SUSPENSION OF THE STOCK EXCHANGE OF SINGAPORE

Dr Hu Tsu Tau: The problem of the Pan-Electric Industries and those of the Stock Exchange attracted wide public interest. I therefore propose to give the background in some detail to Members of the House so that they can see the issues concerned in their proper perspective.

First, some background on Pan-El. Pan-El is one of 122 Singapore incorporated companies listed on the Stock Exchange of Singapore (SES). At the time trading in its shares was suspended on the Stock Exchange, Pan-El had a market capitalization of some $230 million, just under 1% of the total market capitalization of all Singapore companies listed on the SES. The main business of the company is in three areas, namely, marine salvage/offshore supplies, hotel/travel services and property development.

Although the current recession has undoubtedly affected Pan-El's main business, they are not the sole, or even the main, cause of Pan-El's problems. These problems arose principally as a result of a series of massive forward share deals which Pan-El had entered into, utilizing funds borrowed from banks. These forward share deals, which totalled some S$140 million, had resulted in losses to the company of an estimated $40 million at the time its shares were suspended. These losses were greater than Pan-El's entire 1984 pre-tax profit of just over $40 million, and led to its defaulting on a $7.5 million loan repayment which was due on 18th November 1985. This default, and subsequent revelation of its massive forward share liabilities, eventually induced creditor banks to call in the receivers after the failure of the first attempt to rescue the company.

Mr Tan Koon Swan, with interests in Pan-El held, through Sigma Metal, signed on 11th December 1985 a rescue agreement with a consortium of Pan-El creditor banks to undertake the following:-

(i) Relieve Pan-El of all its outstanding share purchase obligations by 31st December 1985. This was substantially completed on 31st December 1985;

(ii) Inject a total of $40 million into Pan-El by 31st March 1986 in order to restore Pan-El's liquidity and allow it to continue operations. As of today, a sum of $20 million has been transferred to Pan-El.

The foregoing measures should improve prospects for restoring Pan-El to financial viability.

Prior to the setting up of the Supervisory Committee, the Stock Exchange of Singapore (SES) operated under a self-regulatory system in which the affairs of the SES were managed by a committee consisting entirely of brokers. It set its own trading rules and was not obliged to submit returns to the MAS.

When the problems facing Pan-El and its liabilities in forward share contracts first came to light around 15th November, it became evident that a number of stock- broking companies were heavily exposed to the Pan-El group and its associated companies, with exposures to Pan-El reported at around $140 million and total forward contract exposures estimated at around $600 million. These revelations led to widespread concern amongst banks lending to the stockbroking community (as the aggregate capital funds of all stockbrokers stood at $350 million). There was fear that some brokerage houses could become insolvent if Pan-El and its associated companies failed to honour their forward share contract obligations.

Matters came to a head on 30th November, when the Pan-El rescue negotiations collapsed and creditor banks called in receivers and managers. With this development, the threat of broker insolvency was very real as no assurance could be obtained from lending banks that credit lines would not be withdrawn. In the circumstances, the Committee of the Stock Exchange, after consultation with the MAS and leading local banks, decided to suspend trading temporarily with effect from 2nd December. It was a difficult decision as the damage to the SES and Singapore's reputation was recognized. However, a two- s was considered paramount and superseded all other considerations, including repercussions flowing from a suspension. Without a lifeboat fund and the assurance it gave, defaults by a number of brokers was considered almost inevitable, and this would have led to the withdrawal of credit by banks, leading to more defaults. The ensuing panic amongst investors would have led to a forced suspension of the Exchange under chaotic conditions.

I would like to stress again that the lifeboat fund is not meant to bail out individual stockbrokers who have become or may become insolvent through their own imprudence. Such brokers will still fail. Rather, the lifeboat is there to ensure that the obligations of the members of the Stock Exchange as a whole are fulfilled. The fund is a credit umbrella put up by banks and any drawdowns against this fund would have to be repaid with interest by SES member-firms, individually or collectively.

