LIBERALISATION OF THE SINGAPORE STOCK EXCHANGE

5.34 pm

Dr Wang Kai Yuen: Mr Deputy Speaker, Sir, the long title of my motion is "Issues related to the liberalisation of the Singapore Stock Exchange in the midst of the boom of Internet Stocks". I would like to declare my interest as Director of several listed companies, including I-one.net.

Until the departure of Mr Koh Beng Seng from the Monetary Authority of Singapore (MAS), the Singapore Stock Exchange used to be a bastion of conservatism. After the Pan-Electric episode, the SES had adopted a regulatory mindset and attempted to protect both the gullible investors and the reckless speculators in essentially a buyer-beware market. From time to time, rules for listed companies were made even more stringent with new requirements such as the requirement of an independent Audit Committee and full disclosure of directors' fees.

Listing requirements of Initial Public Offering (IPO) were very stringent, especially those seeking to list on the main board. These companies must have proven track records of profitability.

As a result, the SES became a comparatively calm equity market where speculations were minimal. It acquired a reputation of being a safe market, in so far as an equity market could be made safe. The collective memory of the public is that SES is a strict taskmaster. When a company obtained the approval from the SES to list, the public assumed that someone had done the due diligence and the company's fundamentals had been certified sound.

This public image has remained unchanged today, even though in the post-Koh Beng Seng era, the SES, recently renamed SGX, has modified its stance, moving away from its regulatory role and becoming more a stock exchange like the New York Stock Exchange. Companies seeking IPO no longer need a track record of proven profitability. In fact, MediaRing, when it was being listed, had projected to continue its multi-million dollar losses for the next few years! In essence, any company with a market capitalisation of more than S$80 million post-IPO and could find a merchant banker prepared to underwrite the IPO exercise, could tap the market for funds.

In principle, I believe, Mr Deputy Speaker, Sir, these relaxations are appropriate if SGX were to remain viable and relevant in an increasingly dynamic equity market. Otherwise, more and more market players will bypass SGX and invest in other stock markets in the world, an undertaking made easier because of Internet trading. Unfortunately, as the liberalisation has been quite recent, the fact that SGX is now a less regulated market and hence a more risky place has not yet dawned in the collective memory of the public.

Concurrently, in the liberalisation process, a new kind of companies has burst onto the scene worldwide: the Internet companies. High-tech companies and Internet companies have been the darlings of the US capital market for several years now. Companies, which lose money consistently, continue to see their share prices appreciate. Traditional indicators of company's performance no longer seem to be relevant. For instance, the P/E ratio has become meaningless or non-applicable. The famous example is Amazon.com. This fever has spread to other major stock markets in the world. In Japan, Softbank and Hikari become investment companies with the Midas' touch. With the success of China.com and Pacific Internet in the NASDAQ market, the Internet fever has spread to Hong Kong Stock Exchange, SGX, KL Stock Exchange, and even the Bombay Stock Exchange. In Hong Kong, Pacific Century Cyberworks almost single-handedly leads the charge into the brave new world.

Sir, in Singapore, taking advantage of the relaxed listing requirements, three dot.com companies were listed one after another since June last year, namely, I-One.net, MediaRing and Horizon.com. All these three IPOs were spectacularly successful with prices peaked at multiple times of the issue prices. The scramble is on. Let me quote from Hock Lock Siew column of 19th February issue of the Business Times:

"There is big money to be made from the Internet craze in Singapore. The window of opportunity could be closing as more and more Internet firms get listed. Time is of essence. The faster to market, the higher an Internet startup's valuation." There are indeed many dot.com companies in the pipeline vying to go IPO. Gotcha, Nececity, iProperty, GeoAsia, just to name a few. Many companies, in fact, with very little to do with Internet are now frantically transforming themselves into dot.com companies.

Of course, we are not alone in this. The scene in Hong Kong is even scarier as traditional brick and mortar companies scramble to join the bandwagon. Mr Li Ka-Shing has just launched his Tom.com hoping to raise HK$762 million. I am quite sure many of those dealmakers do not really know the difference between "bytes" and "bites".

As the valuations of dot.com companies in the US continue to escalate, the dot.com phenomenon is beginning to look like an asset bubble. The Internet sector in the US has a valuation of around US$550 billion or 4% of the total market capitalisation. As an indication of the lofty height NASDAQ has reached, it is pertinent to note that Microsoft alone has a market capitalisation of around US$600 billion, a figure larger than the GDP of Canada! The danger of this asset bubble is that all the stock markets in the world are now pegged to the fortune of NASDAQ. It also means that if NASDAQ crashes, this would bring about a simultaneous crash worldwide. The scenario is indeed very scary. In recent days, while Dow Jones has been declining, the NASDAQ has continued to power ahead moving in the opposite direction. Despite all the talk of the new economy, nothing can defy the law of gravity ultimately. What goes up must come down.

