EXCHANGES (DEMUTUALISATION AND MERGER) BILL

Order for Second Reading read.

The Deputy Prime Minister (BG Lee Hsien Loong): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

Introduction

Around the world, exchanges are facing new forces of change. They must contend with increasing global competition from existing and new players, and investors who demand cheap and efficient channels for trading. New electronic trading systems are executing trades between large market participants at low cost, bypassing the exchanges. Exchanges themselves are seeking to link up or forge alliances, so as to remain competitive and to offer a wider menu of products to investors.

In Singapore, the stock and derivative exchanges, the Stock Exchange of Singapore ("SES") and the Singapore International Monetary Exchange ("SIMEX"), have thus far performed well, contributing significantly to the development of our financial markets, and serving both regional and international investors. But Singapore's exchanges must now urgently re-define their strategies so as to remain viable and relevant, and to serve investors as cheaply and efficiently as technology allows and the competition demands.

In November last year, I announced that the Government had accepted the recommendations of the Committee on Governance of the Exchanges. SES and SIMEX would be merged, and at the same time be demutualised, in other words, no longer run as a member-owned entity, but as a private, stock company accountable to a broad range of shareholders. These changes are essential if the exchanges are to respond quickly to new challenges and remain competitive. A merged exchange would also be able to reap benefits in the future from a common user interface and trading platform. It would also be able to offer a variety of integrated products and services which cut across traditional cash and derivative asset classes.

Since November last year Hong Kong has also announced its intention to combine and demutualise its stock and futures exchanges. The two exchanges have just agreed to the plan. The Hong Kong Government has stated that unless the members of the two exchanges vote for the plan, the government will pursue merger and reform through other means.

In Australia, the Australian Stock Exchange, which went public a year ago, is seeking to merge with the Sydney Futures Exchange. The New York Stock Exchange and the London Stock Exchange have both just announced their plans to demutualise. The Financial Times quoted one London stockbroker saying: "Running an exchange must be like living in biblical Jericho with the walls falling down all around you." Transfer Provisions

The purpose of this Bill is to demutualise and merge SES and SIMEX. The first part of this Bill deals with two matters. The first is the process of demutualising and merging the SES and SIMEX. The second is the placement of shares of the combined exchange to new investors. The approach to both matters has been endorsed by the Pro-Tem Committee of the Integrated Singapore Exchange ("PTC").

The demutualisation and merger of SES and SIMEX will be effected by a transfer of ownership from existing members who hold shares in SES and SIMEX to a new transferee holding company, or Newco. On Transfer Date, which is targeted for 1st December 1999, the existing shares of SES, SIMEX and SCCS which are currently held by the members will be cancelled. (SCCS is the computer arm of the SES jointly owned by SES itself and its SES's 26 local members. Since SCCS is not a wholly-owned subsidiary of SES, its shares will have to be cancelled separately.)

At the same time that these shares are cancelled, the three companies will issue new shares to Newco. In return for cancelling their shares in SES and SIMEX, members of the two exchanges will receive a fixed dollar amount of shares in Newco. Each SES member will receive $6 million, and each SIMEX member $170,000 for every seat owned and $115,000 for every share owned. In aggregate, SES and SIMEX members will receive $301 million worth of shares. SES and SIMEX members will thus become shareholders of Newco, and Newco will in turn own 100% of SES, SIMEX and SCCS.

The remaining shares of Newco will be placed with new investors. The share placement will be implemented in two steps:

First, Newco will issue new shares to a pre-designated special-purpose company. The special-purpose company will be a "shell" company owned by Temasek. It will not be able to exercise the voting rights attached to the Newco shares, and will not be allowed to deal in Newco shares without the approval of the Minister in charge of MAS.

Second, the special-purpose company will place Newco shares with new investors. The proceeds from the sale of shares, less the par value and certain merger-related expenses, will accrue to the Financial Sector Development Fund.

The financial advisor to the Pro-Tem Committee (which is Merrill Lynch) will establish a market value for Newco shares based on a book-building process. The special-purpose company will, however, not place out all the Newco shares in one placement. It is intended that the first placement to local and international financial institutions, as well as other investors, will be completed by Transfer Date. The special-purpose company will hold back a portion of Newco shares for subsequent placements, including to strategic partners with whom the integrated exchange may enter into alliances.