The underlying cause is over-trading on the part of a number of brokers who have taken positions or have provided financing for customers in amounts greatly in excess of their capital resources. The problems are centred around some $600 million worth of forward contracts which mature between December 1985 and June 1986. Due to the prolonged decline in stock market prices, many of these contracts could involve losses for end-buyers upon maturity. If end-buyers default, losses will fall immediately on the brokers, and subsequently on lending banks if the brokers then fail.

The present position is that the aggregate capital funds of all Singapore stockbrokers stand at S$350 million, with another S$70 million in the process of being raised. These funds, together with the S$180 million line of credit in the lifeboat fund, should meet all contingencies.

It should be noted that the practice of entering into forward contracts is not specifically prohibited by SES rules prior to 6th December 1985. What went wrong was gross over-trading greatly in excess of capital funds, thus greatly increasing the risk. The risk was aggravated by heavy concentration in certain shares and by exposure to particular clients. Such practices are distinct from market-churning or price-rigging which, if discovered, would be in contravention of the Securities Industry Act.

The events of December last have shown that the SES, as presently constituted, has proved unable to exercise effective self-regulation. A new Securities Industry Act will be presented to Parliament later today, incorporating new regulatory measures adapted from the Bank- ing Act in Singapore and securities industry regulations currently in force in the United States and Australia. The new Act, when approved by Parliament, will provide a sound basis for the development of Singapore's capital markets in an increasingly complex financial environment.

It aims to provide a refurbished SES with the autonomy to manage its day-to-day activities, while providing Government with the mechanism to identify and act against malpractices. A draft of the new Securities Industry Act was given to the SES in June last year. However, implementation was held up due to strong objections raised by stockbroking companies. Discussions with the SES were continuing when events were overtaken by Pan-El's problems.

Finally, I would like to provide Members of this House with some background facts on the importance of the stock market and its position in our financial system, so that the problems of the Stock Exchange can be viewed in proper perspective. Based on 1984 data, the salient facts are:

(1) The stockbroking industry contributed 0.6% towards Singapore's GDP, out of 12.2%, contributed by the financial services sector as a whole.

(2) Employment in the stockbroking industry accounted for less than 5% of the total employment of around 35,000 in the financial services sector.

(3) Total loans extended to the stockbroking industry by the banks was just over S$1 billion, or 3% of the total loans extended by commercial banks to non-bank customers.

(4) Total market capitalization of the Singapore and Malaysia stock exchanges was around S$70 billion, accounting for about 1% of the capitalization of the major stock markets in the world.

(5) Annual turnover of the Singapore stock market was around $8 billion, or 0.6% of turnover on the major stock markets in the world.

(6) Foreign ownership (excluding Malaysian) of Singapore shares accounts for less than 8% of the total market capitalization of Singapore registered companies listed on the SES.

The foregoing facts show that the stockbroking industry in Singapore is a relatively small component of the Singapore economy and that foreign investments in Singapore shares have historically been low. The latter arises not only because the stock market capitalization of Singapore/Malaysian shares is small in world terms but also because turnover is even lower, due to the fact that many quality shares are tightly held by local institutions and are infrequently traded. This has tended to discourage the wider participation of foreign equity investors, who have found our markets to be insufficiently broadly based.

This should put into perspective alarmist reports in the foreign press which have suggested that the present problems of the Stock Exchange will drive away foreign investors and lead to a collapse of the Singapore financial system. The truth is that foreign investors have never been very important players in local stock markets nor have they been actively solicited, primarily because of the thinness of local stock markets.

We want the stock market industry in Singapore to contribute more towards our economy. The reforms proposed under the new Securities Industry Act will provide the necessary regulatory framework for the long term growth of a healthy capital market in Singapore.

Dr Augustine Tan: Mr Speaker, Sir, I have a number of questions by way of clarification. Firstly, why was the new Securities Industry Act not introduced much earlier, especially in the years when we began to launch Singapore as a financial centre?