Yes, we shall embrace the new economy. Senior Minister in his Chinese New Year's speech at the Tanjong Pagar Community Club urged that young men and women in Singapore with bright ideas should be encouraged to take risks to ensure that their ideas could be brought to fruition. The investing public must be encouraged to give their support to the risk-takers so that a new entrepreneurial group could be produced that would give Singapore's economy that extra zip.

The question, Sir, is how Singaporeans can participate in the Internet boom without being sucked into the asset bubble. Had our market been known for its high-risk investment environment where investors go into the market with their eyes open, I would be less inclined to be alarmed. As it is, most people still believe that so long as SGX approves an IPO, the company would have been vetted by one of the toughest regulators in the world. As such, sometimes I feel great unease standing by as the speculative fever sucks in the wise and the worldly as well as the greedy but ignorant. I am sure that in our environment, if things ultimately go wrong, our Government will be blamed. And scenes of the Taiwanese speculators petitioning the Government for assistance to recover their lost fortunes flash in my mind.

Moreover, should the current Internet boom burst, and burst it seems to be sooner or later, would the investors be turned off by all dot.com companies, including those deserving ones, thereby depriving the young and the promising entrepreneurs the lifeline for success? My own preference is for the Government to express stronger words of caution regarding new IPOs of dot.com companies. Perhaps we can follow the practice of cigarette companies printing words like "Smoking is hazardous to your health." But in this case, maybe words like "Profit stream of the company is uncertain. Invest at your own risk." On the other hand, on a more realistic note, I would prefer to see that companies with unproven track records, such as dot.com companies, be confined to SESDAQ, our secondary market, rather than be listed on the main exchange.

Even though this is an unenviable and difficult task, I would like to urge the Minister to strike a balance between liberalisation of our stock exchange and the protection of our retail investors, especially in view of the bull run of high-tech and Internet stocks.

The Deputy Prime Minister (BG Lee Hsien Loong): Mr Deputy Speaker, Sir, I thank Dr Wang Kai Yuen for his intervention. It is a timely reminder of the risks of investing in the stock market.

Over the last two years, we have liberalised and modernised our capital markets. We have changed the listing rules on SGX to allow a wider range of companies to be listed, including start-up companies with short but strong profit records, and companies which have not yet made any profits at all because of heavy reinvestment needs. The new rules are comparable to the rules in other established stock markets in the world for their main boards. The changes have been necessary to enable capital markets to fund the new economy, because the main purpose of the equity market is not to enable investors to make a quick buck, but to be an avenue for channelling funds and resources as equity to invest in companies and enable companies to draw equity in order to be able to grow. So the changes have been necessary to enable the capital market to fund this new economy, particularly including companies in high-tech and knowledge-based industries. If we do not allow high-tech companies to list on the Stock Exchange, then either they will be choked off from equity capital and we will miss out on their growth, or they will list overseas, for example, on NASDAQ, and our stock market will wither. So we are in this business. This is again for professionals.

At the same time, we have changed the regulatory philosophy - from a merit-based one, what Dr Wang called Koh Beng Seng's approach, although it was not just Mr Koh Beng Seng, it was the Government's approach, or what the Business Times called "the Confucian approach", to a disclosure-based one. Previously, we would assess the merits of a proposal and decide whether it is a good or a bad company. Now, we have basic criteria and as long as there is full disclosure and all the facts are put up, we allow the company to be listed and allow investors to go in. This has been necessary because finally, investors have to make their own decisions and to take responsibility for them. No merit-based regulator can guarantee that only successful companies will be listed and that investors will definitely make a profit.

We changed the listing rules last September. Since then, five companies have been listed under the new rules which would not have qualified under the old rules. Only two are dot.com companies, as Dr Wang pointed out, MediaRing and Horizon.com. The other three are China Toll Bridges & Roads Ltd, ST Assembly Test Services Ltd and Chartered Semiconductor Manufacturing Ltd, of which STATS and CSM are also listed on NASDAQ and are by no means start-up companies.

Our changes coincided with the great effervescence in the technology sector and tech stocks in the US markets. There is a new frontier, there is a gold rush mentality. Some people have made it big, others hope to make it even bigger. They are going in, they are trying as if the last train is about to leave the station. Not all will succeed - many will certainly fail. The excitement is for real reasons because the Internet is a dramatic breakthrough in technology which is going to change the lives of billions of people. But, of course, in all this excitement, we start with a good thing and get carried away by its momentum. There is the psychology of a speculative bubble, particularly in the US, in tech stocks. And this has buoyed other markets in the world, including Hong Kong, Bombay, KL and to a lesser extent Singapore. At some point, the American market will come back to earth, the law of gravity will reassert itself and which will affect markets everywhere else. How or when, nobody can tell. If Dr Wang could be quite confident that this is going to happen within this year, contrary to what many other people expect, he could become very rich by shorting the market. On the other hand, if he misjudges, he might not be rich at all.

