CLOB SHARES

[Mr Speaker in the Chair]

Mr Heng Chiang Meng asked the Deputy Prime Minister whether the equivalent volume of $229 billion worth of Malaysian equities traded on CLOB International quoted in a Malaysian White Paper will go to the Kuala Lumpur Stock Exchange now that there is no CLOB International and whether there will be greater liquidity for Singapore equities traded on the Stock Exchange of Singapore in the absence of CLOB International.

Mr Tay Beng Chuan asked the Deputy Prime Minister whether he will give an update on the status of negotiations with the Malaysian government on the US$2.6 billion worth of frozen Central Limit Order Book (CLOB) shares.

The Deputy Prime Minister (BG Lee Hsien Loong): Mr Speaker, Sir, with your permission, I will take the first two Questions together.

Mr Speaker: Yes.

BG Lee Hsien Loong: Mr Heng Chiang Meng has asked whether past investor interest in Clob Malaysian shares would now go to the KL Stock Exchange, since Malaysian shares are no longer traded on Clob; or whether this investor interest will migrate to the SES.

Retail investors actively traded Clob Malaysian shares for two main reasons. Firstly, historically close ties between the two countries gave Singapore retail investors a keen interest in Malaysian companies. They wanted to invest in Malaysian companies even after the KLSE and the SES parted ways in 1973 and Malaysian counters were delisted from the SES in 1990. And secondly, Clob made it much more convenient for Singapore investors to buy Malaysian shares. Investors here could transact in S$ without being exposed to foreign currency risk; and they could deal through Singapore brokers, with whom they were more familiar. This was why Clob was successful.

Since the cessation of the trading of Malaysian shares on Clob in September 1998, retail investor interest has shifted to Singapore shares listed on the SES. This can be seen from the increase in the turnover on SES. From October 1998 to March 1999, SES recorded an average monthly turnover of S$9.8 billion. This figure, without Clob trading, is 63% higher than the average of S$6.0 billion per month transacted in the same shares during the 8-month period (from January 1998 to August 1998) before Clob ceased trading in Malaysian counters. The main reason is loss of convenience with the closure of Clob and the imposition of capital controls in Malaysia.

It therefore appears that investors on Clob have for now shifted their interest from Malaysian to Singapore shares.

There have been accusations that Clob investors shorted Malaysian shares, and were responsible for the collapse of the Malaysian stock market. But very few institutions invested in Malaysian shares through Clob. SES figures confirm that an overwhelming majority of Clob investors (in fact more than 98%) were individuals rather than institutional investors.

A recent comprehensive analysis by the Singapore Business Times, based on data obtained from SES, conclusively refuted the charge that Clob caused the decline in the KL Stock Exchange. I have circulated the full BT analysis to Members. You can find it on your seats.

BT found no evidence of significant short-selling on Clob. Judging by share buy-ins by SES, short-selling of Clob shares had been negligible. BT also analysed trading data on the three days each year which showed the largest falls in the KLCI, for the last five years. It found few Clob counters among the top 30 losing stocks on those days. Further, turnover in these Clob counters was much lower than the corresponding turnover on the KLSE - generally less than 5% of KLSE turnover for the same counters. This is hardly the picture of rampant short-selling on Clob.

BT studied more closely the period from the end of 1996, before the Asian crisis, up to 31st August 1998, just before Malaysia imposed capital controls. Mr Speaker, Sir, with your permission, I will ask the Clerk to distribute a chart showing how the KL stock index as well as Clob investors' shareholdings move during this period. [Copies of chart (Cols. 1665-1666) distributed to hon. Members.] Members will see from the chart that over this period Clob holdings of Malaysian shares rose steadily, even as the KL Composite Index declined continuously and steeply together with other regional stock indices. The KLCI lost three quarters of its value, falling from 1,238 on 31st December 1996 to 302 by 31st August 1998. But Clob investors doubled their holdings of Malaysian shares, from 5.7 billion on 31st December 1996 to 11.7 billion on 31st August 1998. This is counting the total number of shares. Their holdings increased steadily quarter by quarter, despite the decline of the KLCI and the deepening economic crisis in the region and in Malaysia. The sell-down of Malaysian shares did not take place in Singapore. chart - KLSE Composite Index and Clob Investors' Shareholdings of Malaysian Shares (Dec 96 - Aug 98) (Cols. 1665-1666)

Despite the recent rally in the Malaysian market, at today's prices many Clob investors are sitting on losses. Whether they decide to sell, hold or buy more shares on the Malaysian stock market once their trading accounts are opened will depend on their assessment of the value of their shares and of the rules governing their trades.

