BUSINESS TRUSTS BILL

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BUSINESS TRUSTS BILL: Order for Second Reading read.

3.34 pm

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The Minister for Education (Mr Tharman Shanmugaratnam): Mr Speaker, Sir,I beg to move, "That the Bill be now read a Second time."

The purpose of the Business Trusts Bill is to introduce a framework for the governance of business trusts. Business trusts are business enterprises structured as trusts. They are an alternative to companies as a business structure. This structure is already used in other jurisdictions such as Australia, Canada and theUnited States.

Business trusts are distinct from both companies and traditional trusts – with similarities and differences from both. Like a company, a business trust operates and runs a business enterprise. But unlike a company, a business trust is not a separate legal entity. It is created by a trust deed under which the trustee has legal ownership of the trust assets and manages the assets for the benefit of the beneficiaries of the trust. However, a business trust differs from traditional trusts – such as private trusts and unit trusts – in that it is running and operating a business enterprise.

There have been indications of interest on the part of the industry in setting up business trusts. Whereas companies are restricted to paying dividends out of accounting profits, there are no such restrictions on trusts. Business trusts can therefore pay distributions to investors out of operating cash flows. The structure is thus suited to businesses involving high initial capital expenditure with stable operating cash flows, such as infrastructure businesses.

Investors can invest in the underlying business by subscribing for units in the business trust, in a manner similar to investing in shares in a company. The units can be listed on a securities exchange. Introducing the business trust

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structure inSingapore will therefore create a new asset class for investors, and potentially add depth and sophistication to Singapore'scapital markets.

To allow business trusts to be offered to retail investors, it is necessary to establish a regulatory framework for the governance of business trusts.

The Business Trusts Bill is formulated with two objectives in mind:

First, to safeguard the rights of investors or unitholders in the business trust; and

Second, to establish the duties and accountability of the trustee-manager of a business trust and its directors, ie, the directors of the trustee-manager.

MAS has conducted public consultation on the regulatory framework and draft Bill. There has been broad support for the proposed legislation. MAS has considered the comments received in drafting the present Bill, made certain amendments in response to the comments and published its responses to the comments received.

Mr Speaker, Sir, I will now go through the key provisions of the Business Trusts Bill.

Registration under the Business Trusts Bill

The Business Trusts Bill sets out the requirements for the governance of business trusts registered under the Bill. The Securities and Futures (Amendment) Bill will make it mandatory for business trusts offered to the retail public to be registered under the Business Trusts Bill. Other business trusts, such as those offered to accreditedand institutionalinvestors will not require registration under the Bill. This is because such investors are generally better able to

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protect their own interests. Such business trusts may however be voluntarily registered under the Bill where, for instance, the offeror considers that the investors targeted prefer to have the assurance that the business trust is one which is registered under the Bill. Business trusts which are not registered under the Bill will continue to be subject to the Trustees Act, which sets out the general obligations of trustees.

Single responsible entity

The Bill requires that the business trust be run by a single responsible entity known as the trustee-manager. The trustee-manager must be incorporated in Singapore. The trustee-manager has the dual responsibility of safeguarding the interests of unitholders and managing the business of the business trust.

This requirement ensures that fiduciary responsibility towards unitholders of a business trust is clearly placed on a single entity. The alternative would be a bifurcated structure, involving a manager of the business trust and a separateindependent trustee. However, the running of a business trust involves management of an operating business and the making of business decisions on a day-to-day basis. It would be difficult for an independent trustee to oversee the manager's business decisions. It would also be impracticable for a separate trustee to set out an operating mandate for the manager, without fettering the manager's ability to run the business as an operating enterprise. More importantly, it would be difficult to apportion liability for breaches of trust between the trustee and the manager. Adopting the single responsible entity model avoids this problem. This was the approach taken in Australia, in response to a number of cases in which the Court found difficulty

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in apportioning liability between the trustee and the manager.

