COMPANIES (AMENDMENT) BILL

Order for Second Reading read.

The Minister for Finance (Dr Richard Hu Tsu Tau): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

Overview

The Bill before the House principally focuses on the liberalisation of the law to allow companies to conduct share buy-backs. Apart from this major amendment, opportunity is also taken to incorporate seven other amendments. These amendments seek to:

a) update the concept of "deemed interest" under section 7(4);

b) extend the lifespan of employee stock options under section 77 from the current 5 years to 10 years;

c) exclude trade franchises from the ambit of the Companies Act;

d) empower the Minister to make regulations to regulate the administration of unit trusts by managers and trustees, and to extend the life of unit trust prospectuses;

e) remove all restrictions relating to substantial property transactions under sections 160A to 160D;

f) allow a company to purchase insurance for any officer of the company against liability on negligence or breach of duty to the company not occasioned by any wilful act or default on his part; and

g) exempt foreign companies from being required to be registered in Singapore in certain instances.

Share buy-backs

I will first deal with the amendment relating to share buy-backs. The Bill proposes to allow for the purchase or acquisition by a company of its own shares out of distributable profits, after obtaining the necessary mandates from shareholders. It presents a direct and more efficient means of returning cash to shareholders, than the capital reduction procedure that is currently provided under the Companies Act. For example, a capital reduction exercise may take at least three months to complete and also requires confirmation by the High Court. In contrast, a share buy-back affords a company greater flexibility in the timing, procedure and amount of capital to be returned to shareholders. It thus increases the company's ability to adjust its capital base and debt-equity ratio and can improve a company's return on capital, to the benefit of shareholders.

[Mr Deputy Speaker in the Chair]

4.42 pm

The Minister for Finance (Dr Richard Hu Tsu Tau): Because of these advantages, the Government earlier made an announcement, in response to the recommendation by the Finance and Banking Subcommittee, that companies will be allowed to repurchase their shares, subject to safeguards. Various forms of share buy-back schemes are already allowed in the United States, the United Kingdom, Hong Kong, Australia and New Zealand. Government agencies have studied these alternative models and have worked closely with the Corporate Finance Committee, the Stock Exchange of Singapore, the Association of Banks in Singapore, the Law Society and other interested parties to develop the proposal in the Bill before you. In this proposal, both listed and unlisted companies, public and private, can conduct share buy-backs. Now I will briefly walk the House through the provisions.

Clauses 3 and 4 of the Bill seek to amend sections 73 and 76 to allow for the purchase or acquisition by a company of its own shares, without having to make an application to the High Court for approval. Clause 5 of the Bill introduces new sections 76B to 76G. These sections set out the appropriate safeguards and disclosure requirements that have been formulated to ensure that companies will not abuse the scheme of share buy-backs to the detriment of their creditors. These safeguards are as follows:

(a) Companies will only be able to buy back their ordinary shares if their Articles of Association allow for it;

(b) All companies must obtain their shareholders' approval by ordinary resolution to buy back their own shares via an off-market acquisition on an "equal access" scheme. This essentially means a pro-rata buy back offer. Listed companies must also obtain a similar approval in order to carry out on-market share buy backs;

(c) Listed companies will not be allowed to conduct selective off-market purchases. Unlisted companies may, however, obtain their shareholders' approval by special resolution to conduct selective off-market buy backs, but interested parties will not be able to vote in favour of such a resolution;

(d) Companies must buy back their shares out of distributable profits only;

(e) Companies will be permitted to buy back shares up to a maximum of 10% of their issued ordinary share capital during each relevant period. The capital base to which the 10% is pegged is to be ascertained at the date of the last annual general meeting or at the date of the resolution, whichever is higher, unless the Court through an order had confirmed the reduction of share capital. In the latter case, the issued ordinary share capital of the company would be the amount as altered by the Court order during the relevant period;

(f) There is also the introduction of an insolvency test. The company's directors may be personally liable as it is an offence for a director to approve a share buy back when he is aware that the company is insolvent or will become insolvent as a result of the buy back;

(g) All repurchased shares must be cancelled; and

(h) Companies must set up a capital redemption reserve account. The amount by which a company's issued share capital is diminished by share buy backs must be transferred to its capital redemption reserve.

Additional safeguards for public listed companies will be formulated by the Stock Exchange of Singapore as part of its listing rules, and will be announced shortly.

Other amendments

I shall now go through the other amendments in the Bill. These amendments are designed to improve market efficiency and liberalise regulations to afford companies more flexibility. They also seek to rationalise the provisions in the Companies Act with existing practice.

Concept of "deemed interest"

Clause 2 of the Bill seeks to amend the definition of "deemed interest" in the shares of a company in section 7(4) of the Act, to increase the threshold interest from 15% to 20%. This will bring the concept of "deemed interest" in the Companies Act in line with the threshold of significant influence in an associated company under the accounting convention and the Singapore Code on Take-Overs and Mergers.

The current concept of "deemed interest" under section 7(4) is also capable of successive applications ad infinitum along a chain of companies. This has given rise to considerable confusion and practical difficulty. Clause 2 therefore amends the Act to restrict section 7(4) from applying to successive levels. The application of the "deemed interest" concept is restricted to one level. Lifespan of Employee Stock Options

Currently, the law restricts all stock options, including those given to employees to take up unissued shares in a company, to a lifespan of 5 years. Employee stock options are a powerful tool to reward employees, and the lifespan should be extended to help retain and motivate employees. Clause 6 amends the Act to provide that the maximum lifespan of employee stock options be extended from 5 years to 10 years. The lifespan of other forms of options remains at 5 years.

Trade Franchises

The next amendment under clause 7 seeks to amend the definition of "interest" in section 107 of the Act to exclude trade franchises. This will clarify that franchises offered to the public are not subject to the onerous trust arrangements, and trust deed and prospectus requirements of the Act. These provisions will enable the promotion of franchises on a larger scale, as a strategy for small retailers to upgrade and modernise their business. Only franchises as defined will be excluded from the definition. Unit trust and other collective investment schemes will continue to be regulated under the Companies Act.

