LINKS ISLAND SHARES (Assistance to affected investors)

Mr Steve Chia Kiah Hong asked the Deputy Prime Minister and Minister for Finance (a) what avenues of help are available for investors, who are caught by the Singapore Exchange Settlement Committee's decision on the Links Island shares and who are forced to pick up the trades that they have sold per contra before the suspension; and (b) whether there is a fund to help such affected investors and to prevent the broking firms from taking legal action against them.

Mr Steve Chia Kiah Hong (Non-Constituency Member): Mr Speaker, Sir, before the Minister replies, I would like to again declare my interest as regards Question No. 4.

The Deputy Prime Minister and Minister for Finance (Mr Lee Hsien Loong): Mr Speaker, Sir, in July last year, SGX announced that its investigations had revealed that a corner situation had arisen in Links shares. In accordance with the SGX Rules, the SGX Settlement Committee decided that all outstanding market trades in Links shares done during 14-16th August 2000 be settled by way of cash instead of delivery, at the fair settlement price of $1.21. This ruling also applied to sale transactions by contra traders who had bought Links shares before 14th August 2000 and sold those shares during 14-16th August 2000. As a result, such contra traders had to pick up and pay for the shares they bought because their sale transactions, like all other market trades during the period, had been settled in cash instead of by delivery.

Some brokers have indicated to SGX that they are prepared to extend credit to help ease any cashflow difficulties faced by such investors. Others have allowed their clients to pay for the shares by instalments. MAS encourages such flexibility on the part of the brokers, so long as they comply with regulatory requirements. MAS cannot, however, require or compel all brokers to do so.

Another proposal was for SGX to use its fidelity fund to help the affected investors. This is not legally possible as the Securities Industry Act stipulates that the fund may be used only to compensate investors in the event of defalcation by a broker or to pay creditors when a broker winds up.

SGX has informed the company that it is prepared to allow Links shares to resume trading provided the company puts in place safeguards to prevent the counter from being cornered again. One of the safeguards that the parties are discussing is for the company to restore its free float to an appropriate level. The company's free float had fallen to less than 8% (below the minimum 10% required by SGX Rules) at the time of Links' trading suspension in August 2000. If the company can meet SGX's requirements and trading in Links shares resumes, contra traders with Links shares will have the opportunity to sell their Links shares. But there is no guarantee that they will be able to sell their Links shares at the prices prevailing before the trading suspension.

A contra trader should always be prepared to fork out the full amount for his share purchases and not rely on the proceeds from subsequent sale to pay for them. Apart from a corner situation where the SGX Rules provide for cash settlement of outstanding market trades at fair settlement price, there are other risks that contra investors should take into account before engaging in contra transactions. For instance, if trading in the counter should be suspended for a few days (either by the listed company or SGX as provided for under the SGX Rules), before the investor could contra his outstanding purchases, he would have to pay for the shares in full. Or if the share price fell sharply after the investor had bought his shares, he would have to sell off the shares at a loss if he could not pay for them. Therefore, it is not prudent for an investor to over-stretch himself by relying on contra trades to pay for his share purchases.

Mr Steve Chia Kiah Hong: Sir, regarding contra trades, the trades were actually done within the three days and the client would have assumed that they had already been settled. But it was suspended, and after one year the Stock Exchange came and said that the trades were actually nullified under the settlement process. So it was not that the contra traders did not prepare for it. They actually prepared for it but the market had fallen in the one year and whatever savings they had to buy the shares had already been depleted by the market. My question to the Minister is that, in the last three days of trading, the stock prices would actually have gone up, implying that the syndicates had bought more shares to corner the company. So if the Stock Exchange had nullified the trading by requiring that it be settled in cash, would it not be giving the syndicates an easy escape route?

Mr Lee Hsien Loong: Mr Speaker, Sir, there are ways to deal with a corner situation. This is a problem which can arise in any stock market, and there are established ways to deal with it. There is no totally satisfactory way because, by definition, in a corner situation, there are not enough shares to go around. People have committed to deliver more shares than are available because people have shorted, and now they cannot get hold of shares for delivery.