Accountability of the trustee-manager and its directors

The trustee-manager, as a company, would be owned by shareholders. It would typically be controlled by the sponsoring entity which had divested its business by setting up the business trust. The trustee-manager and its board of directors have a fiduciary duty to manage the trustee-management company in the best interests of the company and its shareholders. At the same time, however, as a trustee, the trustee-manager has an additional group of constituents whose interests must be safeguarded, namely, the unitholders of the business trust. The trustee-manager and its board of directors owe a duty to unitholders of the business trust to manage the business trust in the best interests of the unitholders. There is therefore potential for divergence between the interests of the trustee-manager and its shareholders, and the interests of unitholders. This may result in a conflict of duties on the part of the trustee-manager. For instance, the trustee-manager may wish to maximise management fees or may have less interest in minimising operating expenses which are paid to the trustee-manager out of the assets of the business trust. To cite another example, the controlling shareholder of the trustee-manager may influence the operations of the trust or engage in related party transactions that benefit the shareholder, to the detriment of unitholders of the business trust.

To address such potential conflicts of interests, the Business Trusts Bill sets out the duties and accountability of the trustee-manager and its directors.

Duties of the trustee-manager and its directors

The Business Trusts Bill imposes a duty on the trustee-manager to act in the

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best interests of unitholders and to give priority to the interests of unitholders where these conflict with the trustee-manager's own interests.

The Bill also imposes a duty on the individual directors of a trustee-manager to take all reasonable steps to ensure that the trustee-manager discharges its duties towards unitholders. Directors also have a duty to give priority to the interests of unitholders where these conflict with the trustee-manager's own interests. This makes the directors of the trustee-manager responsible for safeguarding unitholder interests.

Annual certification by the board and the Chief Executive Officer of the trustee-manager

The Business Trusts Bill requires that the board of directors and the Chief Executive Officer ("CEO") of the trustee-manager each provide annual certification on specific issues relating to the governance of the trustee-manager. In particular, they are required to certify whether they are aware of any violation of duties of the trustee-manager which would have a materially adverse effect on the operations of the business trust and the interests of unitholders. Where the board or the CEO is unable to make such a certification, the reasons should be disclosed to unitholders.

This certification requirement is intended to make the board and CEO of the trustee-manager acutely aware of their responsibility to safeguard the interests of unitholders of the business trust.

Board composition of the trustee-manager

The Business Trusts Bill provides MAS the power to prescribe requirements on the composition of the board of the trustee-manager. MAS intends to require the board of directors of the trustee-manager to have a strong element of

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independence to protect the interests of unitholders. The test of independence will be based on three criteria, independence from management of the trustee-manager, independence from substantial shareholders of the trustee-manager, and independence from business relations with the trustee-manager. The details will be set out in the Regulations.

Audit committees

In addition, the trustee-manager will be required to establish an audit committee. The Bill provides MAS with the power to prescribe the composition and duties of the audit committee. MAS intends to require in Regulations that the audit committee has a strong element of independence. We also intend to require that the audit committee review the governance policies and practices applied by the trustee-manager in operating the business trust. This provides a further mechanism to ensure that the interests of unitholders are objectively considered by the board.

Setting out the rights of unitholders

The Business Trusts Bill sets out the rights of unitholders. I will highlight the key provisions.

Limited liability of unitholders

The Business Trusts Bill provides that a unitholder's liability is limited to the sum of money which he has expressly agreed to contribute to the business trust. Under common law, unitholders may be exposed to unlimited liability for the obligations of the trust. The Bill provides certainty and protection to unitholders by limiting their liability and puts them in an equivalent position to shareholders of companies.

Change of trustee-manager and trust deed

One of the fundamental rights of unitholders is the right to vote to remove the trustee-manager where the trustee-

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manager is unable or unwilling to fulfil its obligations to unitholders.

The Bill requires that the removal of the trustee-manager be subject to a special resolution of unitholders – that is, it must be approved by 75% of unitholders voting in presence or by proxy. Removal of the trustee-manager may adversely impact the continuity of operations of the business trust. The 75% threshold balances the need to guard against the frivolous removal of a trustee-manager with the need to provide sufficient rights to unitholders to remove an inept or poorly functioning trustee-manager.

Unitholders have the right to vote on amendments to the trust deed. The trust deed is analogous to a contract between the trustee-manager and the unitholders. The Bill requires that amendments to the trust deed must be approved by a special resolution of the unitholders. This voting threshold for amending the trust deed is consistent with the approval threshold for amendments to the memorandum and articles of a company by shareholders in the Companies Act. As an exception, the trustee-manager may amend the trust deed without unitholders' approval where such amendments to the trust deed are necessary to comply with any laws in Singapore.

