Is MAS And SGX To Be Blamed For The Noble Group Limited’s Saga?

Noble Group Limited (SGX:CGP) is the stock that investors love to hate on the Singapore Exchange. Even since a blogger, Iceberg Research, has published a negative report on the company back in 2015, Noble Group has been showing nothing but weaknesses for the past two years.

Over the past two years, Noble Group has seen massive write-downs in its business, running in the billions. Its founder, Richard Elman has even stepped down as its long-term chairman back in 2016. This was followed by its CEO, Yusuf Alireza’s resignation a few months later. Now it seems Noble Group is like an orphaned child wandering in the Singapore Exchange, unwanted, deserted, directionless.

The blogger, Iceberg Research, has been following up with the development of Noble Group since its initial report back in 2015. Just last week, the blogger started to take aim at a different target to attack, the regulators. In its latest blog post published on the 3rd Aug 2017, Iceberg Research claimed that the “saga reveals the complete failure of the regulators in Singapore.”

That seems like a very serious accusation on the part of the blogger. However, is this a fair claim by Iceberg Research? Is the Singapore Exchange (SGX) and the Monetary Authority of Singapore (MAS) really doing a terrible job? In this article, we want to investigate this very question.

Accusations Into MAS and SGX

Iceberg Research basically accused the two regulators of their failure to prosecute Noble Group of its accounting practice; which it claims Noble Group is the “Enron in Asia”.

Personally, I have no love for Noble Group and I do think it deserved all the best press it is getting over the past few years. However, putting the blame of the loss suffered by shareholders in this investment on the regulators might be an unfair accusation. For now, most of the issues Iceberg Research has with Noble Group is the issue with its valuation of many of its assets and contracts. The company has not been caught with outright fraudulent practices like Enron of setting up special purpose vehicles, transferring assets among itself and its SPVs to create an illusion of activities and gains.

For the case of Noble Group, as there is no ready market for its assets, maybe except for its Yancoal investment, it has to record its asset value or contract value is based on assumptions it has to make. It has the rights to use conservative or more aggressive assumptions to value its assets and it might create an inflated asset level for the company. However, that by itself is not really a fraud. The book value of a company does not need to be the actual market value of the company. If all companies need to present its book value as closely to its true market value, then every single company listed on the stock market would just be trading at 1.0 book value.

Where is The Line?

If the regulators are to go after Noble Group for having too aggressive assumptions on its valuation technique, does it mean it has to go after all the other companies that have assets booked at unrealistic levels? Will SGX and MAS have to go after a manufacturing company for not booking its equipment and machines at its liquidation value? Or should they go after companies like Oversea-Chinese Banking Corporation for keeping much of its property value at cost while they are worth so much more at the current market value?

The answer is no, the job of a regular was never to make sure a company represents its book value as its market value. It is the job of the investor.

Huge Salary?

Iceberg Research also mentioned this;

“Every time, they funded what was clearly an accounting illusion. Every time, part of this money was used to pay the astronomic salaries of Noble’s senior managers. The former CEO, Yusuf Alireza, is suing the former Chairman, Richard Elman for $58m he claims he is owed, so that gives us an idea of how much these people were getting paid. Noble has seen a huge transfer of wealth from the shareholders who were deceived to the people who organised this deception. The SGX and the MAS did nothing to stop this scandal.”

It seems to suggest that because the company pays a huge salary to its executive, it is lying to its shareholders and so the regulators should stop it. Again, the argument is quite confusing. A company has the right spend its money as it deems fit. It is not the role of MAS and SGX to tell the company how they should be spending their money. All the information on executives’ pay is public information. If the shareholders and debtholders are unhappy with it, it should be between the management and the stakeholders, I do not see why the regulators should get involved. Many companies in the US are paying their executives extremely well as well. Companies like the big banks like JP Morgan or Goldman Sach or huge companies like Apple Inc, paid hundreds of millions in compensation to its executives. Even unprofitable companies like Twitter or Snap Inc are compensating their executives very generously. Should the SEC go after them and tell them how they should be spending their money? We are living in capital markets, not communist markets.

Conflict of Interest?

Lastly, there is also the classic argument that SGX has a conflict of interest because it has to depend on its profit interests with its regulatory interests. That is why it does not dare to go after Noble Group, fearing that the loss of Noble Group as a listed client on its exchange would reduce its profit. Yet, if we think about it, is it really in the best interest of SGX to “close one eye” on Noble Group? The loss of confidence of investors in the market would directly reduce trading activities in the market. So, SGX would want to have a clean and transparent market to exist, to inspire confidence in investors, which would increase trading volume in the exchange. Therefore, still today, I still find it difficult to accept this “conflict of interest” argument as SGX has nothing to gain from it for letting frauds to prosper in the exchange.

The Deeper Problem

I do not feel the answer to preventing saga like Noble Group is to have tighter and more regulation. The problem is that accounting and business are never a clear-cut issue. There are millions shades of grey. We cannot expect regulators to be the ones coming into the market to tell us which are the good stock to buy and which are the bad stock to short. It is the job of the investors to make that decision. The only thing regulator can do is to make sure companies do not push the limit of accounting practices too far till the point of outright fraud. Even then, it is extremely hard to prove. Enron was never investigated as a fraud until the entire business started collapsing.

Sure, it is easy to find someone to blame when something goes wrong. We blame the company, the management, the regulators. Many times, if we have suffered losses on the investment, maybe we have to take some of the blame ourselves. To ensure we do not fall into the same trap again is to educate ourselves more on the subject of investing.

What do you think should be the role of regulators in the stock market? Share with us below.

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