Secondly, the Hon. Minister pointed out that foreign ownership of Singapore shares amounts to only 8% or less than 8% of the total shares. Is this direct ownership, or does it include indirect ownership through holding companies? The question is very important.

Thirdly, Sir, he mentioned the combined Singapore-Malaysian capitalization of $70 billion. What should be of concern to this House is the way in which the capital markets of the two countries, Singapore and Malaysia, are so heavily integrated, and obviously the crisis that he alluded to, the Pan-El case, had its genesis in manipulation by somebody in Malaysia. What is there to prevent future occurrences of this sort?

Mr Speaker: Any more questions?

Mr Tan Soo Khoon: Mr Speaker, Sir, I noted that the Minister would like to see the development of a healthier securities market in Singapore. Bearing in mind that our present stock market is a rather small one, thus allowing speculators ample opportunities to rig the market as he said earlier, would he not then consider allowing more companies to be listed on the stock exchange so that we have a broader based market, which means in fact easing the regulations for listing.

Mr Jeyaretnam: Mr Speaker, Sir, first of all, as regards Pan-El, is the Minister aware that there were investigations into insider trading in this company as far back as February 1984, or was it 1985? Will the Minister say what was the result of those investigations into this insider trading?

Secondly, about the massive forward share deals of $140 million entered into by Pan-El, will the Minister say whether the MAS was or was not aware of these massive deals in forward contracts on the part of Pan-El?

Thirdly, regarding the Stock Exchange itself, the Minister said that it is self-regulatory. Are we to understand that the MAS had no one on the Committee of the Stock Exchange of Singapore? Although the Minister said that they were not obliged to submit reports, will he say whether the MAS was exercising any supervision at all over how the market was operated by the Committee?

Dr Toh Chin Chye (Rochore): Mr Speaker, Sir, it has occurred to me that since the SES is a market for both Singapore securities and Malaysian securities, has the Minister for Finance consulted his counterpart in Malaysia in moving the Securities Industry Act?

Mr Jeyaretnam: May I ask one more question? May I ask why if the new Securities Industry Act was already drafted by May of last year, it was not presented to Parliament and then sent to a Select Committee so that the SES Committee could make its representations?

Mr Tan Soo Khoon: Sir, may I ask one more question? One of the reasons for the Pan Electric fiasco was obviously the fact that there was insufficient corporate disclosure. Would the Minister consider introducing legislation to require companies to disclose more frequently and timelier their corporate debts? And would he also require the companies to submit audited accounts on a more regular basis than is required at present?

Mr Chiam See Tong: The Minister has said that forward trading was not an infringement of the law, but does MAS realize that people from across the Causeway were using this method to raise funds where they were unable to do so, or at least not at the level from banks?

Dr Hu Tsu Tau: Mr Speaker Sir, I would take the questions in turn. I hope I have got all of them.

First, the question from the Member for Whampoa. Why was not the Securities Industry Act introduced much earlier? I think the reason was, in the earlier days, the SES was under a self-regulatory system which was operating quite sensibly and so there appeared to be no immediate requirement to tighten the rules, in the sense that the stockbroking business is different from banks. You do not have deposits of money under fiduciary responsibilities. Technically speaking, a stockbroker is no more than a commission agent. So if they had confined their activity to collecting commissions, none of this would have happened.

About two years ago, the MAS, as a result of instability in the financial system worldwide, embarked on a major programme of reform for the legislation in the Singapore financial system. Over this period, we have in fact passed amendments to the Acts - the Banking Act, the Monetary Authority of Singapore Act, the Companies Act, Finance Companies Act. Wehave created SIMEX in order to regularize gold trading, and we have issued proper guidelines for merchant banks. The remaining pieces of legislation would have included amongst them three: firstly, the Securities Industry Act, the Insurance Companies Act which is now being passed at Second Reading today, and finally the Futures Trading Act. With the completion of all these changes in legislation, I think we will be well placed to withstand future shocks in the financial system. Unfortunately, because the Stock Exchange was a relatively small component of the financial system, it was left to the tail-end of the process. In retrospect, we should have brought it forward.