Civil liability

The Business Trusts Bill provides for any unitholder who suffers loss or damage because of any conduct of the trustee-manager to take civil action against the trustee-manager. Also, any unitholder may apply to the court for an order in the case of oppression arising from the conduct of the affairs of the business trust, or for leave to bring a derivative or representative action on behalf of all unitholders of the business trust.

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Conclusion

To conclude, the business trust structure provides an alternative business structure to companies, particularly for businesses with stable growth and operating cash flow. Introducing this new structure inSingapore will allow for a new asset class for investors and potentially add to the development of our capital markets. At the same time, there must be appropriate safeguards of the interests of retail investors investing in business trusts. The Business Trusts Bill puts in place a governance framework for business trusts, to protect the fundamental rights of unitholders and to set out the duties and accountability of the trustee-manager and its directors.

Sir, I beg to move.

Question proposed.

Mr Ong Kian Min (Tampines): Mr Speaker, Sir, thank you for allowing me to speak on the Business Trusts Bill. As a lawyer in private practice, I advise clients on corporate and commercial law and welcome the introduction of any new mechanism such as business trusts to help companies raise funds for their business needs. I, therefore, support the Business Trusts Bill.

The business trusts structure is particularly well-suited for businesses with stable revenue and high cash flows with minimal on-going capital expenditure requirements. As most banks in Asia tend to lend against physical assets and have displayed reluctance to lend against cash flow, the Business Trust is a good alternative vehicle for steady cash flow low asset companies to attract funding.

Recently, Iwas cited an instance of a business that had a resilient cash flow of $700,000 a year but could not find a bank to finance it as it had little by way of hard assets, that is, real estate.Business

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trusts may be a viable option for such companies. Further, mature businesses that offer limited capital gains potential have a better chance to get a higher valuation throughbusiness trusts than an equity offering. For the unitholders of the trust, they would benefit from regular distribution out of net cash profits as opposed to accounting profits. However, notwithstanding these benefits, I wonder whether business trusts, in the form envisaged in the Bill, would be attractive enough for our local investment community. I would like to raise three specific points on the provisions of this Bill.

First, the Business Trusts Bill requires the business ofbusiness trusts to be run by a single responsible entity known as the trustee-manager who would have the dual responsibility of safeguarding the interest of unitholders, as well as managing the business trust. Although this combined role addresses the difficulty of apportioningfiduciary responsibility between trustee and manager, the people I spoke to, who are already in the trusts industry, are reluctant to be trustee-manager because they have no expertise running active business enterprises and the additional liabilities of having to manage the business are onerous. Therefore, it seems that the trustee- manager would probably be made up of people who are managing the operations, who now have no choice but to accept the additional responsibility of a trustee of the assets if they want to set up a business trust. But would these managers be so pre-occupied running the business that they sacrifice the interest of the unitholders? How qualified and competent would they be to act as trustees and discharge their duties to safeguard the interest of the unitholders?

Sir, this leads me to my second point which is about compliance cost. To protect the interest of unitholders, the Business Trusts Bill makes it mandatory

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that trustees-managers have on board independent directors and an audit committee to serve as a check and to ensure that the interest of unitholders are objectively considered. But these independent persons would require to be adequately compensated for assuming and discharging these onerous responsibilities. Moreover, the trustee-manager must be a public company incorporated in Singapore and could only run one business trust at any one time. This will result in additional expenses. Sir, larger and more established businesses already have a multitude of options to raise funds from the capital markets, such as public offering and public listing of their shares and issuing corporate bonds, notes and other commercial papers. For small businesses, the extra expenses associated with such mandatory requirements may prove to be prohibitively high.

While protection of unitholders should not be compromised, I believe every effort must be made to keep cost to the lowest possible minimum without sacrificing the quality of the safeguards. The cost of setting up and maintaining a business trust should not be so high that it becomes unattractive compared to other more economical alternative structures. For example, for smaller companies, venture capitalists are familiar with redeemable convertible cumulative preference shares. This is an extremely flexible and established instrument that is widely adopted by companies to obtain funding. These redeemable convertible cumulative preference shares could provide for redemption of the invested amount under certain conditions, payment of preferential cumulative dividends, conversion to equity ordinary shares and preferential rights in the event of distribution of assets, thus giving them quasi-loan and quasi-equity elements. Hence, the funding difficulties faced by small companies may not actually be due

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to a lack of viable or conducive investment structure alone and the introduction of business trusts may not address the difficulties of attracting investors' interest in the first place. Sir, if private investors and venture funds are keen to invest in a particular business, there are already existing funding mechanisms for them to make and protect their investment.