Update on the Clob Issue

Mr Tay Beng Chuan has asked for an update on the frozen Clob shares. I last briefed Parliament on the status of Clob shares during the Committee of Supply in March this year. Yesterday, SES issued a press statement setting out the events leading to the signing of the Agreement, and the background to the cash offer by Effective Capital Sdn Bhd to buy over Clob shares from investors. I have circulated copies of the SES statement to Members.

Members will recall that SES' Central Depository Pte Ltd (CDP) signed an agreement in September last year with the Malaysian Securities Clearing Automated Network Services Sdn Bhd (SCANS), a subsidiary of KLSE. The agreement provided for the migration of all Clob shares to investors' own securities accounts with the Malaysian Central Depository (MCD), based on procedures determined and announced by the KLSE. As the SES statement explained, the SES and CDP have done what is expected of them under the Agreement. But till today SCANS has not fulfilled its part of the agreement, which would enable Clob investors to have their shares in their own securities accounts and to trade their shares on the KLSE.

In the meantime, certain "private sector" solutions have been proposed. One is by Mr Akbar Khan, a Singaporean businessman resident in Malaysia. He has formed a company, Effective Capital Sdn Bhd, which on 30th April 1999 offered to buy Clob shares from investors for cash. The prices offered are on average 58% lower than the prices quoted on the KLSE as at 30th April.

There have also been media reports of other possible offers, including an offer to Clob investors of shares in a closed-end investment fund, to be listed on the KLSE, and which will gradually divest the shares.

The SES statement yesterday gave details of its discussions with Mr Khan on his offer. This was to inform Clob investors of the background to Mr Khan's proposal, and of SES' discussions with Mr Khan and his Singapore lawyer, Mr Sat Pal Khattar of Khattar Wong and Partners.

The SES has maintained throughout that "private sector" offers by Mr Khan or any other party cannot and do not affect CDP's Agreement with SCANS. This is the advice of SES' lawyers, who have also consulted Queen's Counsel on the offer. The lawyers have also advised the SES that Clob investors were, and remain, legal owners of their shares. The Agreement signed by SCANS recognises that Clob shares have the same legal rights as the same classes of shares listed on the KLSE, and gives full effect to these legal rights. Indeed Clob shares have continued to receive dividends and offers for rights issues.

The SES has therefore insisted on clear and reasonable arrangements being made for Clob investors who do not accept any private offers. They should have their shares transferred to their own accounts with the MCD and be allowed to trade them on the KLSE.

Mr Khan's offer, which is a cash offer for Malaysian securities, does not need to comply with regulatory requirements in Singapore. However, in view of the considerable public interest, the SES has pointed out where the offer documents fall short of generally accepted international standards.

SES' lawyers have advised that the CDP has a duty to disseminate details of any offers made to Clob investors, and convey acceptances of the offers to the offerors. CDP will carry out this obligation to inform Clob investors and collect their responses to Mr Khan's offer. In so doing, neither SES nor CDP will be sponsoring, sanctioning or making any recommendation to Clob investors as to whether to accept or reject the offer.

Clob investors should carefully study the offer by Mr Khan, before deciding for themselves whether to take it up. They should consider all relevant factors, including the prices that Effective Capital has offered for their shares.

Clob investors who do not wish to sell their shares on the terms offered by Mr Khan, or to accept any other subsequent offers, do not have to do so. Their legal ownership of their Clob shares is not in issue.

The SES will continue to press the KLSE and SCANS to meet their obligations under the migration Agreement. As the SES has stated, the respective obligations of the two parties are not matters of opinion, but a legal question which can be determined. SES has obtained legal advice that the agreement is a legally binding and enforceable contract.

