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 July 2002. At that time, I informed the House that a private sector-led committee, called the Company Legislation and Regulatory Framework Committee, was doing a comprehensive review of our company law. The Committee was chaired by Dr Philip Pillai, Senior Partner of Shook Lin & Bok, and comprised lawyers, businessmen, academics and Government officials.

After extensive deliberations, including two rounds of public consultation, the Committee submitted its final report to the Government in October 2002 with a set of 77 recommendations. All the recommendations have been accepted for implementation. These recommendations will help to simplify business regulations, create a more conducive business environment, and lower the costs of capital raising and maintenance in Singapore. They also improve Singapore's corporate governance and regulatory framework, and align our practices with the leading jurisdictions.

[Mr Deputy Speaker (Mr Chew Heng Ching) in the Chair]

5.42 pm

The Deputy Prime Minister and Minister for Finance (Mr Lee Hsien Loong): The implementation of the Committee's recommendations will require amendments to the Companies Act, the Securities and Futures Act, and the SGX listing rules. It will also require the enactment of new legislation, such as the Limited Partnerships Act and the Limited Liability Partnerships Act. The amendments to the Companies Act will be done in two phases. This Bill, which seeks to implement 20 of the Committee's recommendations, is the first phase. The other recommendations require more complex amendments to the Companies Act, and will be implemented later.

Sir, I shall now highlight the main amendments proposed in the Bill.

Reducing Business Costs

To promote entrepreneurship, our company law must not impose unnecessary regulatory burden on start-ups and small private companies. Unlike public companies where there are greater public interests to protect, for private companies we need to strike a different balance, in order to maintain acceptable standards while keeping business costs low. I shall now highlight some of the Committee's recommendations that will help to reduce business costs for small and private companies in Singapore.

Removing the Statutory Audit Requirement

Currently, all companies in Singapore are required by law to have their accounts audited by an external auditor. Clause 35 amends section 205 to remove the statutory audit requirement for dormant companies, as statutory audit serves no public purpose and imposes unnecessary costs for such companies. A dormant company is defined in the Companies Act as a company with no significant accounting transactions during the financial year. The removal of statutory audit for dormant companies is in line with the practices in UK and Hong Kong.

Clause 35 further amends section 205 to remove the statutory audit requirement for small exempt private companies. An exempt private company is a private company with not more than 20 shareholders who are all natural persons. More than 75% of companies in Singapore are exempt private companies. Most of them are owner-managed. This means that all the shareholders are also directors of the company. For such companies, audit will be left as a business decision, instead of being imposed as a legal requirement.

The Committee had initially considered removing the statutory audit requirement for all exempt private companies. However, after receiving feedback from businesses and auditors, the Committee decided to adopt the approach in UK and Australia, where statutory audit is removed only for small private companies. The threshold for defining small companies will be based on turnover, which could be raised over time. After much deliberation, the Committee recommended removing the statutory audit requirement for exempt private companies with annual turnover below $5 million. The Government has accepted the Committee's recommendation, but decided to implement it in two steps, to give the business community and the audit firms some time to adjust to the new arrangement. The prescribed revenue threshold will first be set at $2.5 million when this Bill becomes law, and raised to $5 million one year later.

During the public consultation, there were some concerns that the removal of statutory audit would lead to a deterioration in corporate governance standards. This should not happen. For public companies and large private companies, audit would remain a statutory requirement. For small exempt private companies, it makes sense to leave audit as a business decision. There is no public interest at stake. In addition, adequate safeguards will be put in place. For example, shareholders representing at least 5% of the company's shares can compel the company to prepare audited accounts. All companies must also maintain proper accounting records and prepare "true and fair" financial statements that comply with prescribed accounting standards.

Professionally Qualified Company Secretaries

Next, professionally qualified company secretaries. Another move to reduce business cost is to remove the statutory requirement for private companies to appoint professionally qualified company secretaries. The private company must still appoint a company secretary, but this person need not be a lawyer, accountant or professional company secretary.

Currently, all companies in Singapore are required to appoint a professionally qualified company secretary. In contrast, in Australia, Hong Kong and UK, there is no such requirement for private companies. The requirement in Singapore was instituted in 1987 as a means to improve the quality of corporate records of Singapore companies. While the requirement is a useful safeguard for public companies, it is not necessary to impose this on private companies. Such companies can choose to have an employee or director to perform the company secretarial functions. Alternatively, they can outsource to firms which provide company secretarial support.