Newco will not be publicly listed immediately. The PTC envisages an IPO in the medium term. When Newco is listed on the stock exchange, the Bill will provide that MAS will directly regulate the listing and trading of Newco's shares. This will ensure that Newco will not face a conflict of interest when it lists on its own subsidiary.

New Regulatory Provisions Governing Newco

The second part of the Bill establishes regulatory provisions which govern Newco. The exchanges are a key part of Singapore's financial sector infrastructure. MAS currently regulates the SES and SIMEX under the Securities Industry Act ("SIA") and the Futures Trading Act ("FTA"). Since Newco will own and run the exchanges, it is in Singapore's strategic interest for MAS to also exercise some degree of regulatory control over Newco. The Securities Industry Act and Futures Trading Act will continue to apply to Newco's two subsidiaries, SES and SIMEX, with minor modifications which I will mention later.

We should not unduly constrain the new for-profit entity in the running of its exchanges and the pursuit of new business opportunities. The regulatory provisions pertaining to Newco give MAS power to issue directives in the interest of ensuring fair and orderly securities and futures markets, and the proper management of systemic risks. This is necessary for MAS to perform its role as securities regulator, but is otherwise not intended to impinge on Newco's capacity to make business decisions.

The Bill also creates an avenue of appeal by Newco to the High Court against any MAS action. This is consonant with the broader recommendation of the Corporate Finance Committee to allow parties aggrieved by decisions of the securities regulator to have recourse to independent bodies.

The first directives that MAS will issue to Newco relate to its corporate governance. MAS will require Newco to do the following:

First, to seek MAS approval for the appointments of both the Chairman and CEO of the exchange. These are key appointment holders who define the strategic direction of the organisation, and its key risk management principles.

Second, MAS will require Newco to set up a Nominating Committee, whose purpose is to recommend appointments to the Board and key management positions. The appointment of all members of the Nominating Committee will require MAS approval. It is common for international exchanges to have such a Nominating Committee. In Singapore, we have just introduced a similar arrangement for the local banks.

Third, MAS approval will be required for individual shareholdings that exceed 5%. MAS may approve shareholdings exceeding 5% subject to conditions, such as requiring further approvals for subsequent increases in shareholding above specified limits. The 5% limit on individual shareholdings prevents excessive ownership by any one party without the regulator's knowledge. Its objective is similar to limits imposed on other demutualised exchanges such as the Australian Stock Exchange.

One consequence of these measures is that it will not be necessary to cap foreign investment in Newco.

These regulations will remain in the Exchanges (Demutualisation and Merger) Act until MAS review of securities legislation is complete in 12 to 18 months time. The provisions for the regulation of Newco could then be migrated into new legislation. MAS is currently undertaking a review of the structure of securities legislation, to follow-up on recommendations made by the Corporate Finance Committee ("CFC"). It will study the feasibility of integrating the current securities and futures trading legislation into one Act.

Establishment of the Financial Sector Development Fund

The third part of the Bill establishes a new Financial Sector Development Fund ("Fund") under the purview of MAS. I had announced the establishment of the Fund last year in November as part of the scheme to demutualise the two exchanges. The Fund will be the receptacle for the proceeds from the sale of Newco shares to new investors, and monies in the Fund will be ploughed back into the financial sector.

The Bill defines clearly the objectives of the Fund. The monies in the Fund will be used, amongst other things, to develop and upgrade skills and expertise required by the capital markets and other components of the financial sector; support educational and research institutions and R&D programmes, and fund development of infrastructure and projects that support the financial sector in Singapore.

The Fund will be administered by the MAS, and its activities will be reported annually in the MAS Annual Report. MAS will announce details in due course.

Amendments to the Securities Industry and Futures Trading Acts

The final part of the Bill contains consequential amendments to the Securities Industry and Futures Trading Acts arising from the demutualisation and merger of the exchanges. All references to "member" companies have been adjusted to reflect the separation of ownership and membership. The definition of "securities" in the Securities Industry Act is also being expanded to include new instruments such as stock index futures. This will clarify that such new instruments are allowed to be offered and traded on the new exchange.

Question proposed.

Mr Leong Horn Kee (Bishan-Toa Payoh): Mr Speaker, Sir, I fully support this Bill. As the Deputy Prime Minister has said, this Bill will be beneficial to Singapore. The restructuring and merger of SES, SIMEX and SCCS will help the merged entity to become a premier exchange in Asia and make Singapore a hub for financial markets in the region. The trend worldwide is towards the merger of exchanges, as the Deputy Prime Minister has said. We find ourselves in an increasingly competitive environment. We have to compete not only with the other exchanges in the region but also against the major financial centres around the world. Therefore, creativity and product innovations will enable the integrated Singapore Exchange to stay in line with competition.