The Government has also taken up the Clob issue with the Malaysian Government at the political level. Prime Minister Goh Chok Tong discussed the Clob issue with Prime Minister Dr Mahathir at a bilateral meeting in Hanoi in December last year. Both PM Goh and Dr Mahathir subsequently told the press that Clob would be included in the package of outstanding bilateral issues to be discussed and resolved by the two Governments. Dr Mahathir said at a press conference in Hanoi on 17th December 1998, and I quote: "I thought that it is best that we resolve as a package, including of course the problem of CPF and Clob." Dr Mahathir also said, and again I quote: "We would rather like to settle the whole thing as a package so that the water supply is linked to the problem of the railway, CIQ, CLOB and CPF".

However, the Malaysian Government subsequently changed its stand. On 13th March 1999, Reuters quoted Malaysian Finance Minister Tun Daim Zainuddin saying that discussions between Singapore and Malaysia on the Clob issue should be left to the KLSE and SES, and were not part of the overall "package" of issues to be discussed at the government level. Reuters quoted Tun Daim: "I've always maintained it's between KLSE and SES. . As far as I know, it is not part of the package; if they want to include it in the package, it is up to the parties, both governments."

Malaysian and Singaporean senior officials have met twice this year on 11th March and on 21st and 22nd April to discuss the proposed package deal. At both meetings, the Malaysian delegation asked that Clob be removed from the agenda as it was not a Government-to-Government issue. Singapore's response on both occasions was that the Clob issue should not remain outstanding when the package is finally resolved. This remains Singapore's stand.

The Government and SES will make every effort to resolve the Clob issue expeditiously. Clob investors have provided support for Malaysian shares over the years, even when the market was declining over the two years before the imposition of capital controls. It is not to anyone's advantage for Clob investors to feel that they are being treated unfairly, or for the international markets to perceive so.

Mr Heng Chiang Meng (Cheng San): Sir, I have a number of supplementary questions for the Deputy Prime Minister. (1) May I ask the Deputy Prime Minister, since the statistics from Clob show a diametrically opposite picture from that in the Malaysian White Paper, whether SES or even the Government would inform the Malaysian government of these statistics through normal channels? (2) May I also ask the Deputy Prime Minister whether the issue of frozen Clob Malaysian shares could be brought up to international organisations such as WTO or even the International Court of Justice for resolution since it was clear that the trading of Malaysian shares on Clob was all along completely legal and the freeze was because the MCD had changed its rules regarding nominee shareholdings on 31st August 1998, coupled with SCANS not fulfilling its legal obligation of transferring the shares to individual accounts with MCD? (3) I would also like to ask him why CDP, as the umbrella nominee holder for Clob Malaysian shares, has not taken any legal action on this issue so far? (4) Since any private sector party is not precluded from making an offer for Clob Malaysian shares, could an organisation such as GIC or Temasek make an offer to purchase the shares at reasonable prices? In this respect, why is SES even considering the offer from an individual such as Mr Akbar Khan? Who is he? Does this mean that any future offers for Clob shares by any individual, regardless of the background or standing, will also receive the same consideration from the Stock Exchange of Singapore?

BG Lee Hsien Loong: Mr Speaker, Sir, we will of course extend copies of the analysis from the Business Times as well as the statistics I have given to Members today and the graph to the Malaysian authorities. We hope they would be helpful to them when studying the problem.

As for bringing the matter to the World Trade Organisation or the International Court of Justice, this is not a matter in the purview of the WTO, nor is it a treaty between the two countries, because the agreement was signed between SCANS on the Malaysian side and CDP on the Singapore side. But as I have informed Members, we are taking legal advice, including advice from QC, on our rights in this matter. That also answers the question on legal action. We are taking advice on our rights.

Could GIC or Temasek offer to buy? Mr Speaker, Sir, I think that would be very dangerous. Individual investors invested on Clob on their own. This was over the counter. These were not shares which were listed on the Singapore Stock Exchange. They were shares listed elsewhere and not subject to our disclosure rules or corporate governance standards. Investors went in hoping to make a good return. There was no arrangement that if they made a good return, the Government would collect a small percentage, and if they went down, the Government would bear some of the loss. So for the Government to go in with GIC or Temasek to offer to buy these shares from Singaporeans, I think, would be a very, very dangerous precedent. The whole idea that individuals must take responsibility for their investment and must consider carefully and decide and take the rough and the smooth is there. What the Government can do in this circumstance, which has arisen, is to take up with the Malaysian authorities to try and get the matter resolved and that, as I have explained to Members, we are in the process of doing.