On the question regarding foreign ownership, the figure of 8% was a result of surveys conducted by the share registry on companies' ownership, entitlement. So wherever we can, we try to identify holdings. There is a problem, of course, of holding companies where the exact ownership can be a little uncertain. So that figure could be not totally correct, regrettably.

On the question of the linking of the SES and the Kuala Lumpur Stock Exchange and the fact that some of the manipulation originated from Malaysian sources, the way to stop it would be when we pass this new Securities Industry Act which, as you will see from the provisions, would impose a number of prudential controls on the stockbroking community which will stop any imprudent speculation on financing. And also it will allow the MAS to have direct access to stockbrokers books and demand information along lines of the powers which MAS now has in obtaining access to banking information. I think, if properly implemented, this should effectively stop such malpractices.

On the question from the Member for Alexandra, should we not allow more companies to be listed. I think there are quite a large number of companies already in the pipeline, waiting for listing. I do not think we should ease listing requirements unduly because we want only good companies to be on the Exchange. However, for the more speculative companies, we are considering a second register which would impose less restrictions, provided the investing public recognize that the companies on this register are more speculative. It is hoped that this can be implemented sometime this year.

On the issue of corporate disclosures, this is indeed one of the ways to stop manipulation not by the Stock Exchange but by unscrupulous directors who are responsible for the management of public companies. That is one of the biggest problems one faces and corporate disclosures will indeed help in this direction. However, I should make the point that investors with their shares in public companies should pay a great deal more attention to the management of these companies and ask many more questions, and particularly press their auditors to ask questions.

On the question from the Member for Anson, I think the first question was investigation into insider trading in Pan-El. Indeed, I think this took place in early 1985 and this was reported through, I think, anonymous letters of complaint from people inside the company. The matter was referred to the Stock Exchange Committee for investigation, which was the proper procedure in those days at that time.

Mr Jeyaretnam: The result?

Dr Hu Tsu Tau: The result was inconclusive as a lot of insider trading provisions are difficult to implement because the self-regulatory system does not permit the Stock Exchange Committee to demand books or to call witnesses to testify. The new Securities Industry Act would give MAS considerably more powers to investigate matters of this type. As a result the conclusions were, I think, not only this one, but many other insider trading investigations came to nought simply because there was insufficient evidence to permit prosecution.

The second question was: was MAS aware of massive forward dealings? The answer is yes, except that we did not know the size of these share dealings involved. In fact, it came to the attention of the MAS as early as February 1985 as a result of an anonymous complaint or complaints regarding the Alfa-Pacific stockbroking company. Again, because of the self-regulatory system, the complaints directed to the MAS were referred to the SES Committee for investigations. Unfortunately, again the investigations were inconclusive and the answer given to MAS was that forward contract trading was not prohibited by SES rules. And at that time, MAS had no powers to interfere in these regulations. Hence, the need for a new Securities Industry Act. Although we were aware at that time of the presence of forward dealings, we were unaware of the pervading nature of these large contracts amongst a number of brokers. And we could not be aware of this because the SES was not obliged and, in fact, did not supply any form of returns to the MAS. Again, a defect of our regulatory system which I think one has to admit now.

The third question was: did MAS have anyone on the SES Committee? The answer is no. The SES Committee is made up entirely of stockbrokers, no outsiders either. And this is one of the facts which the MAS was very unhappy with and prompted a review of the regulations which led to the drafting of the new Securities Industry Act because it was patently difficult for brokers to regulate themselves where self-interest was involved. It is a totally contradictory situation which is very difficult to resolve. Although it has been commonly used and quite successfully in other parts of the world, particularly in UK, this is one of the reasons why we continue to allow it here because there were no obvious transgressions until recent years. It may be that we should have imposed regulations earlier but it is often easy to be wise after the event. Although we and the MAS have been accused of being far too tough on regulations, this is one area where perhaps we will want to toughen up, in time anyway.