Unit Trust Legislation

Unit trusts are currently regulated under the Companies Act as they are a form of "interest" as defined under section 107. The provisions in section 111 and regulation 9 of the Companies Regulations apply across the board to all forms of interest.

In order to effectively regulate the different forms of interest under section 107, in particular unit trusts, the Minister for Finance needs to be empowered to be able to make specific regulations concerning each class of interest, as and when the need arises. Clauses 8 to10 of the Bill enable the Minister for Finance to do so.

In addition, clauses 10 and 14 of the Bill also seek to extend the life of unit trust prospectuses from the current duration of 6 months to 12 months. There is no increased risk of inaccurate prospectuses being in circulation, following the extension to 12 months, as the managers and trustees are under legal obligation to re-lodge their prospectuses whenever material changes take place and are made.

Substantial Property Transactions

Clause 11 of the Bill seeks to repeal sections 160A and 160D of the Act, thus removing the restrictions relating to substantial property transactions. The provisions have created practical difficulties and are somewhat redundant, as all related-party transactions of listed companies are already subject to disclosure or shareholders' approval (depending on the amount) under the Stock Exchange of Singapore rules.

Provisions indemnifying Directors or Officers of a Company

Currently, it has not been clear from a reading of section 172 whether a company can pay the premiums for a director's indemnity policy. However, it is now standard practice in many jurisdictions for companies to take up insurance for their directors and pay the premium. The amendment makes it clear that a company may purchase insurance for any officer of the company against liability for negligence or breach of duty to the company, which are not occasioned by any wilful act or default on his part. The United Kingdom and Australia have provisions that have equivalent effect.

Registration of Foreign Companies

Clause 13 amends section 366 by seeking to exempt foreign companies from being registered in Singapore in two specific instances.

Nowadays, global financial institutions transact in certain financial instruments booked into a single office of that financial institution. This "global book" will then be "passed" from one financial centre to another and traded by that financial institution's employees throughout the world. Under the current legal position, where trading takes place through the Singapore office, this foreign institution can be considered as "carrying on business" in Singapore and hence should be registered as well. Such a requirement is unduly onerous, if the foreign parent already has a registered presence in Singapore. As increasingly more financial institutions adopt this practice, the gap between the law and commercial practice needs to be closed to keep pace with other jurisdictions like Hong Kong, where there is no such registration requirement. With the amendment, foreign companies need not register if they effect any transaction through its related corporation licensed or approved under any written law by the Monetary Authority of Singapore or under an arrangement approved by the MAS.

In the second instance, clause 13 seeks to free foreign financial institutions from having to register if they establish a share transfer or share registration office in Singapore, in order to become a listed corporation.

Conclusion

These amendments to the Companies Act form the first group of amendments proposed, as part of a wider exercise to update and modernise company legislation in the coming months. Most of the proposed amendments are still being reviewed and will only be introduced next year. The review is part of an ongoing effort by the Government to improve the business environment and put in place a more flexible legislative framework that can respond quickly to opportunities when the economy picks up again. I believe that the amendments I have proposed take a step in this direction, and set the stage for a more vibrant economic and financial climate in Singapore.

Sir, I beg to move.

Question proposed.

Mr Leong Horn Kee: Mr Deputy Speaker, Sir, I support the introduction of this Bill. I shall focus my comments on the main feature of the Bill which is to allow the buy back of shares by Singapore companies. This buy back arrangement is currently prohibited by the provisions of the Companies Act. At present, companies can use their financial resources to invest in or buy shares of other companies. Such investment decisions are usually made based on limited information of the target investments of companies. In some cases, the companies themselves may be good investments and the companies know themselves best. Hence, it may be worthwhile for companies to buy back their own shares rather than buy shares of other companies. This provision of allowing companies to buy back their own shares is an enlightened approach. It is permitted in many countries nowadays. If companies can buy other companies' shares, why not allow them to buy back their own shares which are or can be better investments? The share buy back scheme will also be in the interest of the shareholders.

Sir, I note the present Bill has a few restrictions on share buy back. First, share buy back is only permitted for ordinary shares and not allowed for preference shares or other classes of shares. Second, a company is required to seek shareholders' approval where the following information has to be disclosed:

(a) the total number of shares which may be acquired is limited to 10%;

(b) the maximum price to be paid for the shares; and

(c) the date by which the authority to purchase will expire.

I would like to ask the Minister for some clarifications. First, why restrict the buy back of shares only to ordinary shares but not allow other classes of shares such as preference shares, convertible shares or even warrants? Would this not give the companies more flexibility and choices?

I would also like to ask the Minister on the disclosure of certain information such as the limit of 10% of total shareholding, the maximum price and the limitation of the date to buy the shares. First, on the limitation of 10% total shareholding. Companies may want to buy more shares when they want to go out and buy their own shares. So, would it not be beneficial for companies to be able to buy more than 10%? There may be sellers who want to sell more than 10% each time? So why not have a higher limit? Perhaps 15%, 25% or even 50% of their own shares to buy back.

Secondly, the disclosure of maximum price can also create difficulty and curtail the flexibility of actions by the company. The buying and selling process is a very dynamic one. The parameters and market forces change very fast. Hence, I would like to ask the Minister: would it not create a better chance for them to buy back their shares if certain information is not disclosed to the public, such as the limitation on the date as well as the maximum price they want to pay? Moreover, the fact that the company has to seek shareholders' approval prior to taking action is in itself a deterrent to the companies concerned. There is also the risk that the public announcement of the company's intention to buy back their shares may cause the potential sellers to ask for higher prices. In the end, the company actually is at a disadvantage when they buy back their shares at a higher price than it originally intended. The end result is that companies may actually choose to rather buy other companies' shares, which is subject to less restrictions, than to actually go through a more tedious process of buying back their own shares, no matter how attractive their own shares may be.

