COMPANIES (AMENDMENT) BILL

Order for Second Reading read.

BG George Yong-Boon Yeo (for the Minister for Finance): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second Time."

It is a technical Bill and my explanation is necessarily a little lengthy. So I beg Members' indulgence.

Sir, the Companies Act was last amended in 1987. Representations made to the Select Committee on the 1987 Bill highlighted the need for a thorough review of the prospectus requirements of the Act to serve the twin objectives of clarifying the law in this area and of liberalizing the requirements to promote the development of Singapore's securities markets. The greater part of the Bill is devoted to these objectives.

The Bill also contains a number of amendments aimed at strengthening the statutory means to prevent and detect company fraud, particularly with respect to public companies. These are aimed at reducing the risk of another Pan-Electric type failure.

Finally, the Bill contains a number of miscellaneous amendments aimed at improving or clarifying existing provisions in the Act.

I will now briefly dwell on the main provisions in the Bill.

Clauses 2, 3, 4, 5, 10 and 24 are aimed at clarifying and liberalizing the prospectus requirements.

The prospectus requirements have been in the Companies Act since it was introduced in 1967 and no changes of substance have been made to them since then. With the rapid developments that have taken place in the securities markets worldwide, there is a need for Singapore to keep abreast with these developments to ensure that our bond and equity markets remain accessible, effective, efficient and competitive. It is against this backdrop that the amendments to the prospectus requirements should be viewed.

The general policy thrust behind these amendments is to liberalize the prospectus requirements for the issue of shares and debentures where this can be done without compromising investor protection. The underlying objective, as I have said, is to foster the development of the bond and equity markets, both with regard to domestic and international issues, and thereby to enhance Singapore's position as a financial centre.

The principal amendments in this respect are clause 3 and clause 10.

Clause 3 makes it clear that a prospectus is not required in the case of an offer to the public of existing shares or debentures which are of a class of shares or debentures already listed on an approved stock exchange.

Clause 10 is a major amendment with regard to prospectus requirements. The amendment introduces a new Division 5A to Part IV of the Act. This new Division provides for an exemption from the prospectus requirements under certain specific circumstances.

The conceptual underpinnings of new Division 5A are not new. The existing Act under section 4(6) has always recognized that for certain types of public offers, full prospectus protection is not warranted, as for example, in an offer made to brokers, or in a "rights issue" offer. This has facilitated transactions by issuers for these limited categories of investors. New Division 5A can be viewed as an extension of this theme.

Specifically, new Division 5A provides for public offers to be exempt from the prospectus requirements under the following circumstances:

Offers made by a company to its employees under an employee share investment scheme.

Offers made to banks, insurance companies, the Government, statutory boards, licensed investment advisers, pension funds, unit trusts, closed-end investment companies and other bodies declared by the Minister to be exempt investors. These categories of investors, which are mainly institutions, are presumed, by reason of their business activities and resources, to be capable of evaluating as well as demanding information from an issuer equivalent to a prospectus.

Offers made to non-professional but sophisticated investors who by reason of their income, wealth or relationship to the issuer are presumed to be sufficiently sophisticated not to warrant prospectus protection.

Offers of new shares or debentures where the shares or debentures are of a class that are already listed on an approved stock exchange and the offer is to be made through the facilities of the stock exchange. As these are new issues, the offer would nevertheless have to be accompanied by a Statement of Material Facts, a disclosure statement providing relevant basic information about the issue but which is less onerous to prepare compared to a prospectus.

Offers of debentures made by a body incorporated outside Singapore, and where the offer is made to various pre-specified institutional, professional and business investors.

Offers of debentures made by or guaranteed by the Government or an international financial institution of which Singapore is a member, such as the World Bank or the Asian Development Bank.

New Division 5A also confers power on the Minister to grant dispensation of a prospectus in circumstances either where the cost of providing a prospectus outweighs the resulting protection to investors or where it would not be prejudicial to the public interest if a prospectus was dispensed with.