Some company secretaries and accountants have expressed concerns that the Committee's recommendations would lead to job losses for company secretarial firms and audit firms. The Government is mindful of these concerns. However, we do not think that the demand for services provided by audit firms and company secretaries would disappear as a result of these changes. According to a survey conducted by the Association of Small and Medium Enterprises, more than 50% of the companies surveyed indicated that they would continue to engage professionally qualified company secretaries, even if the law does not require them to do so. In addition, 78% of the companies said they would continue to have their accounts audited, as their shareholders or external parties, such as banks and finance companies, would require audited accounts.

Simpler Business Regulations

Let me now highlight some of the amendments that will help to simplify the regulations faced by companies.

Written Resolutions

Currently, the shareholders of a private company can pass a resolution without having to meet face-to-face. However, the passing of the resolution requires the approval of all shareholders. This is not consistent with the approval thresholds for resolutions passed at face-to-face meetings, where ordinary resolutions and special resolutions would require 50% and 75% approval respectively.

Clause 29 amends section 184 to allow private companies to pass ordinary and special resolutions with 50% and 75% approval, regardless of whether the resolutions are passed at a face-to-face meeting or via written means. The amendment will also allow written resolutions to be passed through the use of electronic communication channels, such as email. This will enable private companies to make decisions more expeditiously and conveniently.

As a safeguard, a shareholder or a group of shareholders representing at least 5% of the total voting rights can require the company to hold a face-to-face meeting to discuss and vote on the resolution. This is to ensure that the company does not use written resolutions as a means to deprive dissenting shareholders of the opportunity to be heard at a face-to-face meeting. Annual General Meetings

Currently, private companies are required to hold annual general meetings every year. Clause 26 amends section 175 to allow a private company to dispense with its annual general meeting if all its shareholders agree. This change is consistent with the practice in the UK. It will benefit private companies, especially those where all the shareholders are also directors.

Conclusion

Mr Deputy Speaker, Sir, company law reform is an on-going process. The review by the Company Legislation and Regulatory Framework Committee marks a significant step forward, but it is not the end. We need to regularly review our laws and regulations to ensure they remain business-friendly and keep up with the practices in the leading jurisdictions. Such reviews will require the collaboration of the private sector and the Government, and the active interest of all stakeholders.

Sir, I beg to move.

Question proposed.

Mrs Lim Hwee Hua: Mr Deputy Speaker, Sir, I support the provisions in the Companies (Amendment) Bill. I welcome the various moves which are undertaken in the spirit of ensuring that the company law and regulatory framework for Singapore is modern, accords with global standards and one which will promote a competitive economy.

Sir, it is in this same spirit that I will focus on the issue of definition of substantial shareholding for compliance purposes. The interpretation of the new section 83, as described in clause 10, like the old section 83, will continue to have far-reaching effects on capital markets here, not least of all, our stock market. Any over-zealousness, witting or unwitting, to apply a more conservative interpretation than necessary, will serve to stifle our own stock market growth, and ultimately to limit the ability of our listed companies to raise capital.

Sir, allow me to elaborate. Clause 10 of the Bill repeals and re-enacts section 83 to require the reporting of changes in substantial shareholding where the shareholding exceeds discrete 1% threshold, above the minimum 5% threshold, the 5% level being defined as what would constitute a substantial shareholding.

This is an improvement from the present position, which is, I believe, similar to that being done in the UK. But, Sir, this does not address the dilemma being faced by funds, particularly big funds, investing in Singapore. The underlying challenge is one of the need for international fund managers to aggregate the interests of the various funds which they operate.

Hitherto, the approach has been, like in the UK, to aggregate shareholdings across all associated entities, including funds, within a corporate group. This approach requires review, especially in the context of our circumstances where our companies are relatively smaller in terms of market capitalisation and where there is insufficient breadth of investible companies.

Sir, international fund managers manage a variety of funds, comprising typically mutual funds and institutional funds for which they serve as investment advisors. These funds are developed for investors with varying needs and requirements subject to different investment objectives, time horizon guidelines and restrictions. The funds also invest in a wide range of investments, such as equities, bonds and money market instruments. No two funds within the same group are identical.

The real test of control, which is essentially the underlying focus, is in the voting of shares. Within a corporate group, there may be a number of entities, including companies, funds and managed investment schemes which hold voting shares in the same listed company. In deciding how to vote their shares, the entity, for example, a fund, must act in the best interests of its members. This may not necessarily be aligned with the interest of the corporate group as a whole nor of the other entities within the group.