Sir, the Minister may wish to clarify these issues.

Mrs Lim Hwee Hua (Marine Parade): Mr Deputy Speaker, Sir, I would like to begin by declaring my interest as a director of a securities company. I shall, however, be making my comments from the perspective of the retail investor and minority shareholders.

The proposed amendments to legislation, to allow for the purchase or acquisition of their own shares by companies, will pave the way for companies, particularly the listed ones, to better manage the return on equity, or, in today's jargon, to "create more value". It will constitute another milestone in the development of the Singapore stock market.

Before I raise two sets of issues regarding the buy-back scheme, namely of safeguards and tax implications, I would like to make some general comments.

Firstly, companies embarking on such a scheme may send mixed signals about business direction and growth potential. Except for the inaugural exercise with the passage of this Bill, we would implicitly be expecting the investor at large to be able to understand why a company is using its surplus funds to buy back its own shares instead of deploying these funds to further business expansion. It is entirely possible for a company to use surplus funds to buy back shares, only to go back to shareholders later on for new capital for expansion. This has been the experience of companies in the other markets. How will the Singaporean-based investor interpret such actions which, when taken together, may appear somewhat ironical?

Unlike reported earnings and the requisite announcements for major corporate developments, share buy-backs can provide a very strong signal to "outside" investors of what management thinks of the prevailing share values. Given the significance of this interpretation, several questions arise as to the provision of sufficient safeguards for minority shareholders against any abuse or manipulation by management and/or majority shareholders.

Need to provide enough safeguards

I would like to urge the Minister to ensure that enough safeguards are provided against the following possibilities:

Firstly, manipulation by company insiders to manage reported earnings-related benchmarks, such as earnings per share, so as to detract from or mask unsatisfactory business performance.

Secondly, possibility of management spending too much time and attention on managing share prices rather than the actual business itself, particularly in times of prolonged market volatility and depressed share prices such as now. The temptation to buy back "undervalued" shares would be too great to resist.

Thirdly, the possibility of collusion between major shareholders and company at the expense of minority shareholders. Although there is a provision to specify a maximum price, should there be a cap on the premium on the price to be paid for shares to be bought back? For example, the 5% limit in the UK? Or do we want to employ a one-broker rule, similar to that in force in the US?

Fourthly, any timing differences which will disadvantage minority shareholders - the obligation to cancel shares bought back is helpful but is there still room for possible manipulation? Ultimately, the key is efficiency in the dissemination of information and transparency.

Fifthly, utilisation of distributable profits earned in earlier years. Should there be a time bar or will the 10% limit to shares to be purchased be sufficient?

Tax implications

Sir, currently, a retail investor who sells his shares on the market for a profit does not pay any capital gains tax. Will this remain the same when he sells his shares as part of a buy-back scheme?

Recently, a listed company, Singapore Press Holdings, embarked on a capital reduction exercise, which sought to return $1.22 per share held. It then transpired that out of the $1.22 capital returned, 52 cents were deemed as capital, and hence tax free, while the remaining 70 cents were treated as a distribution of dividend, and hence taxable.

Although this exercise is different from a buy-back scheme, it is nonetheless instructive for us to study the tax angles. If part or all of the share buy-back proceeds are deemed taxable, how will the retail investor know the difference? Even if it were so, would this unwittingly lead to a two-tier market? Or will companies have to bear the tax burden, which implicitly raises their purchase costs? It would appear that the simpler and more tax-consistent it is for the retail investor, the more successful and well-accepted the scheme will be.

Sir, the issues raised above are more details to be ironed out than grounds against the scheme. Apart from putting in the necessary safeguards, investor education will be equally important.

In fact, I believe that once minority shareholders understand the rationale behind the scheme and are assured that there are enough safeguards, they would embrace the buy-back scheme readily, as it would add another exciting dimension to their investments.

On that note, Sir, I wish to support the Bill.

Mr Ong Kian Min: Mr Deputy Speaker, Sir, I wish to express my support for this Bill.

Legislation permitting companies to buy back or redeem their shares from shareholders has been enacted in various jurisdictions. In principle, it is desirable for companies to have the flexibility and power to do so, provided that shareholders and creditors are adequately protected. Indeed, as the experience of other jurisdictions indicates, this power to buy back shares has proved very useful to companies and has generally given rise to few problems. I expect the amendments will be warmly welcomed by the business and investment communities here in Singapore.

For many companies, the proposed amendments contained in this Bill will provide the option of a more flexible capital structure on which real economic and financial advantages could be obtained if the power to repurchase shares is exercised judiciously. However, I have the following five points to raise with regard to whether the proposed amendments will allow Singapore companies to achieve the maximum benefits that could be derived from having share buy-back legislation of this nature, as well as whether the regulatory framework provided by the proposed legislation will be able to protect creditors and shareholders of the company adequately.

The first issue I would like to raise relates to market purchases by public listed companies. Under the proposed section 76E, market purchases are permitted on the Stock Exchange if the listed company has been authorised in advance by its shareholders. To obtain the authorisation, the company, in its notice of general meeting, has to specify among other things the maximum price which may be paid for the shares. The objective of this requirement seems to be protection of shareholders' interest by placing a cap on the maximum amount of funds which may be used for the purchases. However, this is open to abuse and manipulation. To add to the concerns of my colleague, Mr Leong Horn Kee, the proposed maximum price, being price sensitive information, will have an impact on the movement of the share price because it reflects management's view of the performance and prospects of the company.

The prices of securities are largely influenced by investor confidence which can be boosted or shaken by management's action or announcement. Management must therefore exercise great care in arriving at a proposed maximum price before disseminating to the shareholders by way of the notice of resolution. Once the notice is released and publicised, investors will scrutinise the proposal and come to their own judgment about the company's performance and prospects even before the holding of the shareholders' meeting where the directors have the opportunity to explain their views on the proposal.