Why was the Securities Industry Bill which was drafted not implemented? I think the reasons were that the draft was circulated to brokers in end May/early June last year and the complaints were vociferous because they saw that this would tie their hands and would impose regulations. And there was generally the fear that MAS would again, like people accuse us of doing, introduce overkill. As a result, we had to go back to them and talk extensively and it is this consultative process which makes introduction of legislation time consuming. We could, of course, have rammed it through but you can imagine the uproar which would have occurred had it taken place. We would have been accused for different reasons.

The Member for Rochore's question. Has MAS consulted Malaysia on amendments to the Securities Industry Act? We have not consulted our counterparts in Malaysia directly on the changes although we have kept them informed. Our understanding is that Malaysia also intends to introduce legislative changes probably around April this year. Their provisions are not dissimilar to ours.

Finally, the question of the Member for Potong Pasir. Indeed, now that we know the size of the contracts, it is quite evident that this was a device used by some speculators as a source of fund raising. And this is the reason why it has now been stopped by the supervisory committee and will not be allowed under the rules of the new Securities Industry Act.

Dr Augustine Tan: Sir, a few supplementary questions. From the Ministerial Statement and the Minister's reply, it is obvious that there are three sets of problems that we have to contend with.

First is the regulation of the Stock Exchange, and hopefully the new Bill would take care of the problem.

Second is foreign manipulation, and here is the difficult part because most people who buy stocks for speculation do not bother to have them registered at all. So going to the Registrar of Companies to find out who owns what stock is a waste of time.

The third part which needs attention is the disclosure by company directors to their auditors and to the authority in question. Obviously, the difficulty in the case of Pan-El stems from the fact that forward trading was not reported to the auditors at all. I do not know the law at all, whether they are liable to criminal prosecution, but obviously there is a loophole there that needs to be closed.

Mr Jeyaretnam: Sir, may I ask the Minister on these forward contracts whether he agrees that, in accepting these forward contracts, the stockbroking companies were advancing monies against the shares deposited with them and they were charging premium which, for all practical purposes, was interest on the monies advanced. And the rates for the interest were excessive in some cases. Has the MAS or the Government considered whether there have been violations of the Moneylenders Act?

Dr Hu Tsu Tau: First, the question from the Member for Whampoa in regard to the three problems involved. Regulations, as I said, will be covered under the new Act. Foreign manipulations, it is difficult to trace. Indeed this is a problem although I would point out that it is not necessarily foreign manipulation. I think Singaporeans are equally capable of manipulations. So it is a general problem. Disclosure by directors and reporting to the auditors, that is indeed something which is being looked into - whether the auditors might not be more liable for not, in fact, getting all the facts to the attention of the shareholders. It is not a local problem. It is a world-wide problem. I think there have been a lot of suits involving auditors and directors for mismanagement. It is a complex and difficult problem. One of the provisions of the new Securities Industry Act will be to require auditors to report much more fully on all matters of interest to shareholders. This is similar to the provision under the Banking Act. This requirement is a Singapore innovation and initially it received quite adverse publicity. But now it is beginning to be generally accepted by regulatory authorities world-wide including, I think, both the UK and Hong Kong. External auditors are now required to report much more fully on the affairs of the companies which they are auditing. In this connection, I think the responsibility of directors is important. The matter is, in fact, under investigation. In the case of Pan-El, it is by the Commercial Affairs Investigation Department of the Ministry of Finance. When violations of the Companies Act or the Securities Industry Act are discovered, the law will take its normal course. Unfortunately, in the case of Pan-El, one of the directors is no longer in Singapore and he is currently being looked for by Interpol. Without his presence, investigation into the affairs of Pan-El is very difficult but nevertheless it is being done.

On the issue of forward contracts, the matter is being investigated by the supervisory committee and if there are any violations, they will be attended to.