Sir, in light of the differing nature of the funds, shareholdings should not be aggregated across the funds for the purposes of complying with the disclosure requirement of substantial shareholding interests.

Let me highlight this unsatisfactory treatment in real operating terms, to bring home the extent to which we are imposing unduly high compliance costs on international fund managers investing in Singapore. One major fund manager recounted how his group's filings for Singapore accounted for 17% of the total, when the group's holdings represented a mere 1% of the total exposure. Another fund manager has a department of four individuals dedicated to ensuring such compliance, but with no clear idea of what the value-add is. Of course, it can be argued that a similar trend can be drawn from the UK investments. However, the practical question is: can these fund managers ignore the UK market? The answer is no. Can they ignore the Singapore market? I do not think we should be deluded into thinking that they have to be invested in Singapore.

But, Sir, this is not the only cost. The real cost is in the consequential curtailing of the liquidity of our own listed companies and their ability to tap capital from a wider shareholding base. Investors of Singapore equities fight shy of raising exposure in the fear that they may breach the law as a group even though the decisions are frequently undertaken independently.

I therefore propose that, in instances where international fund managers acquire listed shares not for purposes of control and where the funds are managed separately, they be allowed to apply for an exemption from aggregating the interests in respect of funds. This can be done on a case-by-case basis.

It is essential that we keep pace with changing market practices. My proposal should reduce the compliance burden of the international fund managers and result in more meaningful disclosure. It will also go a long way towards enhancing Singapore's position as a wealth management centre.

On that note, Sir, I support the Companies (Amendment) Bill.

Mr Sin Boon Ann: Mr Deputy Speaker, Sir, I rise in support of the Bill.

The present first instalment of amendments to the Companies Act comes not long after the Government's announcement of its adoption of all 77 recommendations of the Companies Legislation and Regulatory Framework Review Committee (CLRFC). That it comes so quickly demonstrates, to many in the business community, the seriousness of intent on the part of the Government in trying to reform and review the companies regulatory and legislative framework in Singapore, just to make it relevant and to help enhance the value proposition of Singapore as a place to do business.

Indeed, Sir, the focus on reducing the cost of business in Singapore could not have come at a more appropriate time. Against the backdrop of an already weakened economy, businesses in Singapore are presently bracing themselves for tougher times ahead. The effects of the deadly SARS virus are beginning to bite hard into our economy. Already, we are seeing how people have been laid off in the airline industry because of poor business prospects and taxi drivers having to take home less, because of a general public fear of contracting the virus while riding in a taxi.

At a time like this, any move by the Government to reduce cost, and in particular business cost, is welcome news indeed. In this regard, the move to change the legislative and regulatory framework for companies in order to keep business cost low is a positive step in the right direction. For too many years, businessmen, especially those running small and medium enterprises, have been suffering under the weight of rising business cost and becoming uncompetitive in the process. It is indeed true that every regulatory hurdle that is put in the way of businessman is a cost to him. Streamlining our rules and regulations would not only simplify our compliance procedures but would also help to bring down our costs and hence increase our competitiveness.

While I applaud, Sir, the present initiative by the Government in moving to change our company law framework and regulatory regime to make us more efficient and competitive, I do wonder whether we are doing enough by just focusing on the subject so narrowly. Can we do better? Sir, we should remember that the issue of the cost of business, even from a company law perspective, goes beyond the subject matter of company law. A review should also cover other similar regulatory regimes as well. For instance, we should review the SFA and the listing rules of the Singapore Exchange with the specific view of reducing our cost, if that is the intent of the Government.

In this regard, you will recall, Sir, that at the last Committee of Supply sitting, I did mention that the listing rules in Singapore, while they seek to create greater transparency in the market place, have in some ways contributed to the cost of doing business here. I am referring in particular to quarterly reporting requirements which listed companies in Singapore must comply with over time. I may have mentioned then that many listed companies here find quarterly reporting to be unduly burdensome and may not be entirely appropriate in some cases.

Recently, I did a survey amongst my firm's existing clients to determine whether they agree with the sentiments as expressed. In this regard, Sir, I would like to express my interest in the matter as a solicitor and may have an interest in the outcome of this legislation. All who replied were unanimous in telling me that they find quarterly reporting to be burdensome. In some cases, there is very little variation in information provided from quarter to quarter. This applies especially to property investment holding companies. I understand that not all stock exchanges around the world require quarterly reporting from their companies. It is significant to note that the main board of the Hong Kong Stock Exchange does not require quarterly reporting.

