Hock Lock Siew
Published January 24, 2007

Improper disclosure of property material info?


THE property market is hot, and scarcely a day passes without news of developers making bullish forecasts about their projects. That's hardly surprising because businessmen are expected to capitalise on positive market conditions. It has, however, created a situation which raises questions relating to the proper disclosure of material and stock price-sensitive information, given that many developers are also listed companies.

The Singapore Exchange (SGX) has taken a firm stance when it comes to dealing with listed companies which fail to properly handle the disclosure of material information. A recent example was thumb drive maker Trek 2000 International; it is possible to draw parallels between that case and the current situation involving listed developers.

Early last year, SGX reprimanded Trek for making improper and selective disclosures. Trek had said in an interview with Reuters that it expected sales and earnings to grow by 20-25 per cent over the next 3-5 years. As the information was material and had not been publicly disseminated before, SGX listing rules required Trek to make a prompt announcement. Trek did not do so and made an announcement only after being alerted by SGX, by which time its share price and the trading volume had risen sharply.

In rapping Trek, SGX said the company breached Rules 702 and 703 of the Listing Manual. Rule 703 obliges an issuer to provide timely disclosure of material information, while Rule 702 says an issuer must release all announcements via SGXNET, the exchange's electronic dissemination platform, unless otherwise specified. Trek was subsequently fined by the Monetary Authority of Singapore (MAS) for contravening continuous disclosure requirements under the Securities and Futures Act (SFA).

Breaking the rules too?

Are listed property developers, in making forecasts about the pricing of their projects, also in breach of these rules?

Clearly, saying that an upcoming project will fetch $2,000 psf or $3,000 psf is tantamount to making a material forecast. A practice note on corporate disclosure policy and rules issued previously by SGX noted that while no definitive list can be given on what constitutes material information, examples provided in the Listing Manual include information concerning an issuer's assets and the 'financial condition' of things such as ventures, mergers and acquisitions. Forecasting how much a project would fetch is a statement on financial condition, and few people would argue that it does not constitute material information.

If the information is material, then it needs to be properly and promptly disseminated. At this juncture, it's worth pointing out that while listed developers (not all, though) do make disclosures regarding their projects on SGXNET, they usually leave out price projections. Instead, the price projections are often disclosed at media interviews - calculated perhaps to grab the headlines. That is the manner in which all the forecasts of record prices have been made in the current property bull run.

This is selective and improper disclosure - according to SGX rules. As far as the rules go - and the Trek case provides an illustration - disclosing material information to the media is selective disclosure if the same information is not broadcast promptly on SGXNET. Developers may argue that telling the media is enough, but the counter-argument is that developers will be held more accountable if they are made to disclose price projections on SGXNET. As it is now, a developer may be tempted to 'talk up the market' by forecasting a new record price for a project in a media interview. If the projection proves to be puff, it may look a little bad but there is nothing to formally hold it to the forecast. But if that same projection is made on SGXNET and placed on record, then the developer would be bound to provide an explanation if it falls short of the mark - just as in the case for earnings projections.

It provides a safeguard against potential market manipulation, and serves as a reminder that every forecast has to be carefully made - it should not be just an attempt to talk up prices or create excitement.

More significant impact

There is a bigger moral hazard, in fact, when it comes to developers: while what other companies say are often specific to themselves or to a sector, what developers say can have a much broader and deeper impact, given the importance of the property market here.

So there is a case then for the SGX to pull the brakes and apply the requirements for proper disclosure to the bullish price projections now being made by listed developers.