Sir, my third point relates to third parties dealing with the business trust. It is envisaged that the business trust be structured in the form of trusts with no separate legal existence. As the trustee-manager has legal ownership of the assets of the business enterprise and manages the business, creditors could only claim against the assets of the business trusts via the rights of indemnity of the trustee-manager, provided the trustee-manager has acted properly in incurring the liability. It would be cumbersome, impractical and probably impossible for creditors acting in good faith to conduct checks on whether the trustee-manager is acting properly for every single transaction entered into. This differs from the situation of a company and creditors dealing with a business trust would not have the same level of protection as creditors dealing witha company. Consequently,there is a need for potential creditors and people who intend to transact with the business trust to be educated on its structure, the inherent risks involved and their rights as creditors and counter-parties.

Sir, to conclude, there is a need to continually create new asset classesfor investors and add more breadth, depth and sophistication to our capital markets and business trustsare one such additional asset class. However, to strengthen our capital markets, we should also continue to promote the traditional investment instrumentslike stocks, bonds

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and other debt securities. I am told that following the Asian financial crisis, when financial institutions in Thailand were cash-strapped, the Thai government and corporations went directly to the market to raise funds by issuing bonds. This resulted in the Thai bond market taking off and growing rapidly. I would like to ask the Minister what steps would be taken to increase the market size and trading volume of listed bonds and, ata later stage, listed business trusts on our local market.

On that note, Sir, I support the Bill.

Mr Andy Gan Lai Chiang (Marine Parade): Sir, ever since when I was doing my post-graduate studies in accountancy, trusts have been a popular subject. Then it was a popular vehicle not only for wealthy families to manage their wealth to ensure a smooth transition to future generations, but has also been used to manage family businesses while the owners of the wealth are still alive. Trusts have also been used by business partners, especially professionals such as doctors and accountants, who wish to separate their personal assets from their professional services in order to reduce exposure to heavy taxes and other potential liabilities.

Besides being a useful vehicle for tax and estate planning purposes, a trust in whatever form has its downside in that it has to be managed by a trustee, whom the settlor and the beneficiaries could depend on managing the trust. However, I am happy that Singapore would now have trusts that are actively engaged in business to be registered as business trusts and operate within its own legal framework. It could also raise funds from the public and act like a public-listed company. This would add depth to our capital market and clearly enhance the sophistication of our financial market.

On the subject of trustee-manager, clause 6 states that the trustee-manager

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is to be a company that does not carry on any other business other than managing the affairs of the business trust. Clauses 7 to 17 spell out its powers and responsibilities. However, could the Minister comment on how much should the trustee-manager be capitalised as well as its net worth before it is being allowed to act? This point is important as the trustee-manager couldbe penalised on many potential lapses of duties, as well as having to carry on a heavy load of expenses such as professional directors and audit committee members. Its fiduciary duties also open it to potential professional negligence and its cost of corporate governance would be high. There could be times when the risks-to-reward ratio ofa trustee-manager may not be that attractive enough to attract the right skills in managing the business trusts. Hence, a trustee-manager, I presume,has to be a company of good financial standing. Furthermore, the trustee-manager should be well-positioned financially to absorb high penalties. For example, clause 12(1) and (5) relatesto the duties of directors or trustee-managers to disclose interest in transactions or when holding any office or possess any property which might be in conflict with their duties. Such lapse in declaration could be innocentlyleft out in these days of complex business transactions, but without any damage to the business or the business trusts as well, but the directors may still be found guilty with a possible fine of up to $100,000 or to imprisonment for a term of not more than two years or both. On top of this, a further fine of $10,000 for each day such offence continues after conviction may be imposed although, in such cases, a fine is necessary and sufficient warning has been given.

Business trusts, like any form of trusts, have to contend with beneficiaries who are not satisfied with the way a business is run by the trustee-manager or are in dispute withfellowbeneficiaries.