Could the Minister, therefore, reconsider the merits of requiring such a specific information as the maximum share price to be made known and weigh them against its potential for abuse and manipulation? If the maximum share price has to be specified, I believe there should be rules or guidelines on the steps and precautions to be taken in determining this maximum price so that companies would not arbitrarily set a price which is without basis and proper justification. As this issue relates to listed companies, perhaps the Stock Exchange of Singapore could incorporate the appropriate safeguards in its regulations on market purchases by companies listed on the SES.

While on this issue of market purchases by listed companies, I would like to propose that there should also be some safeguards in relation to the execution of the buy-back trades. Will the Minister consider imposing restrictions, for example, that a company cannot purchase its own shares at a price higher than 5% above the average of the last share price recorded on the last five days on which the shares were traded on the Stock Exchange? This will prevent the company from chasing the share price up and paying unnecessarily high prices in a volatile market.

My second point relates to the necessity of restricting permitted purchases to ordinary shares in the company. This point has also been raised by my colleague, Mr Leong Horn Kee. The term "ordinary shares" has not been defined in the amendments nor in the principal Act, but would presumably refer to voting shares or equity shares as compared to preference shares which carry special rights with respect to, for example, repayment of capital, dividends and voting. There does not seem to be a clear reason why other shares, perhaps other than redeemable preference shares, could not be repurchased by the company. However, while I believe that it may not be necessary to restrict share buy-backs to ordinary shares, I do think that it is necessary to provide that only fully paid up shares may be repurchased, which has not been expressly provided in the amendments. Otherwise, creditors may lose a valuable asset on liquidation of the company, ie, of uncalled capital if the shares which have been repurchased and cancelled were only partially paid up.

Thirdly, again I share Mr Leong's concern, under the proposed amendments, a company can only purchase up to 10% of the issued share capital during the relevant period. It seems that a cap of 10% is an arbitrary limit. Given that one of the reasons for a company to want to repurchase the shares is to make efficient use of the surplus funds, and circumstances differ from one company to the next, the application of such a fixed cap uniformly on all companies may be too inflexible. Although having a limit may be prudent for a start, this issue should be reviewed from time to time to allow for a gradual liberalisation of the rules over time. This limit should be raised or lifted when companies become more familiar with the buy-back procedure and when shareholders become better able to evaluate how proposed buy-back schemes affect their interest.

My fourth point is in regard to the adequacy of the proposed provisions in safeguarding the interest of creditors. I observe that the main protection afforded to creditors is found in new section 76F(3) where every director or manager of a company who approves or authorises the purchase or acquisition of the company's own shares knowing that the company is insolvent or will become insolvent as a result of the purchase is made personally and criminally liable. However, the purchase is not void nor voidable, and creditors will have to sue the directors and managers in their personal capacity to recover the shortfall. This may be cold comfort to the creditors if the directors and managers are of shallow means.

Finally, Sir, as mentioned by my colleague, Mrs Lim Hwee Hua, I hope the Minister will clarify a number of related issues on the taxation implications. On the part of the company, as the consideration will be paid out of distributable profits, does the company have to deduct tax at source as in the case for dividend payment, or are there any situations where the purchase of shares could be regarded as something akin to a distribution made as a result of reduction of the company's share capital and hence not accessible to tax? Lastly, if tax is to be deducted at source, could the individual shareholder obtain a tax credit in respect of the amount deducted?

Sir, I hope the Minister will enlighten us on these issues.

Mr Shriniwas Rai: Sir, I am in support of the Bill. I shall confine myself to the buy-back scheme.

As Members have mentioned earlier, other jurisdictions such as the United States, Australia and New Zealand, have similar provisions. This is to be welcomed as Singapore is behind time. However, there are certain concerns which I would like the Minister to address. Both Mr Leong Horn Kee and Mr Ong Kian Min have mentioned about the 10% limitation. I am aware that the Minister may, by Gazette notification, increase this limitation, but I wonder why the 10% was picked up.

Sir, the other issue that has to be resolved - I think Mrs Lim Hwee Hua has also raised this point - is this question of taxation, which is very important. Whether there is going to be tax liability, I think both the public and the companies at large must know beforehand what is the Minister's stand on taxation.

Sir, as the price of shares is sensitive information, the regulation must be drafted in such a way that members of the public are protected, especially now that there is a depressed market in Singapore, any buy-back scheme must ensure that the minority interests are protected.

Sir, there is another issue which I would like to raise. Although at a company's general meeting, notices are to be given, it would be prudent to have a proper advertisement in the newspapers to announce any scheme of this nature, so that the public as well as the members of the company will be in a position to respond to this. In this case, I refer to new section 76C.

Sir, the other issue which I would like to find out from the Minister is this. The role which the Stock Exchange would be playing is very important. So far, I think it is to the credit of our Stock Exchange scheme that we have a fairly open and transparent market. It is very important for the Stock Exchange of Singapore to see that this provision is regulated in such a way that there is no abuse.

With that, Sir, I support the Bill.

Mr Sin Boon Ann (Tampines): Mr Deputy Speaker, Sir, thank you for allowing me to join in the debate on the Companies (Amendment) Bill. Before I proceed, I would like to declare my interest on the subject matter. I am a practising solicitor and would have in the course of my work to advise clients on the Companies Act, including the amendments.

The Bill, apart from taking the opportunity to clarify certain provisions of the Act, is radical in nature as it seeks to introduce share buy-back schemes into our company legislation. Up until now, a general rule in the company law is that a company may not return any assets to its members while it is a going concern, except in the form of dividends paid generally out of profits. As it is commonly understood, when a company is liquidated, the shareholders are the last to get their money back. The creditors will get their payments first before the shareholders get anything. Accordingly, if the shareholders are allowed to get their monies back first, it would reverse the order of payment as it is understood for a company in liquidation, and this would not be fair to the creditors. When a creditor does business with the company, he does so on the faith that the capital shall be applied only for the purpose of business and he has therefore the right to say to the company that the company must keep the capital and not return it to the shareholders. Otherwise, the creditor will not have faith nor confidence to do business with the company and commerce, as we know it, may not have taken off to the extent that we see it today.

