and detect manipulation in a targeted and effective manner. This includes developing new capabilities to reduce market noise and increasing the value of SGX trading queries and alerts, e.g. deployment of artificial intelligence in the SGX real-time monitoring system.

In response to feedback that the MTP framework should be used to delist issuers with low-priced shares and poor fundamentals, SGX highlights that the financial watch-list addresses the financial performance of issuers. Issuers are placed on the financial watch-list if they record pre-tax losses for the past three consecutive financial years and have an average daily market capitalisation of less than S$40 million over the last six months. These issuers must improve their financial performance and recover their market capitalisation or be subject to delisting after three years. Further, SGX is making various enhancements to the financial watch-list framework.

Strengthening financial watch-list

SGX will implement the following amendments to the Listing Rules to strengthen the financial watch-list in the areas set out in the consultation:

  • Exclusion of non-recurrent income or income generated by activities outside the ordinary course of business in profitability test assessment for financial watch-list exit: Practice Note 13.2 of the Listing Rules will be amended to clarify that SGX will exclude non-recurrent income or income generated by activities outside the ordinary course of business in assessing whether issuers fulfill the profitability test in exiting the financial watch-list. For example, income arising from a write back of an impairment provision will generally be considered as non-recurrent and will be excluded from the issuer’s profits. SGX will reject an application to exit the financial watch-list if it is of the view that the issuer’s accounts do not demonstrate profitability arising from the ordinary course of business.
  • Issuer to fail to meet profitability test for financial watch-list exit if financial statements are subject to modified audit opinion, or if auditors highlight material uncertainty relating to going concern: The Practice Note will also be amended to clarify that SGX will not consider an issuer to have met the profitability test for exiting the financial watch-list if its financial statements are subject to a modified audit opinion, or if its auditors have highlighted a material uncertainty relating to going concern. Given the material irregularities or uncertainties concerning the issuer’s financials under these circumstances, SGX believes that these financial statements should not be relied upon for the purpose of exiting the financial watch-list.
  • Artificial distortions to share prices not representative of true market demand to be ignored in share price and market capitalisation tests: As highlighted in the Consultation, SGX will ignore artificial distortions to share prices that are not representative of true market demand for assessing the share price or market capitalisation tests in the Listing Rules. The Practice Note will be amended to highlight that SGX will take into consideration whether an issuer’s share price during the relevant period has been determined by artificial means in assessing whether the issuer has fulfilled the market capitalisation test for exiting the financial watch-list.

One respondent expressed support for the above proposed amendments as it will result in stronger vigilance over companies that attempt to game the exit criteria. Another respondent suggested that SGX also consider, in granting approval to exit the financial watch-list, if the issuer is undergoing an independent review, special audit or other investigations by a regulatory authority. In response to the feedback, SGX will examine the specific circumstances in granting approval for an issuer to exit the financial watch-list and SGX is likely to reject the application if there are regulatory concerns.

In addition to the amendments listed above, SGX will amend Appendix 13.1 of the Listing Rules to reflect the change in SGX’s frequency of review of the financial watch-list to be on a half-yearly basis.

Other comments received on quarterly reporting obligations 

SGX received feedback supporting the removal of the MTP framework. The feedback suggested that SGX keep a tighter watch on issuers that have a disclaimer of audit opinion or qualified audit opinion on their financial statements and issuers that have a poor compliance track record, including those which are a subject of a notice of compliance, public reprimand or ongoing investigation by a regulatory authority. A further suggestion was that such issuers should be required to provide quarterly updates on their financial position or business operations.

In response to the feedback, SGX states that following the launch of the Consultation, SGX has announced the revised risk-based Quarterly Reporting (“QR”) framework. Issuers that receive a modified audit opinion or where their auditors have expressed a material uncertainty relating to going concern will be required to publish their financial statements on a quarterly basis. Issuers that receive a modified audit opinion will also be required to provide quarterly updates on efforts to resolve their audit issues and to confirm that the impact of the audit issues on the financial statements has been adequately disclosed. SGX will also have the powers to require issuers with whom SGX has regulatory concerns to publish their financial statements on a quarterly basis. SGX will consider whether there is a material breach of disclosure rules or whether there are concerns on the issuer which involve material financial impact. SGX may also take into account the issuer’s compliance track record in exercising its powers. Issuers that are required to perform QR under the risk-based framework must continue doing so until their regulatory issues are resolved.

Reference materials

The following materials are available on the SGX website www.sgx.com:

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