Why does the SES consider Mr Akbar Khan's offer? Mr Speaker, Sir, the short answer is that we have reason to believe, and we satisfied ourselves, that Mr Akbar Khan was acting with the endorsement of the Malaysian authorities.

Mr Shriniwas Rai (Nominated Member): Mr Speaker, Sir, I have two supplementary questions for the DPM. Firstly, I see that we cannot go to WTO. But could we explore the possibility of arbitration in a third country? Secondly, would SES demand, and I use the word "demand", MCD to comply with the agreement reached on 18th September between SES and KLSE SCANS on the question of migration of Clob shares, especially as the Clob shares have been transferred to an omnibus account?

BG Lee Hsien Loong: Mr Speaker, Sir, we will explore all possibilities and take QC's advice as to what our rights are and how they can be given effect. The QC's advice is that this is a legally binding enforceable agreement and that, in fact, we are entitled to specific performance from the other party. How to get that done, whether arbitration or not, these are matters which I leave to the lawyers.

As for demanding that MCD complies, indeed that is what we have been raising with MCD. It is not a matter of raising our voices. It is a matter of getting rights recognised.

Dr Lee Tsao Yuan (Nominated Member): The graph which the Deputy Prime Minister has provided shows conclusively that there was no dumping of Malaysian shares on Clob. I presume it is the volume of shares. I have two questions in order to make the picture complete. The first question is the volume of shares that he has provided on this graph. What is the percentage of this volume compared to the volume of those respective shares on the KLSE? Is it a large volume? Or is it a small volume? Can significant movements on the Clob really affect Malaysian stock prices that much? The second question I have is that the graph and the details which have been provided here show, for example, the increase in the volume of Clob shares. What about the statistics on short selling as such? Are there any statistics on the volume and value of short selling?

BG Lee Hsien Loong: Mr Speaker, Sir, I do not have the figures on what percentage the Clob shares accounted for the corresponding total number of shares in these companies. I believe it would be small, probably around a quarter. But I am hazarding a guess. Most of the trading with Malaysia and KL and nearly all of the institutional investors, who are the big players, invested in KL rather than in Clob. Clob was providing a facility for Singaporean investors.

As for the volume of short selling, as I said in my reply, it was small. We do not have direct numbers for this. What we have are the figures for share buy-ins because when somebody is short and unable to recover his position by the time the delivery is due, then the Exchange will go in and buy-in on his behalf in order to meet his obligations. The volume of buy-ins on Clob has been very low and, therefore, we believe that the volume of shorting has been very low. The fact is that overall, Clob shareholders have increased their total holding of shares. Each time, the stock market fell, they bought into a falling market. Over two years, it shows that overall, they were not dumping Malaysian shares. They were investing in Malaysian shares and they doubled their holdings in two years.

Mr Inderjit Singh (Ang Mo Kio): It seems that from this incident, Singaporeans are being singled out and treated differently from other investors in other countries. I have two questions. Firstly, are there any other investments other than the Clob shares that have been affected by the controls that the Malaysian government has placed specifically for Singaporeans? For example, I recall that we have some ringgit holdings. What has happened to them? Secondly, is there any message from the Government to Singaporeans regarding investing in the Malaysian market in the future? Even if he invests directly in the KLSE today, will he be treated differently again in the future?

BG Lee Hsien Loong: Mr Speaker, Sir, other investments in Malaysia would of course be affected by the capital controls, in terms of movements of float funds and withdrawal of funds.

As for the ringgit holdings, I do not have the latest position. But I understand that they have been converted into commercial deposits and have gradually been withdrawn over a period of time in a way which has not caused a disturbance in the market, and which the Malaysian authorities were aware of.

As to whether other investments in Malaysia now will be affected by future uncertainties, I am in no position to answer that question.