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When distressed companies opt for restructuring, can more be done to protect small investors?

When distressed companies opt for restructuring, can more be done to protect small investors?

Stock index tickers at the Singapore Exchange (SGX) premises. (File photo: Reuters/Edgar Su)

SINGAPORE: Corporate restructurings can be lengthy and ugly as creditors fight for whatever that is left to go around. Retail investors who are ranked lowest on the creditors’ list and have the least bargaining power, are often left feeling helpless.

That is the case for Ms Teo who had invested a five-figure sum into Hyflux’s securities, as she watched the once-vaunted water treatment firm struggle to put together a rescue plan nearly 16 months after seeking bankruptcy protection.

A prior deal had asked small investors like her to stomach up to a 90 per cent loss on their investments. While that was later aborted when Hyflux fell out with its would-be white knight from Indonesia, it remained a rude shock. “We really felt like we were taken advantage of,” she recalled. 

As the company continued its search for a new investor, Ms Teo bemoaned that meaningful updates have slowed to a trickle. In particular, Hyflux’s talks with Middle Eastern suitor Utico have dragged on for months. 

“We don’t know what’s going to happen or what we can do now,” the 46-year-old told CNA.

READ: From making waves to drowning in red ink: Hyflux, Tuaspring and how a business giant came undone

A recent commentary from the Securities Investors Association Singapore (SIAS) sought to highlight the “disadvantaged” position of retail investors when companies run into financial troubles, and called for more protection measures.

Already licking their wounds, individual moms and pops do not have the means to pursue legal action or seek legal advice, according to SIAS chief David Gerald.

This is in contrast with institutional investors “who would have taken as many measures as possible to ensure that their interests are protected in the relevant legal documents”.

Unequitable communication is another problem. Mr Gerald pointed out that firms in trouble may choose to have “more open lines of communication” with larger stakeholders or start withdrawing from the public eye by saying that negotiations are confidential and delicate.

“Our experience tells us more needs to be done to protect the interests of retail investors when trouble strikes,” he wrote.


Mr Gerald, in that commentary, suggested two ways to strengthen protection for minority investors.

Having been the advocacy group for investors’ rights over the past 20 years, SIAS has been involved in the debt restructuring efforts of several embattled locally-listed firms, with the latest being Hyflux.

It provides independent legal and financial advisers to retail investors on a pro bono basis. It also helps to form steering committees comprising affected investors, and organises regular townhall meetings between the company’s management, steering committees and other retail investors.

Even with that, there are still problems.

One of which is that it remains up to the firms to decide whether to approach SIAS.

Mr Gerald said: “This means there could be many instances where shareholders are not properly engaged and are therefore exposed to the likelihood of not knowing where they stand.”

Authorities may want to consider having “a formal requirement whereby all companies which face liquidation are to engage SIAS”, he suggested. At the same time, SIAS could also be granted “locus standi” to act on behalf of stakeholders in court.

The set-up of a fund or insurance policy may also be explored, said the SIAS chief. This will be used to help SIAS pay for the legal and financial advice aimed at helping retail investors.

“Debt restructuring will become increasingly important and if Singapore is to become a hub for such activities, it will be essential for all affected parties to enjoy equitable treatment,” Mr Gerald noted.

“In this regard, SIAS can play an important role in ensuring that the interests of investors are properly represented.”

SIAS president and CEO David Gerald speaking at the Nanyang Technological University.


Market experts whom CNA spoke to echoed the need for small investors to be better protected, but they mooted ideas for the formation of a separate investors group.

For investment specialist S Nallakaruppan, this should be an association with statutory powers.

Citing his experiences as an aggrieved shareholder of troubled firms like Noble and Vard Holdings, he said: “Already so injured, where will retail investors find resources to gather like-minded people and then find a lawyer to protect their rights?

“You need somebody to take charge and make requests to the company. For the company to oblige, it (the body) needs some statutory power."

National University of Singapore (NUS) associate professor and corporate-governance advocate Mak Yuen Teen suggested forming a body to arbitrate disputes between investors and companies, as well as an independent group that monitors companies and “publishes negative reports” on them and its directors.

He also gave the idea of having a body that can sue on behalf of shareholders.

Assoc Prof Mak raised the example of the Securities and Futures Investor Protection Centre in Taiwan, which helps mediate disputes and litigate on behalf of investors. Funding for the centre is provided by the stock and futures exchanges, securities firms and futures firms, he added. 

If this is to be emulated in Singapore, it should be separate from SIAS, he added.

This boils down to how SIAS has taken on other tasks, such as corporate governance which involves it giving out awards to companies. This may make it challenging for SIAS to also take companies to task.

“How do they sue companies after giving them transparency or best corporate governance awards, for instance, or after jumping to their defence?” said the accounting professor at the NUS Business School.

READ: As local investor advocacy group SIAS marks 20th year, funding and succession are challenges ahead

Operating as a charity, SIAS also largely raises funds through corporate funding and its annual programmes, such as the Investors’ Choice Awards. This reliance on corporate funding is another drawback in the eyes of experts.

Said Ms Stefanie Yuen Thio from TSMP Law: “Should SIAS be granted ‘official standing’ as the investors’ association de jure, listed corporates may attempt to buy ‘soft’ influence through donations and sponsorships.”

“Even in the absence of such external meddling, it would be tough for SIAS to prove its independence if, for instance, allegations are raised by stakeholders with competing interests.

"This could undermine its effectiveness as a retail investor advocate when insolvencies arise,” the law firm’s joint managing partner wrote in a commentary published in the Business Times on Oct 29.

In response, Mr Gerald said SIAS, which he founded in 1999, has always been “very careful” about its role.

For instance, the association had stopped working with an unnamed bank after being told not to comment on the bank’s problems.

“Companies do understand that we have to be independent and they work with us on the basis that SIAS has to be independent,” he said in response to CNA's queries.

“We have demonstrated adequately that we safeguard our independence and the rights of individuals.”


Ms Yuen Thio would also like to see the laws changed to better allow retail investors to take action against errant boards.

This will include amending the Companies Act to permit class action lawsuits and to help minority investors obtain timely company information in order to pursue legal claims against the directors and management.

Laws on third-party litigation funding could cover minority shareholder lawsuits in insolvency situations, she added.

Meanwhile, she also suggested the Singapore Exchange’s Central Depository, which holds the shares of investors, to provide a communication service for shareholders to rally other shareholders for a common cause. 

Nevertheless, all these should be accompanied by more efforts to raise investor education. 

Ms Yuen Thio cited the example of perpetual bonds or “perps”. “(These) are not really bonds in the traditional sense and a savvy investor would not invest without understanding the risks associated with a bond that the issuer has no obligation to repay.”

The issue of whether retail investors fully understood “perps” and its features was thrown up at the onset of the Hyflux saga. 

“When corporates go into default, there is usually very little left to go around so the parties would be picking scraps off a carcass,” she said.

“It’s much better to arm investors with knowledge and the ability to assess potential investments so that they do not put their life savings into companies that are financially overextended or badly managed.”

Source: CNA/sk


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