As I understand it, the creation of a single integrated privately-held company through the merger of SIMEX and SES will be completed by end 1999. Then the open access of both SES and SIMEX to qualified foreign investors and financial institutions will take place within three years by January 2002. This will coincide with the freeing of SES commissions. The initial public offering (IPO) of the merged holding company may occur within five years. Since the proposed demutualisation and merger will be very beneficial to Singapore, I would like to ask the Deputy Prime Minister whether he would consider speeding up the process, assuming the various parts of the merger exercise progress expeditiously and smoothly and ahead of schedule.

Waiting three to five years for the entire process to run its full course appears to be a long time. Since the said result will strengthen our pole position as a top financial centre in this region, it would be worthwhile to hasten the process. Moreover, the freeing of the commissions of transactions on the SES will benefit the ordinary investors, especially the small retailers. Of course, the speed of implementation depends on our ability to find suitable management for the merged entity and conduct training for the staff and executives of the merged exchange.

Sir, I would now like to refer to clause 13 of the Bill which pertains to the regulatory functions of the merged exchange. I would like to ask the Deputy Prime Minister how he intends to separate the regulatory functions of this merged entity with its other interests. As the entity will eventually be listed, it will have profit oriented objectives. Hence, if the integrated entity were to be responsible for some of its regulatory functions, areas of conflict of interest may arise. The Deputy Prime Minister has said that the new exchange will continue to perform routine regulatory functions, like listing approvals and market surveillance. I am concerned that even such regulatory functions may on occasions be at conflict with the financial interest of the exchange. As in the case of the corporatisation of the Singapore Telecom, the Public Utilities Board and others, when they were corporatised, the Government set up separate bodies to undertake their regulatory functions. In this instance, therefore, I wish to know whether the integrated exchange will continue to be a self-regulatory body over the long term, or that the Government intends to ultimately take over all the regulatory functions of this exchange. I think this is important as the exchange will be listed in about five years' time. The interests of the shareholders, the broking houses, the management and the public may not coincide. Hence, I feel that an independent regulatory agency separate from the exchange should play the overseeing and arbitration role.

Sir, this merger is one of the recommendations of the Committee on Governance of Exchanges. The Government has accepted or agreed to study many of the recommendations of the Committee. I would like to take this opportunity to ask the Deputy Prime Minister whether the MAS is ready to disclose the results of their study of the various recommendations, and what are the further changes, if any, to be expected of good corporate governance practices or additional disclosure requirements of listed companies on the SES.

I now refer to clause 10 of the Bill which governs the proceeds from the sale of shares of the holding company. According to press reports, the proceeds from the opening of the new exchange to more new investors could amount to between $350 million and $380 million. The proceeds are a large sum of money which should be put into a Financial Sector Development Fund. The stated usage is for training and upgrading of the financial industry. This amount of money seems quite substantial. I wish to enquire whether the Government wishes to, besides having the MAS being involved in the management of the funds, allow other fund managers; or perhaps allow some involvement of the exchange in giving its views as to how the funds can be used. And if these funds are ultimately not being fully utilised, would the Government consider putting it to other uses, or putting it into the Government Consolidated Fund?

Sir, I wish to conclude by stating once again that I support the Bill. The questions that I have asked are to seek further clarity on the functions and the related issues on the exchange.

Mr Shriniwas Rai: Mr Speaker, Sir, thank you for giving me this opportunity.

Sir, I rise to support the Bill moved by the Deputy Prime Minister. I wish to make some observations.

The merger of the three entities that has been outlined by DPM is to be welcomed if we are going to play a major role in the financial market. Thanks to SingTel and to Government policy, we have got the most shareholders in the region, and I would also declare my interest that I am also a shareholder of some listed companies. It is very important to have an exchange that is forward-looking and I am glad the Minister pointed out the example of Australia and even Hongkong. However, I would like to be much more nearer home, Sir.

I would urge the Stock Exchange, when it is merged, to try to educate the public, because there is this lack of knowledge of how the Stock Exchange works in Singapore, and everybody who has got some spare money wants to make quick bucks, and their money goes into shares. I am not going to say that the Stock Exchange should prohibit people from being speculative, but I hope that some sort of public education will do us some good.