I did also mention earlier that imposing quarterly reporting requirement may affect our ability to sell listings in Singapore as a value proposition. In this regard, I would like to ask the Minister whether the Government has come to any decision on quarterly reporting requirements.

Sir, quarterly reporting is just one example of how, in our effort to be transparent, we may have gone overboard. I will cite another example. The present practice in the industry requires companies that depart from the Code of Corporate Governance to give detailed explanations for its departure. In the present regulatory climate in Singapore, and being afraid of the rap on the knuckle, companies have gone to great lengths to explain every instance of departure from the corporate governance code. Such an undertaking is also thought to be unduly burdensome. This, unfortunately, demonstrates the carrying out of the desire to be transparent and accountable to the extreme. You will appreciate, Sir, that every endeavour to comply with the regulations will come with a price. In this regard, I would also like to ask the Minister whether the MAS could issue a further directive to specify the extent to which explanation is required for not complying with the Code of Corporate Governance.

It is, therefore, necessary that if we are to undertake a review of the Companies Act to help reduce business costs, we should also at the same time undertake the review of other relevant legislation and regulations with the same view in mind.

With that, Sir, I support the Bill.

Mr Lee Hsien Loong: Mr Deputy Speaker, Sir, I thank Mrs Lim Hwee Hua and also Mr Sin Boon Ann for their contributions. I have a lot of sympathy for their approach and priorities, and let me explain our position and what we can do.

On the definition of substantive shareholding which Mrs Lim raised, currently, an investor holding 5% or more of the voting shares of a listed company has to notify the company and the SGX of any changes in shareholding within two calendar days. For example, if it moves from 5.3% to 5.5%, he has to tell the company and SGX about this 0.2% change. The aim is to make sure that the company and SGX are aware of who the substantial shareholders are and what are the movements in their shareholdings. In a takeover situation, this is important information for everybody.

In computing this shareholding, the investor must include both his direct interest and his deemed interest. In other words, he has to aggregate several items together - very likely. Direct interest is what he holds himself. But, if he is in a corporation, deemed interest will include shares held by related corporations, eg, subsidiaries and associates. This requirement to aggregate their direct and deemed interests is similar to the practices in the US, UK, Australia and Hong Kong. So, it is not just the Commonwealth jurisdictions.

And there is a rationale, which is to improve the level of transparency by allowing the company and SGX to know who exercises effective control over the company's shares. Otherwise, you will have a front, a dummy, and then you operate a wayang kulit from behind, and that causes problems.

While we need proper disclosure, we also recognise it is important to reduce the reporting burden for fund managers and investors. That is why we accepted the recommendation to make the changes which are in the Bill today: first, to require notification only when your shareholding changes by one percentage point, a discrete 1% threshold above the minimum 5%. So, if you go from 5.3% to 5.5%, you do not have to report. But if you cross the next threshold, which is 6%, then you will have to report, which is like what Hong Kong and the UK are doing. And instead of two calendar days, you will have two business days. So, over the weekend, you do not count those days.

These are minor improvements. But, as Mrs Lim pointed out, there will still be reporting requirements that may still be onerous. So, we will study her suggestion to see whether it is feasible for us to exempt certain categories of investors and fund managers from the requirement to report their direct and deemed interests. We will have to study it, because it is a grey area. There are reasons why we want to know who the substantial shareholders are. For sensitive companies, there may be a double reason. But even for other companies, we must have an effective definition and one that is not too difficult and whose reporting requirements are not too burdensome. But we will study this.

Mr Sin Boon Ann raised two questions: one, on quarterly reporting, whether we have made any decision on amending this. He had raised this in the Committee of Supply and I had promised to look into the matter, which I have done, and he has kindly given me the response from his survey of his own clients.

Quarterly reporting will enhance Singapore's transparency and standing as a world-class business and financial centre. As we move to a disclosure-based regime, it becomes more important for investors to be informed more frequently of the progress of publicly-listed companies. Developed economies like the EU, Canada, US and Japan, and also some developing Asian economies like China, India, Malaysia and Thailand, have all implemented quarterly reporting for their listed companies. We introduced mandatory quarterly reporting for listed companies from 1st January this year to further improve Singapore's transparency and disclosure standards. But quarterly reporting does impose cost on companies, particularly the smaller ones. And it is not just the financial aspects, but also a significant amount of management attention is required to prepare the quarterly statements to the necessary standards for public release. And these can be burdensome, especially when business conditions are difficult and profits are down. Considering the current conditions, it makes sense to defer quarterly reporting for some smaller companies to help them reduce their business cost.

