Taiwanese listed companies had better shape up or they will find themselves being shipped off the exchange. That’s the warning from Ding Kung-Wha, vice chairman of Taiwan’s Securities and Futures Commission. He says the SFC is planning radical changes in the months ahead that will have a major impact on listed companies. The moves are likely to include improvements in corporate governance regulation, a national stability fund and investor protection.
To take a biblical turn and deal with the latter first, according to Ding there are two key points about the new investor protection package. Firstly, a new watchdog will be established whose role will be to help those who have lost money on the securities market to sue offending advisers.
‘The second point is to establish an investor protection fund according to investor protection law.’ Legislation to do this is currently before the Yuan (Taiwan’s parliament) but has still to be passed. Getting such legislation through parliament could take time as there is ‘other more important legislation’ before the Yuan, says Ding. What is cheering though is that it is unlikely to be affected by the Taiwanese presidential elections.
Ding gives some examples of how the new law will operate although the exact structure and mechanics of it are not yet decided. ‘If, for example, a public company has a financial crisis, or goes bust leaving many investors with losses, then the investor protection law could be used to sue the company, its underwriters or the auditors.’ Individuals who are keen to sue do not lose that right although they might lose a great deal of money and time. Suing a company in Taiwan is an expensive and drawn out procedure. The law will also give investors the right to sue companies and their directors if they suspect they have lost money due to insider trading.
Global view
Globalization affects a number of questions relating to the Taiwanese stock market at the moment. While some markets in the region are gearing themselves up for 24-hour trading, the Taiwanese response is much more cautious. Indeed, its concession to round-the-clock trading has been just an extra 30 minutes – delaying the exchange’s closing bell from 12.30 pm to 1.00 pm.
This caution is more heavily related to fears over the trading reaction of the retail market than institutions, explains Ding, although he concedes that the possibility of alliances might affect the situation in the future. ‘If we forge alliances with other foreign markets in the future then that might lead to 24-hour trading. We have considered establishing full afternoon trading but investors argue it might affect their job since they would not have time to analyze stocks.’ Unsurprisingly the opposition adds to the SFC’s caution: ‘We want to extend the trading system step-by-step,’ says Ding.
Such conservatism also goes part of the way toward explaining why online trading, such a phenomenon in the US and some other Asian countries, is unlikely to catch on in Taiwan. On top of the natural Taiwanese caution, the market is relatively accessible and cheap to enter so the incentive for retail investors to move toward online trading does not exist as it does in other markets.
Taiwan is blessed with three markets: the Taiwan Stock Exchange and an over-the-counter (OTC) market which has both a normal and a second board. The three markets tend to make investing in young growth stocks relatively easy for retail investors as well as institutions. But it can also mean that unstable companies give investors a bad experience. As Ding points out, the OTC’s second board has ‘less restrictive’ requirements and attracts risk takers. It has no earnings requirements, thereby making the TSE and OTC normal board relatively more conservative.
What is uncertain though is how long-lasting this non-internet market actually is. Ding notes that 3.6 percent of the volume of trading is currently done via the internet and does concede that the potential for growth is there. Taiwan is, after all, a country with high levels of computer access among the population and free flows of information. That being said, there seems to be little work in progress at the SFC to encourage companies to use the web to increase disclosure standards. Certainly, Ding seems somewhat confused when asked about the possibility of the SFC acting to lead companies down this route. One could put this down to linguistic difficulties but, if that is the case, it is the only point in the interview when the interpreter fails to get the point across.
Stable approach
The official line is much more focused when Ding moves on to the establishment of a national stability fund. That’s partly because the legislation has already been passed, partly because of the amount of money involved: NT$500 billion. That tends to focus the mind.
The fund is available for a range of circumstances when listed companies might need bailing out. It was originally conceived as a means of protection from external political pressures but domestic economic factors are now included in the funds remit too. Ding mentions an obvious political threat that could lead to an economic downturn: missiles from the mainland being fired into the Taiwan Sea. Nor is this scaremongering just plucked from the air – missiles rarely are. In 1996, during Taiwan’s first ever presidential election, the People’s Republic of China was so fearful of the first full democracy on Chinese soil that it fired off a few missiles in the general direction of Taiwan. The attendant economic consequences were massive although the political ones were soon smoothed over. Sabres were rattled but free and fair elections went ahead. More broadly the rule of thumb is that the fund is there to protect Taiwan or mitigate it from external forces beyond its control.
‘If other countries do something that might affect our country’s economy we must do something to prepare for it,’ says Ding.
Foreign company IROs slavering over the idea that their own governments might dream up some similar type of bail-out fund should pause for thought – it is not an automatic insurance policy. That’s still down to individual companies. Indeed, natural disasters may be ruled out as quickly as human ones. Ding refers to the ‘921’earthquake that severely damaged large swathes of Taiwan last September 21 (hence the name) ‘We think the 921 earthquake a tragedy but it did not significantly affect the economy of Taiwan so we would not think to use the fund,’ he says.
Earthquakes, it seems, do not lead to national instability – just a bit of local trouble.
