Lessons From Delisting

Foreword from ShareInvestor

This article “Lessons From Delisting” by Wong Wei Kong was first published in The Business Times on 01 Apr 2010 and is reproduced in this blog in its entirety.

The forced delisting of several struggling companies from the Singapore Exchange (SGX) has become the latest controversy in the market. While views will remain divided, what’s clear is that for both the exchange and investors, there are lessons to be learnt.

On Tuesday, the SGX reiterated its decision to delist five of the six companies on its watch-list that were earlier given delisting notice – General Magnetics, Chuan Soon Huat Industrial Group, ASA Group Holdings, Fastech Synergy and Ionics EMS. The sixth firm, Chinasing Investment Holdings, qualified for a 12-month reprieve. The companies ended on the watch-list after posting pre-tax losses for three consecutive fiscal years up to March 2008 and having an average daily market value of under $40 million over 120 trading days.

The SGX’s move, not surprisingly, has been greeted with dismay by minority investors who have complained that forcing these companies to delist will only hurt small shareholders. The companies are generally in no position to make attractive or fair exit offers, with some unable to even make any offer at all.

The SGX, certainly, is not blameless in the whole affair. The delisting saga essentially represents a quality issue, and this stems in turn from the large number of very small companies found on the exchange. Looking ahead, more of such companies are likely to find themselves in similar circumstances. If one takes the view – and many do – that these companies found their way into the exchange only because the SGX had set the bar too low previously while admitting initial public offerings or had placed too much faith in the market doing its job, then some responsibility has to be attached to the SGX for the present situation.

Having said that, it would be short-sighted to call upon the SGX to just let failing companies persist, even if that is what some shareholders want. For one thing, the exchange needs to enforce the rules that it has laid down – not doing so would send the wrong message and create more problems down the road. The point here is that the SGX is accountable above all for the integrity of the whole market (and to its own shareholders as a listed company, of course), and the exchange should not be faulted now for trying to ensure that only viable companies remain listed, even if it is held responsible for having opened the door too wide. The SGX is not responsible for the performance of these faltering companies – it should be the directors and management of these firms that take the rap.

And investors caught in these companies need to take responsibility for their investment decisions too. As SGX pointed out, there were plenty of red flags. These companies have registered financial losses for at least five successive years. They were placed on the watch-list two years ago after recording at least three consecutive years of losses. These firms were struggling not just during the recession but also when the economy was booming and other companies were reporting record profits.

Why did investors continue to keep their money in these firms? Did they question directors and management hard enough? Were some investors hoping for a quick punt but were caught out? For them, while having some grounds to call for more protection under the law, the best protection they could have afforded themselves was to have recognised the inherent risks of punting very small stocks, not withstanding the potentially higher returns.

So hard lessons all round then. For the SGX, what it’s doing is akin to closing the stable door after the horse has bolted. For investors, it’s the old lesson of investing with your eyes open. And one more thing – the regulators must take steps to ensure that the owners, directors and management of these failing companies do not take advantage of the situation by taking them private without an offer or a fair offer even when they can afford to. In a situation where everyone is a loser, it would be a travesty if they emerged winners.