Since there is always a risk that some of these exemptions may be used as a conduit to avoid the prospectus requirements, the new Division 5A also provides in the proposed subsections 106E, I, J, K and L various regulatory safeguards designed to check possible abuse and to ensure public availability of pertinent information.

The new Division 5A is not the only part of the Bill aimed at facilitating debenture and share issues. Clause 4, for example, extends the nonmenclature permitted of debentures to allow for greater flexibility in marketing them internationally.

Mr Speaker, Sir, public offers which cannot gain an exemption from the prospectus requirement under the exemptive provisions mentioned above will continue to be subject to the prospectus requirement. Even so, there is a weakness in the Companies Act in that there are presently no provisions in the Companies Act for the Registrar to refuse registration of a prospectus in circumstances where the issuer or the issue is of doubtful integrity. It is intended to change this in the interests of the man-in-the-street investor. Clause 6 accordingly amends section 50 to extend the grounds on which the Registrar can refuse registration of a prospectus, the object I repeat, being to shield unsophisticated, small-time investors from issues or issuers of doubtful repute or quality.

Clauses 20, 21 and 22 attack the problem of the detection and prevention of company fraud in a three-fold manner.

Clause 20 provides for the mandatory establishment of a system of internal accounting controls in public companies to ensure that their assets are safeguarded and transactions are properly authorized and recorded so as to permit the preparation of true and fair accounts. This is based on a recommendation from the Institute of Certified Public Accountants, formerly known as the Singapore Society of Accountants or SSA. As this is not a particularly onerous requirement, the proposal is to extend it to all public companies of which there are approximately 700 out of a total of 58,000 locally-incorporated companies.

Clause 21 amends the Act by inserting a new section 201B. This section obliges every Singapore-incorporated listed public company to have an audit committee.

Sir, audit committees are internationally recognized as being one of the most effective influences minimizing fraudulent financial reporting. In the UK many public companies, both listed and unlisted, have voluntarily appointed audit committees. Proposals have also been made for legislation to make it mandatory for public companies to have audit committees. Although not mandatory in the US, it is nevertheless a requirement of the New York Stock Exchange that any company listed thereon must have an audit committee.

The role of an audit committee is essentially threefold: first, to watch over management to ensure that there is no management override of established prudential financial practices and procedures; second, to assist the board of directors in discharging their responsibilities for financial reporting and third, to provide an impartial channel for complaints concerning the management and direction of a company.

Under the proposed amendment, an audit committee shall consist of at least three members, the majority of whom must be independent directors of the company. One of these independent members will be the chairman of the committee. Subsection (5) lays down the functions of an audit committee.

Although the Institute of Certified Public Accountants had recommended that audit committees be made mandatory for all public companies, it is intended that this requirement be confined to the listed public companies for the time being, for three reasons. Firstly, there is a dearth of people in Singapore with the standing and qualification to competently discharge the duties and responsibilities imposed upon audit committees. Second, the cost factor. Because non-executive directors sit- ting on audit committees will expect to be adequately remunerated for their efforts and responsibilities. Third, the need for audit committees to act as watchdog over full-time management and executive directors is greatest in the listed public companies.

There are presently 342 listed public corporations in Singapore. Of these, only the 148 incorporated in Singapore will be required to have audit committees. These companies will be given a grace period of 12 months from the time the legislation comes into force to set up their audit committees.

Clause 22 places a responsibility on the auditor to report corporate fraud. New subsection (9A) makes it mandatory for the external auditor to report to the Minister where he has reason to believe that an offence involving fraud or dishonesty is being or has been committed. Although there are some who view this as a compromise of a fundamental principle of company law whereby auditors are appointed by shareholders in general meeting and therefore owe allegiance only to shareholders, it is in the overriding public interest that such a provision be made. I would like to assure the House, however, that this provision is not intended to alter the role of auditor from that of watchdog to one of bloodhound. Instead, the provision is intended to allow the auditor a lawful basis to report fraud to the authority without fear that he may in the process be contravening any duty owing to shareholders. New subsection (9B) gives this protection to the auditor. This statutory duty on an auditor to mandatorily report fraud to the authorities is not without precedent in our legal system as the Banking Act, the Finance Companies Act, the Insurance Act and the Securities Industry Act all impose this duty of reporting fraud to the appropriate authority.