Currently, listed companies with a market capitalisation above $20 million are required to do quarterly reporting for financial years starting after 1st January 2003. Companies that fall below this threshold have been given a 1-year deferment. They will start quarterly reporting for financial years starting 1st January 2004.

We have decided to make the following changes to the quarterly reporting requirement. The market capitalisation threshold will be raised from $20 million to $75 million, based on the 31st March 2003 market capitalisation data published by SGX. This will defer quarterly reporting for about half the mainboard companies and nearly all the Sesdaq companies.

Secondly, quarterly reporting will also be deferred for a newly-listed company, if its IPO market capitalisation is $75 million or below.

Thirdly, we will review the quarterly reporting requirement for these smaller companies in mid-2005. We will review it and we will decide at that point what to do. Thus, quarterly reporting for these companies will be deferred by at least three years, compared to the larger companies. SGX will be implementing these changes with immediate effect.

On the Code of Corporate Governance, Mr Sin asked whether the requirement for listed companies to provide an extensive explanation in their annual reports for any deviation from the Code is unduly burdensome. The Code contains 15 principles and 55 guidelines. The guidelines serve to illustrate and elaborate on the principles. The companies are encouraged to comply with the guidelines, as they are good corporate governance practices. But these are guidelines, not requirements. Nor do we intend companies to publish pages of detailed legalistic explanations of their corporate governance practices, as some listed companies have done in their annual reports this year. So, to explain why you did not comply, you would have another long turgid small-print document.

In fact, in their annual reports, companies should focus on how they have applied the principles of the Code which embody its spirit, rather than the many individual guidelines. They should, however, disclose and explain any deviation from the guidelines, which is similar to the disclosure obligations in jurisdictions like the UK and Australia. But it is up to the companies to decide how detailed their corporate governance statements need to be. The market will judge the quality of each company's disclosures.

Under this approach, SGX will not routinely review and query the contents of corporate governance disclosures in their companies' annual reports, but it may act, if it receives a complaint, a tip-off, or if it has cause to suspect that a company has not complied with the listing rules or if there is a false or misleading disclosure. This approach is consistent with the move to a disclosure-based regime.

Sir, if companies understand that this is a guide, and they put into their annual report a statement which they judge appropriate as to how they have complied with it and where they have not complied with it, that is sufficient. We will not, for example, go and ask them why the explanation for item No. 53 out of 55 items is not long and detailed enough. I hope that makes it clear. I think the SGX also would be very relieved not to have to burden itself with these detailed supervisions, and these moves should make it easier.

I should say that, in order for the regulators to be able to supervise the system sensitively, we need to have good feedback from people and from companies for us to know what is working and what is not, what is tiresome without serving a purpose, and what is just form without substance. It is very difficult for the regulator on his own to get this feel. We will try our best, but we are not ourselves practising. We are regulating or supervising. So, unless the participants are willing to speak up effectively and forcefully and press their point, and if they are not heard the first time, to try again, then sometimes we may not get their message and we may end up with an outcome which does not really work.

In these two cases, the matters have been discussed. There has been feedback, the matters were debated, some adjustments were made but, actually, further adjustments were necessary because I think the situation was changing, and the business conditions change. When this happens, it is incumbent on the participants, the people who are affected, to speak up and let us know. And, as we have said many times in Parliament and elsewhere, you have to have the confidence to speak up and not worry that if you speak up you may be blackmarked or knocked down or some other thing may befall you. Because if you do not speak up, then we would not know and it would not be fixed. So, we have to have that mutual confidence and rapport and, if one avenue does not work, to try different avenues. Finally, we may or may not agree, but I think it is important that the issues have a full airing and the decision is a considered one, taking all views and all facts into account.

Mr Sin Boon Ann: Mr Deputy Speaker, Sir, I would like to thank the Deputy Prime Minister for hearing out the people in industry and making the necessary changes.

Coming back to the other point about explanations for departures from the corporate governance code, would the Deputy Prime Minister not agree with me that part of the reason why people have gone to the other extreme of giving detailed explanation is because they fear the heavy hand of the regulator? What the Deputy Prime Minister has just said earlier was that you leave it to people to form their own judgment as to the appropriate level of disclosure and explanation and they will have to justify afterwards.

I think it will take a while in the engagement between the regulator and the people concerned to find the appropriate level that they are comfortable with. In the interim, until such a comfort level is established, can the MAS give the assurance that there will be a light-handed and light-touch approach in enforcing the regulations?

Mr Lee Hsien Loong: We have said so many times, but I will underline it heavily.

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.