MID-CONTINENT EQUIPMENT LTD (Suspension of trading of shares)

[Mr Speaker in the Chair]

Mr Leong Horn Kee asked the Deputy Prime Minister why the Stock Exchange of Singapore (SES) suspended the trading of shares of Mid-Continent Equipment Ltd on SESDAQ, and whether the SES should have approved the `Initial Public Offer' application by the company, especially considering the large percentage of private placement shares.

The Deputy Prime Minister (BG Lee Hsien Loong): Mr Speaker, Sir, trading in the shares of Mid-Continent Equipment Group Ltd ("Mid-Continent") on SESDAQ began on 22nd July 1998 following its initial public offer ("IPO") of 18 million shares at $0.15 each. SES suspended trading in the counter on 31st July 1998, following a sharp run-up in prices and large volumes during the first eight days of trading, and confirmed on 11th August 1998 that the shares in Mid-Continent had been cornered. The SES has referred the case to the CAD to investigate possible offences of manipulation under the Securities Industry Act. The attachment (Cols. 985 - 988) that I have circulated to Members sets out fully the facts of the case. Attachment - The Trading and Suspension of Mid-Continent Shares on SESDAQ (Cols. 985 - 988)

The SES approved Mid-Continent's IPO application because Mid-Continent met the listing requirements for a company to be admitted to SESDAQ, according to the existing rules and procedures. However, the Mid-Continent case revealed weaknesses in these rules and procedures that need to be put right.

Concentration of Placement Shares

The problem with the Mid-Continent IPO was an over-concentration of shares in the hands of a few persons. 90% of the IPO shares were placed privately with only five persons. The company's shares were therefore vulnerable to being cornered when trading started.

It is not MAS or SES policy to require companies to sell the majority of shares in an IPO by open subscription by the public, or to limit the private placement tranche to only a small percentage of the IPO shares. The listing rules for SESDAQ allow a company to use private placement for up to 25% of its IPO shares, or a higher proportion if the SES agrees that there are good reasons for doing so.

In practice, the SES has been flexible in allowing companies to sell IPO shares via private placement, particularly for Main Board listings. SES has used this discretion more widely for SESDAQ listings since August 1997, in view of the difficult market conditions.

Mid-Continent was similarly allowed a large private placement tranche of 90%. The problem was not this large private placement per se, but the small number of placees and the resulting over-concentration of IPO shares.

The present SES rules are inadequate to prevent such over-concentration. Moreover, neither the company nor the issue manager is required to inform the SES of the number of placees and their respective shares of the IPO issue. For several years now, the SES has left it to the issue manager to ensure a sufficient shareholding spread after an IPO so that trading in the secondary market would be orderly.

This needs to be reviewed. In Hong Kong and the United Kingdom, a company can distribute up to 75% of its IPO shares via private placement, but this is subject to a tight limit on the value of shares placed to each investor. Hong Kong also requires a minimum number of such placees. MAS has asked the SES to propose rules to prevent over-concentration of IPO shares, including the maximum percentage that can be placed privately and the minimum number of placees.

Once provisions to prevent over-concentration of IPO shares are put in place, issue managers will be responsible for complying with them and ensuring a sufficient shareholding spread for orderly trading in the secondary market.

The SES will also introduce requirements on standards of conduct for issue managers to bring them in line with the best practice internationally.

Responsibility for Approving Listing Applications

We are also reviewing the procedures for approving listings. Presently, the SES is solely responsible for approving applications by companies to list on the stock exchange. In 1983, after a spate of listings of doubtful quality, the Minister for Finance had directed the Securities Industry Council (SIC) to advise the SES on new listing applications. The final decision on listings still rested with the SES, but there was close consultation between the SES and SIC. But this arrangement ceased last year after the SIC decided that it no longer needed to review SES listing decisions .

The Corporate Finance Committee chaired by Mr Lim Yong Wah is studying the appropriate roles for the SES and MAS in approving listing applications and the issue of shares by companies. One issue is whether the MAS should be given the power to overrule decisions of the SES on listing applications, where it considers this necessary to protect the public interest. Regulators in some other jurisdictions can exercise such veto powers within a mandated time period. However, such powers should be used sparingly and only when the regulator has strong reasons to believe that doing so is in the public interest.

Approval of Listing Applications under a Disclosure-Based Regime

The MAS agrees with the proposal by the Corporate Finance Committee for a predominantly disclosure-based regulation regime. This will give more room for the market, rather than the regulator, to judge the commercial merits of transactions. It will help to develop deeper capital markets, with broader participation from institutional investors.

But disclosure-based market discipline is not an automatic formula for sound and orderly financial markets. In established markets which adopt a disclosure-based regulatory philosophy, the stock exchange or regulator does not totally suspend judgement on the proposals put to it. The stock exchange or regulator should not attempt to judge commercial merit, but in some instances it may have non-commercial grounds to conclude that a proposal is not in the public interest. For example, it may have reasonable cause to doubt the integrity of the directors or major shareholders of a listing applicant. In such cases, it may consider disapproving the listing proposal. We too need to develop such safeguard mechanisms.

I have explained MAS' position with regard to approving listing applications in order to clarify what a disclosure-based regime means, and not to comment on the specific case of Mid-Continent. MAS will evolve its regulatory style to allow more free play in the market. But it will not lower standards of integrity, or allow our financial markets to be brought into disrepute through manipulation and sharp practice.

Mr Leong Horn Kee (Bishan-Toa Payoh): Mr Speaker, Sir, as the Deputy Prime Minister has said that he would not comment on the case, I would not ask about the case. May I ask him whether he could explain what are the rules and penalties against manipulation of shares?

BG Lee Hsien Loong: Mr Speaker, I believe manipulation of shares is a criminal offence and one can go to jail.