COMPANIES (AMENDMENT) BILL

Order for Second Reading read.

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

Sir, the Companies Act was last amended in January 2001. Since then, three private sector led Committees set up by my Ministry, the Monetary Authority of Singapore, and the Attorney-General's Chambers, have been active in reviewing Singapore's corporate governance and regulatory framework.

One of the Committees was the Disclosure and Accounting Standards Committee (DASC). The DASC submitted its final report to the Government in September 2001, with a set of recommendations to improve Singapore's accounting standards setting process, disclosure requirements and rules on auditor independence. The Government has accepted all the DASC recommendations. This Bill seeks to implement the DASC recommendations that require amendments to the Companies Act.

At the same time, the Registry of Companies and Businesses has also embarked on several key initiatives to further its mission of making Singapore best for business. This includes the introduction of an electronic filing system called BizFile, which would allow round the clock filing and information retrieval services over the Internet for RCB's customers. This Bill seeks to introduce legislative changes that would facilitate the implementation of an electronic filing system for companies in Singapore. It also seeks to simplify the incorporation process and reduce the time required to incorporate a company in Singapore. This Bill also contains other amendments which are intended to update and streamline certain procedures and provisions in the Companies Act.

Sir, I shall now highlight the main amendments proposed in the Bill, starting with those to effect the DASC's recommendations.

Compliance with Accounting Standards

To position Singapore as the key business and financial centre, we need to give investors the confidence that companies registered in Singapore present true and fair financial statements that are in accordance with internationally accepted accounting standards. Incidents such as Enron and Worldcom have shown the dangers of misrepresenting financial statements. While the Government cannot ensure the integrity of financial reporting, we can put in place a regulatory framework that facilitates proper disclosure. Currently, there are no statutory requirements for companies in Singapore to comply with prescribed accounting standards. Clause 37 amends section 201 to require all companies to comply with prescribed accounting standards. This is similar to the practice in the UK and Australia. Similar to the approach in UK, we would allow companies to deviate from the prescribed accounting standards if, and only if, such deviations are necessary for them to present a true and fair set of financial statements.

Clause 37 also requires companies to make full and detailed disclosures in their financial statements regarding the nature, financial effect, and justifications, for such deviations. As an additional safeguard, the directors' decision to deviate from prescribed accounting standards would require the concurrence of the companies' external auditor.

Clause 61 repeals the Ninth Schedule. The Ninth Schedule contains a listing of items to be disclosed in the companies' accounts and was included in the Companies Act during a time when accounting standards were not well developed. Today, the situation is different, as accounting standards have become much better developed over the years. With the move towards a disclosure-based regime and a legislation of compliance with prescribed accounting standards, it is no longer necessary for the Companies Act to contain additional provision relating to financial reporting and disclosure requirements. Instead, companies would comply with the reporting and disclosure requirements that are prescribed in the accounting standards, or by market intermediaries, such as the Stock Exchange. These requirements are more up-to-date and they can better reflect the changing needs of the market place.

Council on Corporate Disclosures and Governance

Currently, accounting standards in Singapore are set by the Institute of Certified Public Accountants of Singapore (ICPAS), which is a professional organisation of accountants. ICPAS has done a good job over the years. To improve the efficiency and rigours of its accounting standards setting process, it has also aligned many of our accounting standards with those issued by the International Accounting Standards Board. However, as compliance with the accounting standards would be made a legal requirement, it would not be appropriate for the accounting standards setting authority to reside with a professional organisation. And, in leading jurisdictions such as the UK and Australia, accounting standards are set by independent bodies comprising representatives from businesses, professional organisations, academic institutions and government. This allows the key stakeholders to have a more direct say on how accounting standards should be set.

Clause 36 introduces a new section 200A which provides for the establishment of an independent panel to prescribe accounting standards for Singapore companies. The proposed panel would be known as the Council on Corporate Disclosure and Governance. Under the new arrangements, the ICPAS would continue to play a pivotal role to support the new Council in the accounting standards setting process. In addition to setting accounting standards, the new Council would also make recommendations to the Government on the review and enhancement of Singapore's corporate governance and disclosure policies. The new Council would comprise members from businesses, professional organisations, academic institutions and Government. The Council Members would be appointed by the Minister for Finance. Moving forward, the new Council would provide a collaborative mechanism for the private and public sectors to continuously review and improve Singapore's corporate governance and regulatory framework. We expect to set up the new Council in August this year, after the legislative amendments have been approved.

