Published April 14, 2011
By R SIVANITHY
IT'S disturbing to note that of the 10 China stocks or S-chips suspended from trading on the Singapore Exchange (SGX), four - Falmac, Oriental Century, New Lakeside and China Gaoxian - are investments included under the Central Provident Fund Investment Scheme (CPFIS).
Scanning through the list of shares whose names contain the word 'China' reveals that at least 20 more are permitted CPFIS investments. So it has to be just as disquieting to learn that in order to qualify as a CPFIS stock, only four criteria are employed: the company has to be incorporated in Singapore; it has to be listed on the mainboard (Catalist companies qualify if they were already listed on Sesdaq, Catalist's predecessor); it has to be traded in Sing dollars; and it has to allow CPF investors to attend its meetings.
Finally, it can be of no comfort to local investors who have used their CPF savings to invest in S-chips to read that US regulators earlier this week have set up a task force to investigate fraud in the listing of China companies in the US via reverse takeovers or 'backdoor registrations'.
US Securities & Exchange Commission (SEC) commissioner Luis Aguilar was quoted in news reports as saying there have been over 150 backdoor registrations of Chinese companies since January 2007, and that a number of these companies have been 'vessels of outright fraud', attributing this to the lack of due diligence in reverse mergers, deficiencies in cross-border auditing rules and procedures, as well as the inability to enforce US securities laws in China.
Since investigations into the suspended S-chips here are still ongoing, it would be premature to conclude that the Singapore experience is identical to the US one; however, it would be fair to say there are some disconcerting similarities because the sector here is currently labouring under a shroud of suspicion born of a series of accounting failures and corporate governance lapses over the past two years.
Does all this mean it's time the authorities stop allowing the use of CPF money for S-chip investment? Not quite. It would not be reasonable to conclude that just because a handful of China stocks appear shady, all China stocks are suspect; there are many high-quality investments to be found within the S-chip segment, many of which pay decent dividends and some of which have even been included in the Straits Times Index (STI).
However, the scandals associated with China companies listed outside China have drawn attention to a need to review and tighten the rules for all CPF stocks.
The use of CPF savings for stocks started in 1993 when Singapore Telecom was listed, and a time when the 'Asian Tigers' appeared to be a compelling, long-term manufacturing growth theme that captured the imagination of investors everywhere. Whether or not the scheme has been a success is not known but according to CPF's website, as at September 2007, a not-inconsiderable sum of $4.5 billion was invested in CPFIS stocks. So it appears the use of CPF money for the stock market has proven popular with retail investors.
However, of the four criteria currently used for inclusion in the CPFIS, only one relates to quality, and even that tenuously at best - namely that the stock be listed on the mainboard.
Granted, this is a 'caveat emptor' world we live and invest in, but by now many observers would agree that meeting SGX's listing requirements is hardly an endorsement of quality sufficiently high for investing one's retirement savings.
The authorities should therefore consider raising the CPF bar by taking a case-by-case approach, employing criteria such as quality and reputation of the company's board, its adherence to the Code of Corporate Governance, whether it has a proven and consistent track record of profits and/or dividends, and whether its disclosure record over the years has been acceptable.
Other criteria worth considering are whether the company is widely covered by brokers, the availability of analyst research, liquidity of its shares, and whether it is frequently queried by SGX on odd share price movements.
Whatever the eventual criteria, a tightening of the present rules should be undertaken to ensure maximum safeguarding of people's CPF savings.
No comments:
Post a Comment