For Retail Investors in SGX Equities
On 9-Jan-2020, SGX RegCo announced the scrapping of quarterly reporting for firms except for riskier companies. These risky companies includes those whose auditor have raised alarm. Remaining companies only need report their financial half-yearly. This new ruling takes effect from 7-Feb-2020.
The announcement did not explain in detail its rationale for this change other than ...
' ... to enhance its regulatory regime by taking a more targeted approach.' and
to 'brings us in line with other global markets, including Hong Kong, Australia, the U.K. and other E.U. countries.
Some explanation through news feed were:
" ... to be more targeted, even surgical so as to ensure compliant companies aren't overburdened while non-compliant companies receive more attention." (The Straits Times, 10-Jan-2020)
'Experts, ... They believe the move announced yesterday by the regulatory arm of the Singapore Exchange (SGX) will not adversely affect transparency but will relieve firms of significant cost burdens. (The Straits Times, 10-Jan-2020)
There were many other amendments in light of the new ruling:
Financial assistance to third parties
Rights issue and
Changes in earning prospects.
THINKING OUT LOUD
From a retail investor perspective, I view these changes as a step backward in building a regulatory environment that nutures highly competitive and potentially global companies.
"More targeted approach"
While SGX is responsible for listing good and healthy companies into the exchange and SGX RegCo is taking a proactive approach in targeting riskier companies; it is investors that eventually bore the risk of a company performance. Hence the final decision regarding risk should rest with investors. Taking away quarterly reporting increases investment risk in particular the ability to react timely to changes in the risk profile of a company, especially small & medium enterprise.
"In line with global markets"
Referencing exchange practices in Hong Kong, Australia, U.K. and other E.U. countries for decision; and excluding dominant exchanges in U.S. and I think Japan as well, borders on confirmation bias. The latter exchanges house global companies, many of which have changed the way we live. Following 'other global markets' do not reflect independence of thought & innovative thinking in defining a unique value proposition for SGX.
"Companies are overburdened"
Timely reporting is one of the most critical management & investor tool. It allows executive and investors to take early actions to explore opportunities or manage risk. If a company view quarterly reporting burdensome, it is a red flag in itself.
While reporting would take up much time 20 years ago; the proliferation of software & computing power have dramatically shorten time-to-report and at a much lower cost.
Global companies in U.S. could report quarter results within 30-days. Most of our simple structured corporations requires 45 to 60 days to report unaudited results.
In today's highly competitive environment it is liken to investors having to read history every 4-1/2 months and now 7-1/2 months after the fact (companies given 45-60 days to report results).
It also increases the risk of insiders exploiting this longer reporting duration to their advantage, rules aside.
"Relieve firms of significant cost burden"
When a company decides to list in the local stock market, it was already a known fact that quarterly reporting & reporting cost is a given. That it is a significant cost burden years after raising public funds is simply absurd.
Depending on SGX RegCo to target riskier companies is not a viable option. History of corporate failure have shown that:
By the time annual audit flag a going concern or material uncertainly, it is usually long after the fact.
- A black swan event like in 2008, could render many healthy businesses becoming a going concern within months.
- The investor community is much more apt at sounding out risky companies e.g. short-sellers, fundamental analysts or investor communities.
SGX RegCo role is in regulation and ensuring transparency. Not to decide for investors which company is riskier relative to others.
This new ruling should have little impact on large insurance funds, mutual funds, sovereign wealth fund or private equity which typically invest in established companies for very long term.
However, retail investors will have to be mindful of the added risk, primarily because the community typically invest or trade in micro, small and medium size companies where a company's balance sheet can weaken dramatically over a short period; unlike larger companies that require a longer period for creative destruction to run its course.
We now have to be more vigilant, work a little harder, and perhaps look a little further to invest our hard earned savings.