Directors' Report

Section 201 of the Act currently requires all companies to include a report by the Directors in their Annual Report. The DASC has felt that some of the disclosure requirements in the Directors' Report, such as those pertaining to the company's financial position do not add much value as they essentially repeat information that is already provided in the company's financial statement. As a result, Directors' Report becomes overly cluttered. Clause 37 removes the requirement from section 201 for Directors to disclose such details in their report. A statement by Directors as required under section 201(15) of the Companies Act would be retained as it requires the Directors to confirm that the company is solvent and that the financial statements presented to shareholders are true and fair.

Introduction of BizFile

While we strive to improve Singapore's regulatory framework, we also need to ensure that our processes are efficient and business-friendly. RCB has been actively working with the private sector on ways to streamline its processes so as to bring about greater convenience and lower cost to its customers. One of RCB's key initiatives is the introduction of a web-based electronic filing system called "BizFile". BizFile enables businessmen and professionals to perform filing and information retrieval on-line at any time of the day. BizFile also enables RCB to reduce business cost and expedite the turn around time for incorporation and filing. The introduction of BizFile would raise RCB's service standards and align its practices with its counterparts in the US, UK and Australia. RCB has launched the first phase of BizFile, which deals with incorporation of companies in January this year. It plans to launch the second phase of BizFile by the end of the year.

Let me now highlight the amendments in the Bill that would facilitate the implementation of BizFile. With the move to an electronic filing system, RCB would consolidate its existing hardcopy forms into electronic forms. Currently, a person who wants to file information with RCB has to fill in several hardcopy forms that capture some duplicate data items. BizFile also removes the need for manual data entry by the RCB officers, thereby reducing the time and cost required for processing the application. BizFile further simplifies the filing and incorporation process by doing away with hardcopy certificates, statutory declarations and affidavits. There are several clauses in the Bill, such as clauses 8, 16, 19 and 24, that amend the Act to remove the need for statutory declarations or affidavits. RCB would verify the user's identity online, using his unique national pin, which is also the CPF PAL pin before allowing the user to submit his declaration electronically. Singaporeans who do not have CPF PAL pin would be assigned an ID and password by RCB for their BizFile transactions.

Clause 7 amends section 17 to replace the issue of a hardcopy certificate of incorporation via electronic notification. Any member of the public who wishes to check the registration status of a company can do so online, at no charge.

Clause 7 also provides for the issue of a hardcopy certificate of incorporation upon the payment of a fee. This is to cater to companies that still require hardcopy incorporation certificates for other purposes, such as for submission to overseas regulators.

Removal of Pre-Incorporation Checks for Similar Names

For the purposes of registering company names, jurisdictions such as the US, UK, Australia and Hong Kong, do not conduct any pre-incorporation checks for similar names. These jurisdictions have found that the checking for similar names only delays the incorporation process and increases business cost. They only conduct pre-incorporation checks for identical, undesirable and gazetted names. This enables same day incorporation, which has become the service standards that businessmen would expect. To benchmark our service standards for incorporation to that of the US, UK, Australia and Hong Kong, we propose to align RCB's practice with these jurisdictions.

Clause 12 of the Bill removes the requirement under section 27 for the Registrar to do pre-incorporation checks for similar names. Under the new arrangements, an applicant who wishes to register a company name can first perform some preliminary checks from BizFile to see if the name he is applying for is similar to that of an existing company or business. Bizfile would alert the applicant if there is an existing company or business with a similar name. The applicant can then decide whether he wants to proceed with the application or select another name. The law would continue to provide protection and avenues for redress for incumbent companies and businesses. An aggrieved party can lodge a complaint to the Registrar against the company or business, with a similar name, within twelve months from the date of registration of that company or business. After twelve months, an aggrieved party can still bring the matter to the court. This is similar to the practice in the UK.

Mr Speaker, Sir, in conclusion, the proposed amendments in this Bill are part of a comprehensive exercise to review our company legislation and to enhance Singapore's competitiveness as a global business centre.

Another private sector led Committee, called the Companies Legislation and Regulatory Framework Committee, is in the process of reviewing our company law and regulatory framework. This Committee has posted its draft report on the Internet for public consultation, and is expected to submit its recommendations to the Government later this year. If its recommendations are accepted, we will be making further amendments to the Companies Act.

Sir, I beg to move.

Question proposed. 2.30 pm

Mr Leong Horn Kee: Mr Speaker, Sir, I wish to express my support for this Bill. The Bill seeks to implement the major recommendations of the Disclosure and Accounting Standards Committee.

As Singapore is establishing itself as a major financial centre in the world, we should adopt internationally recognised and accepted accounting standards and practices. However, recent instances of major corporate disclosure failings, like Enron, Worldcom and Xerox in USA, have shown that no amount of good corporate governance regulations or strict accounting standards can guard against management bent on crooked reporting. This is particularly glaring as these incidents occur in the USA which prides itself as the motherland of good corporate disclosures and transparency.

