Singapore Exchange (SGX) is an equities, fixed income, derivatives, commodities, and foreign currency exchange. SGX operates the largest stock market exchange in Southeast Asia with nearly S$1 trillion in total market capitalisation of listed equities. SGX is also Asia’s largest debt securities exchange with more than 3,100 bonds from 47 countries listed.
As an exchange operator and a regulator, SGX occupies two roles which are usually separated – for example, the independent Securities and Exchange Commission regulates the New York Stock Exchange and Nasdaq in the U.S. Because of its dual roles, SGX has had to deal with criticism about a potential conflict of interest between its commercial and regulatory operations.
In September 2017, SGX set up a subsidiary – Singapore Exchange Regulation (SGX RegCo) — to oversee its regulatory role. The regulatory unit has the power to act against companies and directors if they are found in breach of SGX listing rules. Although SGX RegCo is still part of the main company, it has an independent board and has no profit or financial considerations to worry about.
As it turned out, SGX RegCo was thrust into the spotlight when I attended SGX’s latest annual general meeting. The issue of corporate governance took centre stage as shareholders focused on a recent episode where Stamford Land filed a defamation lawsuit against well-known activist shareholder, Mano Sabnani. The company alleged that defamatory comments were made by Sabnani during Stamford Land’s AGM, on social media, and in a letter to the Business Times. As a result, the incident sparked a debate on minority shareholder rights and SGX’s role in protecting the interests of minority shareholders.
Here are 12 things I learned from the 2018 SGX AGM:
1. Total revenue grew 5% year-on-year to a record-high of S$844.7 million. Likewise, net profit grew 7% to hit a 10-year high of S$363.2 million. This was mainly due to strong revenue growth in the Derivatives segment which grew 12% in FY2018 and now contributes 40% of total revenue. SGX’s two other segments – Equities and Fixed Income, and Market Data and Connectivity – also posted revenue growth, and contributed 48% and 12% of revenue respectively.
2. CEO Loh Boon Chye highlighted that Singapore is among the top 20 countries for U.S. investment in foreign securities. As at end-2017, U.S. investors held US$143 billion of Singapore equities, up 43% from the year before. FY2018 was also a record year for bond listings which now contribute over 20% of SGX’s overall listing revenue. SGX also offered a new asset class to retail investors this year — private equity-backed bonds — when it listed the Astrea IV bonds.
3. SGX is now Asia’s largest exchange for foreign exchange (FX) futures. Total notional traded for SGX’s FX futures suite grew 131% to US$658 billion in FY2018 and the management expects its FX derivatives business to contribute positively to net profit in the next few years.
4. SGX will implement a new dividend policy for FY2019 onward which aims to pay an absolute quarterly dividend of 7.5 cents per share. (This is equal to the annual dividend of 30 cents per share received this year.) Previously, the company had paid a dividend of no less than 80% of net profit. The new policy aims to pay shareholders a steady and sustainable dividend – which ought to grow in time – while giving the management more flexibility to retain earnings for investments for future growth. Based on the new absolute dividend and SGX’s share price of $7.46 as at 21 September 2018, its dividend yield is 4.0%.
5. A shareholder was unhappy about the amount of goodwill on the balance sheet (S$88.6 million) and wanted to know if the value could ever be recouped. CFO Chng Lay Chew explained that SGX acquired Baltic Exchange for S$138.8 million in November 2016 of which S$76.2 million was assigned to goodwill. The Baltic Exchange is the world’s premier exchange that provides maritime shipping information to facilitate the trade and settlement of shipping contracts and derivative shipping contracts. The CFO said that the value of the Baltic Exchange lies in its brand and its data and intellectual property rights, and he believes that its synergies with SGX will generate value that will more than cover its goodwill on the balance sheet.
6. SGX currently has over 50% global market share for dry bulk forward freight agreements. When a company ships or imports a dry bulk commodity like iron ore, it has to use data from the Baltic Exchange to price its shipping contracts (forward freight agreements). The Baltic Exchange licenses this data to other exchanges and the management expects business to grow as the volume of international trade increases.