It is for this reason that the Companies Act has a rather strict regimen to ensure the maintenance of capital in a company. This is seen, for instance, in general prohibitions against providing financial assistance in the purchase or acquisition of a company's shares without strictly observing the proper procedures and reduction of capital without getting the court's sanction. These restrictions are generally meant to provide safeguard for the creditors of a company.

Sir, does the introduction of share buy-back schemes fly in the face of all that the company laws seek to do, that is, to protect the interest of creditors through the doctrine of maintenance of capital? Sir, I think not. Looking at the overall scheme of the proposed share buy-back provisions under the Bill, one gets the impression that the objective of the Bill is not to return capital at the expense of creditors but to ensure the proper management of a company's capital. At the moment, a company may pay off any paid-up capital by returning that which is in excess of the needs of the company or the company may reduce the paid-up value of the shares in the company and reflect what is left of the capital after it has been reduced by trading losses. To achieve this end, the company would have to go through the relative inconvenience of having to petition to the court to get its approval and the process is subject to the right of the creditors to object to the reduction of capital. Besides reduction of capital does not necessarily reduce the total number of members of the company. What the reduction does is that it uses paid-up capital across the board. In other words, reduction of capital does not necessarily achieve the objective of reducing the absolute number of shareholders in a company.

Sir, as proposed, the share buy-back scheme allows a company to manage its capital more effectively. A company may want to buy back its own shares for many reasons. This would include, for instance, a desire to return surplus cash to shareholders so that the capital may be put to better use elsewhere or to increase earnings per share or net assets per share, or to increase the marketability of the company's shares, or perhaps defend the company against possible takeovers. Where the company intends to reduce the capital of the company or the shareholder base of the company, the share buy-back scheme allows the management the additional option to achieve the objective without the necessary inconvenience of the existing arrangements.

Sir, share buy-back schemes were introduced much earlier in a number of countries. These countries include, for instance, the United States, United Kingdom, Australia and Hong Kong. The application of share buy-back scheme in these jurisdictions is becoming increasingly widespread these days. In some jurisdictions such as the United States, the shares subject to re-purchase are taken out of circulation but remain in issue. In others, shares which have been re-purchased are cancelled. Whatever the approach, the economic outcome is similar. A reduction in the number of shares in circulation is likely to increase in the value of the remaining shares arising from the interplay of supply and demand factors. Additionally, if the earning potential remains relatively undiminished, the earnings per share will increase and, in theory, that should increase the share price.

As far as existing creditors go, the Bill seeks to protect their interest in a number of ways. First, no more than 10% of the shares may be purchased by the company or such other percentages as are allowed by the Minister. Its limitation to 10% of share capital serves to ensure limited reduction each time. Secondly, there is a requirement that shares can only be bought out of the profits of the company. Thirdly, the directors and officers must be satisfied that the company is not insolvent at the time of the purchase of the shares. The Bill says a company is insolvent if (i) it cannot pay its debt as it falls due or (ii) the value of the company's assets is less than the value of its liabilities, including contingent liabilities. If the company fails either of the two tests, it is regarded as insolvent and cannot do a share buy-back scheme. By insisting that the purchase price may only be paid out of the profits of the company, the creditors at least can have the assurance that shareholders cannot simply declare a return of capital to their detriment. Through this, the share buy-back scheme is able to achieve flexibility of capital management with minimal risk of compromising any party's interest.

Sir, while I note that the Government has taken measures to ensure that the shareholders and the creditors are protected under the Bill, I do have a number of concerns which I would like to point out.

Firstly, by allowing the share buy-back, companies may be encouraged to return surplus capital instead of using the money for high-yielding investment opportunities. The return of surplus capital may be an indication of weakness in the corporation's strategic plan and the return of capital may just serve to exacerbate that weakness.

Secondly, by reducing its working capital through the share buy-back programme, the proportion of debt would invariably increase in the company's capital structure. This would increase the company's financial risk. We should also note that the share buy-back results in an indirect transfer of bondholders' wealth to the shareholders. This is applicable especially to companies that use long-term debt as a form of financing. By buying back shares, the company is, in fact, increasing its gearing ratio while reducing the proportion of its financing through equity. Because of the increase in a company's financial risk, the bonds are now riskier. But bondholders are not compensated for the higher risk with higher coupon interest. This would invariably make bond issuing in such an environment less attractive and in the long term, it may impact on our Government's effort to develop the bond market in Singapore.

Thirdly, share buy-back schemes increase the risk of triggering the provisions of Rule 33 of the Takeover Code which compels the making of a takeover bid if the party concerned is left with holding 25% or more of the shares and unwittingly acquires shares which are in excess of the relevant threshold. In such an event, the shareholders may not be prepared to mount a takeover bid. To avoid such a possibility, it may be necessary to ask for waiver in advance from the Securities Industry Council or the Minister. Additionally, in the case of listed companies, a shareholder may not by choice become a substantial shareholder in a company but become one as a result of the share buy-back scheme. The consequence of being a substantial shareholder is that his identity would have to be disclosed to the public. Now, Sir, not everyone would like to have their identity disclosed as substantial shareholders in a listed company.

Fourthly, in most other jurisdictions, share buy-backs are generally regarded as positive information. As a result, the share price would tend to rise upon a share buy-back announcement. Because of this, I am concerned, as was expressed by several of my colleagues earlier, that the potential for insider dealing may arise. Quite obviously, those with inside information may be tempted to trade on the shares before the buy-back scheme is announced. A curious situation may also arise where the company engaging in share buy-back may be privy to price-sensitive information. For instance, what if the company was working on a major invention which it knows would affect the share value and which it intends to announce after the completion of the share buy-back scheme? Would the Minister say that the company is engaging in insider dealing? Additionally, there is always the possibility of manipulation by unscrupulous managers trying to prop up their share prices due to a market downturn or poor intrinsic value. Alternatively, managers and directors with share option schemes may prop up the value of their options by initiating price buy-back schemes not for the benefit of the company but for their own benefit. The consequent rise in value of the shares will substantially profit these managers. I would like to ask of the Minister whether he would consider managers initiating share buy-back for the purpose of enhancing the value of their stock options as being engaging in acts of market manipulation.