In the same vein, I would like to urge the banks in Singapore to take heed of this Bill, that if the banks were to play an important role in this country, they should try to think of merging as fast as possible. Otherwise, we will be behind time.

Another area which I am a little disturbed in this Bill is clause 17. Clause 17 of the Bill deals with the question of jurisdiction of the District Court. As hon. Members are aware, if a man is convicted in a District Court, his right to appeal lies only to the High Court and no more. He cannot go to the Court of Appeal without the leave of the Court of Appeal. But if the matter is tried in High Court, he has got a chance in the High Court with one judge; and then in the Court of Appeal with three judges. In view of the seriousness of the issues involved, I hope, if not now, at least in future, the Government will consider this position that the High Court should be the proper forum to hear criminal cases.

Sir, with this observation, I am more than glad to support the Bill, and I think it is a timely Bill. In fact, when I was in Sydney some months back, I never thought that it would be so soon, but it has in fact come to this House, and I support this Bill.

BG Lee Hsien Loong: Mr Speaker, Sir, Mr Leong Horn Kee has asked whether the Government will consider speeding up liberalisation of brokerage commissions. Indeed, the timeframe for liberalisation of commissions is being reviewed by the Financial Centre Advisory Group which we set up with private sector participants, and MAS itself is also studying this issue. A number of factors need to be taken into account, for example, the schedule of liberalisation of commissions may need to be dovetailed with the timing of various other regulatory changes affecting brokers. It is a very swift moving industry. Events are happening around the world, and if we are 12 months late, we may be out of the game. So we may well have to revise the schedule. But there will be other parts of the plan which also would have to be dovetailed as well.

As for the regulatory functions to ensure that shareholders are properly protected, the merged exchange will be in a different position than, say, SingTel or Singapore Power, because SingTel and Singapore Power came out of statutory boards which both used to regulate as well as to operate. TAS used to regulate and operate the Telecoms industry and PUB used to regulate and operate the utilities industry (water, electricity and gas). When they corporatised, they had to be split and their functions were divided up into the regulatory part and the operating part. In the case of the Stock Exchange and the Futures Exchange, MAS has always been the ultimate regulator. We have always had oversight, and we will continue to have oversight and regulate the two exchanges as well as the holding company after their merger and demutualisation.

The exchanges themselves will always have to do a certain amount of policing of their own rules, but that is at a different level, and MAS will always be in an over-watching position. We have to maintain a balance between being hands-on and controlling everything and standing back and letting things run perhaps in the wrong direction. We have to be not hands-on but in a position to put things right, if necessary. And that is what MAS will do.

On the Corporate Finance Committee, indeed, they made a large number of recommendations which we have been following up, and we have made progress in many of these. I think MAS will be putting up an update soon within a few weeks to keep the public posted as to the progress of the work so far.

Finally, on the Financial Sector Development Fund, what should the money be used for and can we take views on how to spend it? As Members will know, there is never any shortage of suggestions on how money should be spent. In this case, we will certainly take ideas not just from the Stock Exchange but from the industry and the Financial Sector Advisory Group. The purposes have been spelt out very broadly in the Bill - to promote the financial industry and the infrastructure and training - and I think there will be many worthwhile avenues to which the money can be applied. Of course, what is done, we will report annually to Parliament in the MAS' Annual Report.

Mr Shriniwas Rai asked why issues should not be raised in the High Court when there are appeals against decisions of Newco, whether these should not be heard at the High Court with an avenue of appeal to three judges at the Court of Appeal, rather than be heard in a District Court and appeal only to the High Court. It is a matter of how you want to balance the judicial system and where you want to put the prerogatives and the powers of the different levels of the Courts. It is our judgement, and I think also the Attorney-General's Chambers, that the offences can be dealt with by the District Judges because they have sufficient expertise, skills and experience to do so, and the offences do not attract capital punishment or life imprisonment.

But at a more fundamental level, there is an appeal allowed directly to the High Court, because if MAS issues a directive to Newco and Newco is aggrieved by this directive, Newco can appeal to the High Court, and the High Court will judge the matter. And if the High Court rules against Newco, there is nothing to prevent further appeal to the Court of Appeal, which is very important, because it will mean that MAS' directives would need to stand up to High Court's scrutiny.

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. - [BG Lee Hsien Loong].

Bill considered in Committee; reported without amendment; read a Third time and passed.