Extension of MTP deadline needed, given state of market

In just over two months, the extension given by the Singapore Exchange (SGX) to companies that have yet to comply with the minimum trading price (MTP) requirement of 20 cents will come to an end.

Unless the SGX is willing to offer affected companies another extension, the worry is that a good many more may find their way onto the MTP watch list, where they have three years to make good on the breach or face the pain of delisting.

As it is, 41 firms were already on this watch list when it was first unveiled in March. Surprisingly, they included a stock popular with retail investors, Rowsley, with its hefty market capitalisation of $606 million.

The MTP made it into the SGX rule book in March last year as part of the bourse's efforts to curb speculation and nudge underperforming firms to look into ways to improve their businesses and engage investors, to ensure that their share prices stay above 20 cents.

Companies were given a one-year grace period to comply with the new requirement and most of them chose to consolidate their shares in order to do so - that is, reduce the number of shares to increase the value per unit.

Last December, the SGX decided to offer a six-month reprieve to companies which have yet to comply, citing challenging market conditions as one reason for doing so. As such, when the MTP took effect, there were 69 firms which were given until Sept 1 to comply.

They are now joined by another 13 firms which failed the latest MTP review earlier this month but have also been given to Sept 1 to mend the breach, rather than be sent to the MTP watch list.

The problem is that the reprieve period may be too short. If anything, the challenging market conditions have become even more challenging and the threats looming on the horizon - the sluggish global economy and the increasingly bitterly contested United States presidential elections, to name just a couple - can only mean that things will get even tougher.

In hindsight, most of us could not have anticipated, when the SGX announced the timetable for implementing the MTP two years ago, that market conditions could turn so bad.

Just to give an idea as to how badly investor sentiment has soured: Between March last year and now, the Straits Times Index (STI) has fallen by as much as 28.4 per cent. The STI has been down 19 per cent over the 16 months since the MTP requirement kicked in.

And as consolidation of shares is viewed as a simple administrative exercise, few of us could have anticipated the selling pressure encountered by some penny stocks after they consolidated their shares.

After all, whether an investor has one share in a $100 stock or 100 shares in a $1 stock, he will still have the same degree of ownership in a company, since the price of a stock is determined by the number of shares that have been issued.

Some market pundits have suggested that one reason a stock continues to fall after it consolidates its shares is the poor business fundamentals it suffers from.

While that may be true in a few cases, some of the companies affected by the MTP rule appear to be victims of bearish market conditions as they belong to the offshore and marine sector whose businesses have been badly bruised by oil majors slashing their capital expenditures to combat falling oil prices.

There is another observation worth making: When the SGX embarked on enforcing the MTP requirement, there was almost no precedent that it could rely upon to assess the outcome of the exercise.

True, an MTP rule is in place in some major bourses, such as the New York Stock Exchange. But because the rule has been operational in these bourses for a long time, counters failing to measure up form only a small proportion of all the companies listed on them.

In contrast, the SGX's MTP exercise was on a much bigger scale, affecting well over 200 counters, which accounted for almost one-third of all the mainboard-listed firms.

The problem could also have been compounded by the presence of short-sellers taking advantage of investors' worries about a possible drop in the consolidated share price by borrowing scrips to sell in the hope of buying them back at a cheaper price later.

Such claims of predatory short-selling are difficult to substantiate but, in the uncertain market conditions, it would not be surprising if the fears which they trigger are more likely than not to keep buyers away.

What should be done?

Suggestions abound, like merging the MTP watch list with another watch list that the SGX has had in place since 2008, onto which a mainboard-listed firm is tossed if it records a pre-tax loss for three consecutive financial years and has an average daily market capitalisation of less than $40 million over the previous 120 trading days.

But even if the regulators are receptive to such a suggestion, there is no telling what fresh problems may emerge from further tinkering of the watch list criteria. It would also take time to launch a public consultation process to debate the merits of such a proposal.

Instead, the more pressing issue may be to convince the regulators to agree to a further delay in enforcing the MTP rule on companies which have yet to comply, at least until 2018 when the SGX Post-Trade system comes online and other reforms, such as new short-selling reporting requirements, kick in.

Sure, such a postponement may trigger a storm of protest from companies which have already complied with the MTP requirements and suffered a backlash, with their share prices falling as a consequence.

But we live in an uncertain world where even the world's most powerful central bank, the US Federal Reserve, has a problem making up its mind on pressing ahead with its next interest rate hike, for fear of the chaos it may unleash on the financial markets.

Under such trying circumstances, it is simply not advisable to stick to an MTP compliance timetable conceived when market conditions were far more bullish than now.

It is worthwhile recalling that when the SGX's predecessor, the Stock Exchange of Singapore, started to roll out scripless trading 26 years ago, it also took a cautious stance, adopting a timeframe which stretched into years to ensure that the exercise did not disturb the market-trading dynamics while the companies were going scripless by batches.

Given the uncertainties now facing the market, stretching the timeframe for companies to comply with the MTP ruling would be welcome by both the affected companies and investors.

This article was first published on Jun 20, 2016. Get a copy of The Straits Times or go to straitstimes.com for more stories.