Sir, while I have expressed some reservations, it is not to be taken to mean that I do not support the Bill. On balance, I think the benefits of the share buy-back outweigh the risks. At the moment, there are adequate safeguards to deal with this concern. So long as the Government continues to promote transparency within the legal framework of our companies, both in the business dealings and the shareholders' structure, the integrity of our company legislation should not be compromised as a result of the introduction of a share buy-back provision. I would, therefore, support the Companies (Amendment) Bill as a matter of policy.

Sir, having stated my general support for the Bill, there are, however, a few minor drafting details that I would like to touch on.

Firstly, clause 2 of the Bill seeks to amend the definition of "interest in the shares of a company" in section 7(4) to increase the threshold upon which a person is deemed to have an interest in a body corporate from 15% to 20% of the voting power. In the present form, section 7(4) has often caused much confusion. The often asked question is whether in a circular fashion, the section applies to shareholders of a company who is deemed to have an interest in the shares by virtue of a potentially unlimited change of 15% interest. In a way, clause 2 of the Bill seeks to overcome that by making it clear in the notes that the purpose was "to restrict its application to not more than one level".

Sir, while I am happy to learn that the Ministry has recognised the need to clarify the application of the present section 7(4), I submit that the draftsman has not gone far enough. In fact, I would say that the proposed provision is still unclear. Rather than restricting the application to just one tier, when read literally, there is a possibility that the clause may apply to more than one tier. The clause provides that the person shall have an interest in the share in which a body has an interest in if, inter alia, the body corporate is accustomed, whether formally or informally, to acting in accordance with the directions of the person concerned.

In using the word "informal", one would have much difficulty in applying the provision with precision. In its ordinary meaning, it is conceivable that the management consultant to a company, which habitually acts in accordance with the management consultant's direction, may also have an interest in the shares of the company that the company is deemed to have an interest in. Will the Minister explain if this is the intention of the Government?

Additionally, the words "controlling interest" are used to determine if the person has an interest in the body corporate. There is, however, no definition of what the words "controlling interest" mean. Would the Minister clarify what the words "controlling interest" mean, having regard to the use of the proportion of shares as being more than 20% in the proposed section 4A? Does "controlling interest" therefore mean something more than the percentage of voting rights attached to the shares? If it does, will the Minister please explain to this House what these interests are?

Clause 5 sets out the new sections 76B to 76G of the Act which relate to the share buy-back scheme. In the new sections, the words "ordinary shares" are used. Ordinary shares in the Act are rather not defined words. Presumably, ordinary shares are used to exclude redeemable preference shares or any preference shares for that matter. Does it therefore mean that, apart from preference shares, the provision of the new section 76B will be applicable to all classes of ordinary shares, irrespective of whether or not there are further differentiation within those classes of ordinary shares? How would the definition of equal access scheme apply in cases where different classes of ordinary shares have been created? The new section 76C (2) provides, inter alia, that the notice specifying the intention to propose the resolution to authorise an off-market purchase referred to in the earlier subsection must, among other things, determine the maximum price which may be paid for the shares. On a plain reading of the Bill, one wonders how a notice can determine the price of shares. Does it mean that the notice must state how the maximum price of the shares is to be determined? In its present form, the expression does seem a little odd. Sir, I think it would be more accurate to describe the notice as specifying the maximum price of shares rather than determining the maximum price of shares, as is presently stated in the Bill.

The same comments apply to new section 76E (2) (b) as well. New section 76C (4) also provides that the authority for an off-market purchase referred to in the section may, from time to time, be varied or revoked by the company in a general meeting. Having provided for such powers, the new provision is, however, unclear as to what happens after those powers have been exercised by the company. Does it mean that everything which has already been done prior to the revocation or variation of the powers is no longer valid to the extent of the variation or revocation? The same comments apply to section 76E (5) as well. Finally, new section 76C (6) defines an "equal access scheme" as one which, inter alia, satisfies the requirements of all persons having a reasonable opportunity to accept offers made to them. The use of the term "reasonable opportunity" may introduce uncertainty into the legislation. It may be better to introduce a fixed minimum period during which the offer is open. If left as it is, it may be open to each individual shareholder to argue that, given its present circumstance, he was not given reasonable opportunity to accept the offer. Additionally, with respect to new section 76C(6)(c), it may be neater if the words "that there shall be disregarded" be deleted and substitute therefor with the word "for". This would make the drafting simpler and neater.

Sir, I have chosen to confine my comments principally to the share buy back scheme and I would like the Minister to respond to these comments. But for the comments, I support the Bill.

Mr Simon Tay: Mr Speaker, Sir, I think we are in search of lighter regulation to provide more freedom for businesses and companies in Singapore to liberalise without creating an unfair market or a market which people can take advantage of, to do unfair things.

In moving this amendment, we realise that we are letting go of some of the institutions of old. We are letting go of Government's close supervision, to some degree, and are deciding to rely on some other institutions more. We are also letting go, among the choice of institutions, of the Court's since the share buy back scheme will reduce the role of restructuring under the Court's supervision. The institutions we then turn to will increasingly be the SES and, more than that, the investing public, and we have an increasing number of citizens who are using their private funds, their CPF funds, for this purpose to create a citizenry who are also shareholders in our companies.

Let me, with this background, turn to my concerns regarding disclosure and transparency as regards the share buy back scheme and the deeming provision. Let me try to avoid repeating many of the points my colleagues before me have made.