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Such disputes may escalate and one party or parties that have a lot to lose may appeal to the Minister andAdvisory Committee and an Appeal Advisory Panel may be appointed to deal with these matters as provided for inclauses 88 to 91. May I find out from the Minister whether such Committee and Panel Memberswould be made known to the business trusts so as to provide transparency and confidence to the public?

Business trusts are on-going businesses and, as such, would have credit lines with their suppliers. In normal circumstances, trusteesare responsible for any debt incurred by the trusts and, in this case, under the business trusts, it is the same practice. However, business trusts may be listed as public companies and are larger than, say, a typical familytrust, and suppliers are exposed togreater financial risks. May I ask the Minister whether the creditors of business trusts have any rights that are better than any other trusts? As far as I know, creditors could only claim from the assets of the business trusts via the rights of indemnity of the trustee-manager, as my colleague has pointed out. As such, creditors may not want to do business with business trusts under the current level of protection that the Bill accords. However, looking at the opportunities offered, business trusts are interesting new models from which businesses could operate from and it provides a good avenue from which wealth could be created and protected. With somecreative financial planning, business trusts could be a good vehicle for wealth to be managed properly for generations to come.

Mr Speaker, Sir, I support the Business Trusts Bill.

Mrs Fang Ai Lian (Nominated Member): Mr Speaker,I would also like to support the Business Trusts Bill. This introduces a new regulatory framework for business

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trusts which is a new class of business entity that combines the elements of companies and trusts.

As the Minister had said, this is already in operation in other countries, so it is good to see it taking root in Singapore, and it would add to the sophistication of the capital markets and also enhance our position as one of the world's leading financial centres. I am sure it would definitely bring cheer to the market place.

I remember some years back, the bankers were complaining about the gloom and doom, off-shore banks were moving out and operations were run down and the fact that we were not able to attract the newer and more value-added activities such as assetsand risks managements to Singapore as much as we would like. All that has changed, especiallywith the liberalisation of the domestic banking business and, indeed, this has prompted Citibank to announce a $1.5 billion investment into Singapore in Citibank Singapore. Offshore business banks are coming back and also beefing up their operations and indeed, thePrime Minister, in his National Day Rally speech, said that the financial services sector is hotting up again. Indeed they are hiring in bigger numbers now, much to the consternation of businesses like ours who have got to queue behind them, but we are not exactly complaining.

So a lot had been done in terms of stimulating the banking and financial services centre. There is still a wish-list and one relates to what bankers described as antiquated trust laws, especially relating to the traditional trust laws, for example, MrAndy Gan had said the private family trust laws. There had been a consultation paper which had been widely distributed and it has been rumoured that legislation would be

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introduced towards the end of the year. This is important. Bankers are looking towards the updating of these laws which have not been revised significantly because it would help to attract the funds, especially from Europe, which are seeking alternative financial centres because of changes in banking laws there. So whilst we await a revision to the legislation relating to the traditional trusts,

the introduction of business trusts is indeed very welcome. Asthe Minister hassaid, business trust is a new form of trust. It is regular business and yet not regular business, because it is established under a trust deed and not under the Companies Act. And as he has said, it is well suited for businesses which have stable growth and stable cash flow because distributions are from the cash flow. It will also be suitedfor the strategic industries like power generation. The ownership can vest with the Government but the operations can be privatised.

Business trustswill add to the sophistication of the market place and I see it as a natural development fromReal Estate Investment Trusts (REITs), which were introduced some two years ago. REITs are managed under the collective investment scheme under the Securities and Futures Act (SFA). Withthe collective investment scheme (CIS)under the SFA and with further amendments to the SFA, businesses can choose between CIS and business trusts.

REITs, introduced some two years ago, have been fairly successful. We now have four. We are first movers in this game and it has caused our neighbours to think likewise. And the speed with which they introduced REITs is quite phenomenal. In Hong Kong, their consultation paper came out in March 2003 and the final version came out in July. And Malaysia also introduced REITs into their budget and also exempted stamp duty from properties injected into REITs. So,

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we have the first mover advantage andwe are alsoquite lucky that these countries have not launched any REIT. My comment here is that the first mover advantage can be very quickly eroded if we do not take advantage of it by attracting more REITs and creating the critical mass and building up the industry here.

