SGX as Regulator & Profit Operator – Conflict of Interest?

Rusmin from the Fifth Person did a great re-cap on the SGX (Singapore Stock Exchange) AGM 2015, which I was not around to attend this year.

SGX: 8 Things I Learned from its AGM 2015

I would like to talk briefly about his first point which I’ve reproduced here

SGX has a dual-role as a regulator which protects the interests of shareholders of publicly listed companies in Singapore and as a profit-driven enterprise that is held accountable to its own shareholders.

I’ve previously been critical of the failure for the authorities to protect minority shareholders. Investors in S-Chips have seen little recourse. The Blumont Saga has dragged on with little updates to minority shareholders.

Has Justice Been Served?

One of the few updates on it is a case involving Goldman Sachs, and Quah-Su Ling, CEO of IPCO who indirectly involved in the penny stock rout.

So imagine my horror when I read in the newspapers that the SGX was actively seeking more listings from Chinese firms. Considering the sad and sorry tale of financial and corporate fraud of Chinese firms listed overseas, this was depressing.

Still, its hard to blame the SGX, and Rusmin’s point highlights it:

The only stable recurring business for SGX is market data which contributes 10% of the revenue and corporate action services (i.e. processing dividends) which contributes 4.6% of revenue.

A lot of SGX’s revenue derives from activity. The same inherent problem with getting non-bias advice from a barber arises.

If you ask him whether you need a hair cut, what can he say?

SGX must perform its regulatory role, in protecting shareholders. And yet, if listing requirements are too strict, firms will find it increasingly harder to list, thereby reducing their own profits.

Who is going to complain?

The shareholders of the SGX board which are there for a profit sharing motive.

In a way, I pity the whoever takes the role of the CEO of the SGX. As Prof Mak Yuen Teen wrote in his article

A couple of years ago, I met the retired CEO of a listed stock exchange which, like SGX, has dual roles of a regulator and operator. I asked him whether he thought there was a conflict between the two roles.

He replied: “Of course there is, but I couldn’t say it when I was the CEO.”

I think the problem with the current situation is pretty clear.

What puzzles me more is why haven’t the authorities moved to rectify the situation by simply seperating the regulatory role of the SGX into an independent body.

After all, that’s the standard operating practise of most countries.

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