My first concern with the share buy back scheme is that it is possible that it may be open to price manipulation. This is primarily because the investing public often does not know what is happening when a buy back starts to happen. The provisions in the Act provide that notice be given to the Registry of Companies (ROC). However, I think that in the climate of the small investors in Singapore, this may be insufficient. The SES undoubtedly will also make the buy back decisions known to the mass net. But again, this might not be enough since the mass net goes to mainly people with seats in the Stock Exchange. It might not reach the smaller investor. The smaller investor then will see the price go up or down and the volumes go up and down and there might be some sort of psychological effect on them which they may not understand. They might therefore follow blindly.

Secondly, as regards the share buy back scheme, clearly the Bill is on good ground in providing that for listed companies, this must be bought from the open market. However, Sir, there are two dangers. The first is of a bail out. Even though you buy in an open market, it depends on who has made, what shares are available. There may therefore be a danger of collusions whereby major shareholders in need of funding make their shares available at exactly the right time. The Minister might respond that these possible collusions would be tackled under the general insider trading rules. However, it seems to me that these rules may not be themselves sufficient since the information of when a company buy back will happen may not in a sense be price sensitive since the price is pretty much fixed. It is more a question of when the shares are available rather than what price.

The third point I want to make about the share buy back is the opposite effect. Rather than having a bail-out of major shareholders, there is in fact the effect of consolidating and increasing the effective holdings of the bigger shareholders. And here I share the concern of Mr Sin Boon Ann that this will effectively increase the percentage held by certain shareholders. And the question is whether the Takeover Code would be triggered. This is not clear, since section 213(3) of the Companies Act provides that the effect must be of acquiring effective control, that is, acquiring shares. In the event of a share buy back, the shareholder does not acquire any shares but, nevertheless, may find himself put above the statutory limit.

The final point relates to the deeming provision. As Mr Sin has said, it is good for clarity in this issue that for too long, we have been concerned that deeming provision upon deeming provision will lead to endless tiers of deemed interests. However, there is some concern that we may be moving in the opposite direction of greater transparency. This is because we will be using one tier only. It will be more possible to have shell companies. With these comments, I leave it to the Minister.

Dr Richard Hu Tsu Tau: Mr Deputy Speaker, Sir, all speakers have expressed some similar concerns about the provisions of the Bill. I will deal with each speaker separately.

Mr Leong Horn Kee has asked whether we should not allow the buy back scheme to be extended to all shares rather than just ordinary shares. The reason why ordinary shares were stipulated is because they form the bulk of the shares issued. Although the number of preference shares is not insignificant, what we are really talking about are the non-redeemable preference shares where such a provision of buy back might be extended to. For the time being, the proposal is to confine it to ordinary shares until we gain more experience in this particular process. Generally, I would say that the provisions are on the prudent side because of our lack of experience in administrating such changes. We have perhaps over provided for the protection of the small shareholders at the expense of flexibility. Hence, the limitation of the share buy back to 10% for each instance and the cap on the price movement of 5% of the average of five preceding days' share prices. Also, there is the need for shareholders' approval on the maximum share prices allowable. All this may sound restrictive, but they are designed to protect smaller investors who may not be familiar with the procedures and, therefore, may not comprehend the implications if more flexibility is introduced into the scheme.

I come next to Mrs Lim Hwee Hua. She is concerned that the buy back scheme itself may trigger a signal to outsiders that there is something basically wrong with the company for it to want to buy back its own shares. Is that the concern?

Mrs Lim Hwee Hua: No. It is more a signal of how management itself feels about the value of the prevailing share prices. They may think it is undervalued.

Dr Richard Hu Tsu Tau: One of the main reasons for companies deciding to buy back its shares is that it has accumulated substantial excess capital which it finds difficult to place into attractive investments. I do not believe - unless you are suggesting collusion - that an average company would rush around to buy back its shares without good reasons. It could be either because it has got more money than it knows what to do with, and therefore it is better to return part of these to shareholders who may then wish to re-invest in other things.

The Member is also concerned as to whether there are adequate safeguards to ensure that the company insiders do not manipulate for personal advantage. Unlike some countries which do not impose limits on the number of shares which can be repurchased each time, we have imposed a rule that such purchases should be limited to 10% of share capital. The 10% limit for share repurchase will minimise the potential and scope for management to manipulate benchmarks such as earnings per share and the price earnings ratio. If a company is in fact making losses, repurchasing the shares will not improve its earnings related benchmarks. And if a company is making only modest profits, a 10% share repurchase will not inflate its earnings related benchmarks noticeably.

The other safeguard which we have introduced is to allow buy backs only to be made out of distributable profits accumulated over time. It also requires prior shareholders' approval, and there is an insolvency test. I believe that under the present rules, there are sufficient safeguards to prevent abuse. Of course, in administering this particular amendment over time and as we acquire more experience, there may be a case for reviewing some of these rules.

The Member is also concerned that management may be spending more time in managing share prices than in managing the business itself. I can only comment that you cannot stop this. Whether you have a share buy back purchase scheme or not, if management is inclined to do this, they will do it anyway.

The Member has also asked whether there should be a cap. We have in fact imposed a cap of 5% as in the UK, rather than follow the one-broker rule which is prevalent in the United States. This was decided on after consultations with the Stock Exchange of Singapore, the Association of Banks and the Law Society.

The Member is also concerned whether timing differences will disadvantage minority shareholders. One way to avoid this is to require that repurchased shares be cancelled immediately on purchase. In addition, listed companies will be required by the SES listings rules, which are yet to be implemented, to disclose all details of these repurchases, including the number of shares bought and the prices paid before the start of trading on the following business day. Also, section 103 of the Securities Industry Act prohibits the company's directors and other insiders from dealing in the company's shares when they are in possession of price sensitive information. This will help ensure that insiders do not deal in the company's shares when they have privileged information such as the time and number of shares to be purchased on any particular day.