For the record, Sir, I support the creation of the proposed panel of Council on Corporate Disclosure and Governance. If its role is only to serve as a body to make recommendations, then there must be retained some teeth in the regulatory framework for existing Government agencies to police and fine offenders who flout these rules. I read in the newspapers that in the USA itself, they are thinking of charging the dishonest management responsible for making untruthful disclosures in their companies' accounts.

In line with my disappointment that no amount of good corporate governance regulations can safeguard against dishonest management, I would like to raise the issue of quarterly reporting. Quarterly reporting is required from next year onwards for listed companies. I had supported this idea in the past in the hope that more regular reporting would enable better business information and transparency. However, I now come to the view that quarterly reporting may have some serious disadvantages. As evident in the USA, quarterly reporting has caused top management of companies to be very short-term focused on quarterly results. Share prices jump or plummet on every piece of good or bad news. Management's attention becomes distracted by the need to report good results every quarter, year in year out, which is not an easy thing to achieve, even by the best of management.

Sir, I, therefore, have come to the conclusion that quarterly reporting has severe disadvantage of forcing companies and market analysts to be too short-term and narrowly focused. Hence, I would like to ask the DPM and the Minister for Finance to reconsider the requirement to introduce quarterly reporting by listed companies from next year onwards.

Sir, I would like to raise two issues relating to the on-going holding costs of companies. Currently, about 75% of Singapore's 100,000 companies are dormant and tax-exempt companies. The reason is that many Singaporeans wish to incorporate companies in readiness to start a business. However, most of these companies remain dormant for a long time. Meanwhile, the shareholders have to incur some unnecessary on-going costs, such as to appoint a qualified accounting firm to prepare audited accounts, and to appoint a professionally qualified company secretary to file accounts. These two requirements add to operating costs.

I would like to ask the Deputy Prime Minister to consider whether the above two requirements can be reduced or simplified, especially for dormant or small companies. The total cost could amount to a few thousand dollars, which are not truly necessary for small or dormant companies. While we encourage companies to adopt good international reporting and accounting practices, I agree with the private sector's Company Legislation and Regulatory Framework Committee in its recommendations that these requirements should not be proscribed by law, especially for small and dormant companies. Naturally, active companies of certain size and activity should be required to adopt these practices for good public disclosure reasons.

Sir, I support the Bill.

Mr Lee Hsien Loong: Sir, Mr Leong Horn Kee raised two points. First is on the quarterly reporting requirement, and the second is on the audit requirement for dormant companies.

On the quarterly reporting requirement, this issue had been brought up last year when the Disclosure and Accounting Standards Committee (DASC) issued its draft report for public consultation. Some listed companies felt that the requirement for more frequent reporting would add to cost and could lead to short-term focus, as Mr Leong pointed out. However, there were other respondents, such as investors, who supported the DASC's proposal, because they would like listed companies to be more transparent and to have more timely disclosures. America, Canada, Thailand and Malaysia all have quarterly reporting for listed companies. Quarterly reporting is also required for companies listed on Hong Kong's Growth Enterprise Market (the GEM market) and the Tokyo's Stock Exchange's mother market for start-ups. Hong Kong and Tokyo are considering having quarterly reporting for all listed companies, in other words, for their main boards. Australia and United Kingdom currently require six-monthly reports for their listed companies.

It is an issue where there are trade-offs. But, on balance, the DASC felt that quarterly reporting would benefit the listed companies in the long run, as investors would gravitate towards more transparent companies. In addition, quarterly reporting would also help to improve Singapore's transparency and standing as a world-class business and financial centre. To give the listed companies enough time to prepare themselves, the DASC has recommended a transition period, before the quarterly reporting requirement is imposed, which has been accepted.

We do not expect compliance cost to increase significantly with quarterly reporting, because the financial results that are used for the quarterly report do not need to be audited. Many listed companies would submit regular financial reports to their Board of Directors, and the additional cost involved in presenting these reports to the public should not be too high. Some listed companies in Singapore have already started doing quarterly reporting. Drawing from the experience of these companies and countries which have started quarterly reporting, listed companies in Singapore should not face too much difficulties in implementing quarterly reporting.

Mr Leong's second point has to do with statutory audit for small and dormant companies and the recommendation to remove the statutory requirement for private companies to appoint professionally qualified company secretaries. I thank Mr Leong for his comments. In fact, the Company Legislation and Regulatory Framework Committee has received similar feedback on the two proposals from the business community. The Committee's review is still on-going. The Committee has posted its draft report on the Internet for public feedback. Public consultation ends on 31st of July. I would look forward to Mr Leong making his comments to the Committee which will take them into consideration, together with other comments from the public consultation, before submitting its final recommendations to the Government.

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. - [Mr Lee Hsien Loong].

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