7. A shareholder was interested to know how SGX planned to grow its equities business. The CEO shared that certain sectors in Singapore are attractive to both investors and companies. For example, Singapore’s REIT market is well-known among investors and attracts listings not just from Asia but from Europe and the U.S. as well. Singapore is also strong in the healthcare and consumer sectors and the CEO said that the country should ideally have several core sectors that investors like, and can offer good liquidity and valuations for companies that aim to list here. He added that SGX’s growth in other asset classes like bonds is also important as companies may look to list its bonds in Singapore first before choosing to raise equity.
8. A shareholder brought up the case of Stamford Land filing a defamation suit against its shareholder and wanted to know SGX RegCo’s role in protecting the interests of minority shareholders as it had kept silent on the matter. SGX RegCo CEO Tan Boon Gin declined to comment directly on the specific case as it is the subject of legal proceedings. However, he shared: “Generally, we encourage a free and frank discussion between the board and shareholders at AGMs. However, there is a line — a legal line and not a line in our listing rules — that cannot be crossed which applies to both board members and shareholders. As a market regulator, we encourage parties not to take an overly-legalistic approach because if they do, I fear it will have a chilling effect on robust conversations.”
9. A shareholder, Vincent Tan, spoke passionately about the importance of corporate governance at the AGM. He said SGX should not fudge the issue as it would ultimately affect the company commercially if minority investors don’t have a voice. He pointed to Principle 11 of the SGX’s Code of Corporate Governance –
The company treats all shareholders fairly and equitably in order to enable them to exercise shareholders’ rights and have the opportunity to communicate their views on matters affecting the company.
– and said that the case of Stamford Land is as good as minority oppression. Investors should have the right to ask tough questions at the AGM, and companies should not be using the courts to threaten minority shareholders for what was said at the meeting. He recounted AGMs where he was only allowed to ask one question, another where the microphone was cut, and one more where the chairman chided him for asking questions that were too detailed. In contrast, he remembered attending an Ascott REIT AGM over 10 years ago where the chairman, Liew Mun Leong, thanked him for his tough questions because it gave the management an opportunity to give open answers and share more insights on their company. Tan concluded by saying that AGMs should not be viewed as a contest between the board and minority shareholders, but as a chance for both sides to engage each other and move the company in the same direction. If investors aren’t allowed to speak up and AGMs become a non-event, then SGX will likewise be affected if the market loses confidence in the quality of companies listed in Singapore. When he finished, the room of 750 shareholders gave him the loudest round of applause in show of their support.
10. SGX RegCo chairman Tan Cheng Han agreed that discussions at an AGM should be robust and he was personally ‘quite taken aback’ when he learned of the lawsuit in the news. However, if it was true that a defamatory statement was made, then a company has the legal right to seek action. But he also understood that shareholders have every right to be concerned and said: “At the same time, let me assure you – where there is a clear case of oppression of shareholders, there are things that we in RegCo can do. If there is evidence where directors have not acted appropriately, RegCo will not hesitate to act. I give all of you this assurance.”
11. A shareholder suggested that SGX RegCo set up a ‘dispute resolution board’ so that disagreements can be settled before ever reaching the courts. Shareholders should also have the right to clarify and retract any inappropriate statements at the AGM before a company considers filing a lawsuit against them. If not, shareholders may be unwilling to voice their opinions for fear of being sued. Even if the minority shareholder is in the right, they don’t have the financial resources that a company has to undergo a lengthy legal process, and they usually end up issuing an apology and paying damages to settle a case. He highlighted the National Kidney Foundation scandal where the charity sued early whistleblowers with success until it met an adversary, Singapore Press Holdings, who had equally deep pockets to take the case all the way. He also requested for SGX to step in and persuade Stamford Land to drop the lawsuit, and to mediate between the parties. The SGX RegCo CEO thanked him for his views and extended an offer to mediate between Stamford Land and Mano Sabnani if both parties were willing to do so.
12. An observant shareholder asked who regulates SGX itself as there would be a conflict of interest since SGX RegCo falls under the same organisation. The SGX RegCo CEO explained that for the exception of SGX, the Monetary Authority of Singapore (MAS) is the authority that regulates the company to ensure independence. SGX RegCo chairman Professor Tan Chang Han added that he can only be removed from his office with the approval of the MAS and that SGX cannot unilaterally do so. Equally, SGX RegCo board members can only be removed with his consent. To that extent, SGX RegCo is functionally independent.
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