The Member has also asked whether there should not be a time bar on the distributable profits. I think there is no reason to impose a time bar. All the distributable profits are in fact profits which the company could have declared as dividends. So, to put a time bar on it does not seem reasonable.

She also asked whether there are tax implications. The rule is that companies will be allowed to buy back shares only out of distributable profits. Therefore, consistent with the current practice of companies on the payment of dividends out of distributable profits, shares brought back out of distributable profits will also require franking under section 44 of the Income Tax Act.

There is also concern about the tax treatment of shares sold on the open market when the seller of such shares may not know the tax implications. The tax rules here are quite complicated. But the basic principle is that if a share purchase is done in the open market, then the seller of the shares would have been deemed to have sold the shares and it is a capital gain. Whereas if the shares are bought under a special arrangement on an equal pro rata basis, it is deemed as equivalent to the distribution of dividends and is therefore subject to tax. IRAS will be issuing tax rules on this shortly.

Mr Ong Kian Min wanted to know why preference shares are not included in the share buy back scheme. I have already explained this.

He also wants to know whether the limit of 10% on each share buy back proposal can be reviewed from time to time. I can assure the House that this will be done. What we need is some working experience before we decide to make changes.

Under our proposed rules, companies must notify shareholders of the authority given to the directors of the company for a share buy back exercise in which the maximum price to be paid will have to be specified, including the maximum number of shares which can be acquired. The reason for imposing such a condition is a safeguard to ensure that minority shareholders' interests are protected. It is not possible for Government itself to determine what the rules for determining the maximum price should be, and this must be left to the shareholders.

As regards risk of manipulation by directors in a situation where the company runs the risk of becoming insolvent, I think the penalties imposed on such activity are sufficiently penal for directors not to want to engage in such practices. A director or manager who approves a buy back scheme knowing that the company will become insolvent as a result of the buy back will be guilty of a criminal offence liable on conviction to imprisonment not exceeding 12 months or a maximum fine of $5,000. In addition, they will be personally liable to the creditors of the company to the extent by which the purchase consideration exceeded the distributable profits. I think these are sufficient deterrents to discourage such activity.

Mr Sin Boon Ann has asked an extensive number of questions on matters of detail. I will try to answer as many of them as possible. But before doing so, I would like to point out that these amendments to the Companies Act are not comprehensive. We are engaged in a massive exercise in which the Companies Act will be amended over a series of occasions. And what is left undone on this occasion, we will have opportunity to review them in the future.

The Member has suggested in a general way that the return of surplus capital to the shareholders may indicate a weakness on the part of management. While this is, of course, a possibility, I think the general experience has been that companies would only buy back shares if they have substantial amounts of surplus capital which they are unable to deploy effectively. And shareholders and purchasers of shares can quickly see through the intent of management if it is otherwise.

The Member is also concerned that the share buy back scheme will increase the debt equity ratio of a company. While this is a possibility, we have introduced a safeguard to allow only 10% to be purchased on each occasion. For the time being, I think this is an adequate safeguard.

The Member is also concerned that the share buy back may create problems, triggering off takeover provisions when the 25% limit is inadvertently hit due to the share buy back process. I would like to inform the Member that the Securities Industry Council (SIC) is now crafting some rules to address this particular problem.

Insider trading is also a question which has been raised. The prevention of insider trading, we believe, is adequately covered under section 103 of the Securities Industry Act (SIA). The provision prevents a company from trading in shares when their directors and officers are in possession of price sensitive information not yet disclosed to the public. By buying back its shares prior to public disclosure of such information, the company will obviously be in breach of the SIA prevention of insider trading provisions.

The Member is also concerned over the possibility of directors and managers buying back shares for their own purposes and therefore engaging in market manipulation. I should like to point out that unscrupulous management could manipulate shares in other ways without the buy back scheme. However, the 10% rule which we have imposed will minimise the potential for manipulation because a 10% share repurchase will not significantly affect the share value of the company. Also, there is a limit on the amount of shares which it can buy because it is limited to the distributable profits of the company.

Turning now to other provisions of the Act, the Member is also concerned that the provision of "deemed interest" can go beyond one tier, in the case of a person having an interest in a share in which a body corporate has an interest in if the body corporate person is accustomed formally or informally to act in accordance with the direction of the person concerned. He also wants to know whether the term "controlling interest" will spell definitional problems.

I would say that the hon. Member is right. It is precisely the intention of the provision to catch such situations. In the case described by the Member, the application of deemed interest can go beyond one tier. As for controlling interest, the term has long standing use in the Companies Act. To my knowledge, it has not encountered such problems in practice.

There are other matters of detail which the hon. Member has raised. I will not answer them in detail but, generally, I would say that any items he has raised which are of significance will be taken care of in future amendments to the Act. Again, I would reiterate that the proposed amendments to the Act have been consulted extensively with the Corporate Finance Committee, the Association of Banks of Singapore, the Singapore Stock Exchange, the Law Society and other interested parties. So it covers most areas of interest. However, there are bound to be gaps in detail which we will take care of next time when we amend the Act again.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. - [Dr Richard Hu Tsu Tau].

Bill considered in Committee.

[Mr Deputy Speaker in the Chair]

Clauses 1 to 4 inclusive ordered to stand part of the Bill.

Clause 5 -

The Chairman: Clause 5. Dr Hu, you may take all the three amendments together.

Dr Richard Hu Tsu Tau: Sir, I beg to move,

(1) In page 6, line 35, to leave out "in favour of the resolution".

(2) In page 7, line 18, to leave out "in favour of the resolution".

(3) In page 8, line 15, and in lines 33 and 34, to leave out "in favour of the resolution".

The reason is to clarify that interested parties cannot exercise their voting rights in any way on special resolutions to vary the earlier authority to conduct a share buy back.

Amendments agreed to.

Clause 5, as amended, ordered to stand part of the Bill.

Clauses 6 to 14 inclusive ordered to stand part of the Bill.

Bill reported with amendments; read a Third time and passed.