There are other clauses in the Bill which are aimed at improving or clarifying certain sections of the law. Together with the amendments which are of a drafting nature or consequential to the principal amendments described above, they are sufficiently referred to in the explanatory statement. The only other provisions in the Bill worthy of special mention at this late hour are clauses 14 and 25.

Clause 14 amends section 149 which provides for the disqualification of unfit directors of insolvent companies. The amendment makes it clear that persons automatically disqualified under the old section 149 can apply for leave of court to continue acting as director. The amendment is a transitional one intended to preserve, under the new section 149, a right that existed under the repealed section 149.

Finally, clause 25 inserts a new section 409B. This provision confers upon officers of the Commercial Affairs Department police powers to investigate offences under the Companies Act and the Securities Industry Act, as well as offences under any other written law disclosed in the course of investigations under these Acts. Police powers of arrest, seizure and so on are essential to the efficient and effective working of CAD officers, who have hitherto relied on police officers seconded from the Police Force for these powers. In the exercise of these powers, CAD officers would be subject to the control and direction of the Public Prosecutor.

Mr Speaker, Sir, in view of the technical nature of the Bill and its implications for the legal and financial communities, I recommend to the House that the Bill be committed to a Select Committee for further debate and to hear representations from the professions and the public.

Sir, I beg to move.

Question proposed.

Mr Chew Heng Ching (Eunos GRC): Sir, I shall be brief.

I welcome the proposal to make the formation of audit committees, particularly in listed companies, mandatory. I think it is a step towards specialization in a board room. It permits closer examination and analysis of financial reporting areas by a few board members. It will also enhance public confidence in the credibility and objectivity of financial information released to the public.

Sir, I have three observations to make and if the observations are too detailed and technical, the Minister of State may wish to refer them to the Select Committee. The first observation relates to the function of the audit committee. The Bill empowers the audit committee to nominate an auditor for the company. I wish to ask the Minister of State if the powers conferred on the committee include the fixing of audit fees. In other words, since the audit committee is in a position to decide who is the best auditor for the company, should not the committee be thrust to decide on the fees to pay to this auditor?

My second observation concerns the procedure regarding convening of meetings of this audit committee. The Bill is silent on the number of meetings the committee should have per year. In order to ensure proper functioning of the committee, I think there should be a minimum of two meetings a year of this audit committee. One is to discuss the six month interim results, and the other to consider the final and annual accounts. Should not the Bill also stipulate the minimum number of meetings the audit committee must have per year? This is necessary in order to avoid a situation where companies may form audit committees just to comply with the Act, but no meetings actually take place.

The third observation relates to section 207 (9), clause 22 of the Bill. This section requires that the auditor in the course of his or her performance reports fraud or other dishonesty committed by officers and employees of the company to the Minister. My concern here is the extent of dishonesty that the Minister wants the Auditor to report. Surely the Minister does not want to be bothered with reports of petty dishonest acts by employees of the company, eg, an employee making false claims on transport or entertainment. I think the report to the Minister on dishonesty should be confined to serious dishonest acts by officers of publicly listed companies, especially those matters that pertain to misrepresentation of accounts to deceive the public.

Would the Minister care to comment on these observations?

BG George Yong-Boon Yeo: Sir, I propose to take the Member's points in the Select Committee. Firstly, because it is rather late in the day. But that is not the principal reason. More importantly, I think these are issues which are best discussed with members of the professions and with representatives from the business community.

Question put, and agreed to.

Bill accordingly read a Second time.

Resolved,

That the Companies (Amendment) Bill be committed to a Select Committee consisting of Mr Speaker as Chairman and seven Members to be nominated by the Committee of Selection. - [BG George Yong-Boon Yeo].