So I cannot comment whether the Singapore market is too high or too low, much less on the merits of individual stocks or companies which are listed on the Stock Exchange. But I can tell you that not every company that calls itself dot.com is naturally and automatically an Internet company or destined for fabulous success. Investors have to decide whether to buy the shares in these companies, or in any other companies. You have got to know the risks. You have got to be prepared for the downside. And you have got to judge what your risk appetite is. If you are an investment fund, picking winners for your portfolio, with many potential winners in a big portfolio, that is fine. One goes sour, another one will turn out right. But if you are a widow investing your last CPF dollar, and you put it on a single company in the hope that you will get rich, then maybe you are better off keeping that money in a fixed deposit in a bank instead.

I think overall, our new rules and philosophy are correct. The Government cannot stop companies from being listed on SGX because we think that their business is too risky, or because we think their shares are priced too high. Risk taking is the essence of business and particularly in the new economy. But we will educate the public on the risks so that people know what they are doing and go in with their eyes open. Whether they are actually looking or not, that is another matter. But we will not spare any effort to explain and to point out, and speeches by Dr Wang, MPs and other leaders will also be helpful.

Of course, even with tight rules, as in the past, you must remember that companies are not guaranteed to succeed. Whatever our rules, they can fail either for business reasons or because of fraud or crime, as Pan-El failed and Amcol ran into trouble. And even if a company is sound, its share price can still be inflated and not justified by the company's earnings and prospects. And indeed, Microsoft itself, which is undoubtedly a very good company with its share price at about $100, that is about 70 or 80 times its price earnings ratio. And Steve Balmer himself, who is now the CEO, had said, "My price is inflated, over-valued." As a result of which, it came down three or four dollars, but it is still over-valued. So I do not think it is possible for the Government to make sure that the Stock Exchange is a safe place.

Anyway it is difficult to prevent people from taking risks, by keeping what we think are risky companies off the Stock Exchange. People who want risky investments find many ways to make them. They can invest overseas. In the old days, when the Malaysian stocks were listed on CLOB, they invested on CLOB, which is a different environment from the Singapore stock market. Or sometimes, if they cannot invest on the stock market, they put money on horses or many other things, or football, or even watch two raindrops on the windscreen and see which goes faster. That is their instinct. Our job is to encourage a more professional and sophisticated share market, not controlled by people looking at the screen through the window and hoping to guess the next move that the share price will make, but people who analyse the fundamentals, understand the business, know the way the industry is going and put bets in for the long term. So if you do not know about stocks, do not buy and sell based on the latest rumour or rely on hot tips from friends. Better entrust your money to a reliable fund manager, buy a unit trust, or leave your money in the bank. It is not as exciting, but it is much safer. Not totally risk-free, but much safer.

What the Government can do is to enforce the rules of the market - have proper disclosure, have tight market surveillance, have quick action against any price manipulation, any monkey business means severe penalties for offenders. Recently, we changed the law to introduce a new civil penalty for insider trading, to make it easier to punish or to obtain compensation from those who make improper use of insider information to trade and benefit themselves at the expense of others.

Investors cannot just invest in a company based on the name of that company. They have to know what the company's business is, how the company is doing, what its prospects are, how much the company is realistically worth. For IPOs and share issues, all this information should be in the company prospectus. We will change our requirements for prospectuses to ensure that they contain all that investors reasonably expect to find it. And this will include information which is known to the directors of the corporation, or known to the persons performing a professional or advisory function in relation to the issue or proposed issue of securities.

This is a move away from a "one-size-fits-all" prospectus. We will accommodate the greater diversity of companies being listed on SGX, and create an environment for intermediaries, like stockbrokers, investment bankers, accountants, even lawyers, are expected to play their part in ensuring that proper disclosure is made. But of course, while we can print a good prospectus, this will only help if people actually read the prospectuses, and do not just blindly subscribe to IPO shares confident that they will make a profit on the first day. And in fact, it is known in some markets, you go to the stockbroker's office, you get the application form with the prospectus, you go out, you throw away the prospectus in the dustbin and you just take the form and hope that the shares are worth some money. Sometimes, even the form is worth some money. But that is not the way.

I have explained the Government's approach towards liberalising and regulating the stock market, and set out what the Government can and cannot do. It is in the nature of stock markets and human psychology that the markets will go up and go down through cycles. These cycles are linked to the real economy, but often overshoot. They last seven years, 10 years, sometimes, like now in America, a bit longer. My suspicion is they are driven by young people who are seeing the cycle for the first time. They have never lost before, they have never seen the blood on the ground. It is exciting and exhilarating. It is their last chance to get in. They ramp it up. And then something goes wrong, it comes down again. And they have learned their lesson. But in 10 years' time, a new generation of greenhorns is born. So we should know this. We have been through this before. The stock market will not always go up. Sometimes, it will come down. So Singaporeans who want to invest on the stock market should know this and invest prudently.

Question put, and agreed to.

Resolved,

That Parliament do now adjourn.

Adjourned accordingly at Three Minutes to Six o'clock pm.