It is like playing musical chairs - ten people running around, nine chairs to sit upon, and the music has stopped. Now, you say, "I am going to sit in this chair", or "I have already "choped" this chair. Therefore, let me do that, and let everybody else settle on their own." But you cannot do that because you may have "choped" this, somebody else may say, "Well, I am waiting for you to do this to settle, and there is a chance I can settle in scrip too." So finally, the most equitable arrangement which is fair both to the people who are long in the shares and who are short in the shares is to say, "There are not enough to go around, we will establish a fair price that the committee sets. They decide what the amount is and, at that price, we settle in cash." And later on, if the shares trade again, at that point, you buy and sell the shares for whatever they are worth. Now, the music has stopped, we settle in cash at a price which is fair to both who are long and who are short.

The duration of the suspension was not something which the Stock Exchange wanted to do. It was something which was unavoidable given the complexities of the investigation into the case because, in this case, many shareholders were involved and the Stock Exchange and CAD had to investigate the relationship between them to establish whether or not they were acting in concert, and whether or not a corner situation existed. So they took one whole year to establish this. And finally, they declared that the corner situation existed, not because they were sitting around, but because investigations were complicated.

The risk of this happening is always there. When you enter into a contra trade, you hope that you would not have to pay in full for the shares which you have already bought, and that you can sell them off and contra it. But between the buying and the contra, several days pass and things can happen in between which can frustrate that matching. And in this case, something did happen. The Stock Exchange acted according to its rules which are published. So before you enter into a contra trade, everybody must know that there is a risk of the stock being suspended, and especially in the case of Links Island, where the prices had been going up, all the more, anybody who goes in knows that this is a speculative punt, and you are taking a risk. So I think that the Stock Exchange did the right thing.

Mr Steve Chia Kiah Hong: May I clarify with the Minister? Is it not more equitable to require all trades, whether before the suspension or during the three days of trading, to be dealt through the normal settlement process? That means, those who have bought and sold accordingly are due, whether they sold the shares, they have to get them delivered, or if they have bought, they have to pay, rather than having a retrospective step of removing the three days and say that all trades done during that particular three days be nullified. Is it not equitable in that sense?

Mr Lee Hsien Loong: Mr Speaker, Sir, we are on a T-plus-3 settlement. So those are trades which have not been closed, which are still open. At the point of suspension, these are trades which are left hanging and you have to find some ways to settle it. As I explained, you cannot settle in stock. Therefore, some price has to be established and, in this case, the committee established a fair market price.

Mr Steve Chia Kiah Hong: Can I clarify with the Minister again? Why did SGX take the three days? Why did it not take T-plus-4, the four days trade, or the two days' trade, or just on Wednesday itself, instead of having the three days' trade?

Mr Lee Hsien Loong: Mr Speaker, Sir, I am not sure whether the question is why are we averaging over three days, or why are we nullifying the trades over three days. If you ask why we are nullifying over three days, the answer is because those were the trades which were not closed, they had not settled, because we are on a T-plus-3 settlement. So any time, when you intervene, you have three days' worth of transaction which you have to clean up. As for the price, what is a fair price? It is for the committee to decide. They deliberated and they decided that they would average over three days.

Mr Steve Chia Kiah Hong: Sir, if I may clarify further that it is actually T-plus-3. So it is four days of trade, and not three days. Effectively, the Stock Exchange is only using three days which is, if the stock is bought on Friday, it is still not closed for that matter. I think the Stock Exchange has not used the correct calculation, when they used only three days. They should have used four days instead.

Mr Lee Hsien Loong: That is a different issue which the Member is raising. His first question was why not allow people who have stock to settle in stock, and I have explained that. Now he is asking whether we can go on four days, instead of three. These are technical issues which I will leave to the Stock Exchange to settle.