Soalso withbusiness trusts.They will add to the sophistication and depth of our capital markets and, more importantly, entrench our position as a progressive financial services centre. Because it has been said that it adds a new class of yield-based financial products for investors in Singapore as well as overseas. If we see the success of REITs, it has really changed in a very positive way how properties are managed. Every square foot of space is being maximised. We see Junction 8,Funan Centre and shopping malls being very vibrant. So it is with business trusts that businesses can see very positive changes.

One of the reasons why REITs have been so successful is perhaps due to the fact that it is able to enjoy a transparency treatment for tax. The tax is levied at the level of the unitholder. So if you are a corporate unitholder, you get taxed at the corporate rate and if you are an individual, it is tax exempt. So this makes REITs very attractive because you can quote gross yield instead of net of tax yield. And this has helped to move this business.

I have awish list for theMinister. Itis forbusiness trust to be similarly accorded the transparency treatment of tax to make it attractive and to make it viable. One worrycould be that there might be tax leakage because you enjoy a better tax collection under the one-tier system, and that there might also be a possible abuse by smaller companies using the business trust structure. Perhaps one way of getting round this problemis to accord

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transparency treatmentto the bigger trusts whichare to be listedon the stock exchange. So, the long and short of it all, my wish list for theMinister is, first,for the laws relating to traditional trusts to be speeded up.

Second, being the first mover, we have been very goodin a lot of the activities. People copy us and that is the sincerest form of flattery. We could perhaps take the offensive and copy those who copy us, and that is in relation to stamp duty. Perhapsstamp dutycould also be removed in terms of properties that are injected into trusts.

Thirdly, I would like to talk about the transparency treatment and that should also be accorded to business trusts. Because ifit is absent, then it will be the best equivalent to the companies enjoying other tax benefits and incentives, andit will alsobe equal to Hong Kong and behind Malaysia.

With the wish list and with the legislation in place,the Government could clearly say that they have done their best to pave the way for business trusts and then it is up to the business community to take it from there.

Mr Tharman Shanmugaratnam: Mr Speaker, Sir, I would like to thank Mr Ong Kian Min, Mr Andy Gan and Mrs Fang Ai Lian for their very useful comments and their support for the Business Trusts Bill, both for the flexibility that it offers to businesses in providing anew business structure that they can employ and also because it potentially adds depth and sophistication to our capital markets.

Mr Ong Kian Min highlighted a very important feature -I should say the key feature of the Business Trusts Bill -which is the fact that the business trust has to be run by a single responsible entity - the trustee-manager - who will have the dual responsibility of safeguarding the

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interests of unitholders as well as managing the business of the business trust. This combined role is something which we thought about very hard and it featured in the consultations that MAS had with the public. Over the year, both interested playersand a range of professionalsgave their comments on this.We considered them very carefully, andhave decided to stick with this single responsible entity model.

The reasons are quite important. In Australia, they initially had the bifurcated model wherethey had a separate independent trustee anda manager of the business enterprise of the business trust. And there were a few cases that had to go to court where the court found difficulty in apportioning liability between trustee and the manager. We are quite clear in our mind. We want to ensure that the fiduciary responsibility towards unitholders is clearly placed on a single entity - the trustee-manager.

Mr Ong is right that, typically, it will be a situation where the people who are managing the operations of the business that is being divested will end up being the people who are running the trustee-manager. They will have to take on added responsibilities. Beyond the responsibilities of running and operating the business, they will have to take on the responsibilities of being a trustee. It means that they have to appoint a board of directors with suitable qualifications. Some members of the board will typically be people with the requisite expertise in performing the duties of trustees. They can also appoint agents and advisers to help them fulfill their obligations as trustees, but the obligation remains with the trustee-manager as a single entity.

Compliance cost will be there, I agree, and it flows from two facts. First, there

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is an inherent conflict of interest that the trustee- manager faces between the duties that it owes to its shareholders - usually theshareholders ofthe sponsoring entity that sets up the trustee-manager - and the duties that it owes to unitholders who invest in the business trust. There is an inherent potential for conflict of interest.

A second reason why we had to place all these additional requirements on the trustee-manager and its directors is the fact that unitholders in the business trusts do not have quite the same powers that shareholders in a company do. In particular, unitholders cannot vote out directors, cannot vote on the appointment of directors of the board. So it does mean that we had to mitigate this lack of control with a range of other measures, to place other responsibilities on the trustee-manager and its directors that ensure that they will put priority on the interests of unitholders wherever there is a conflict of interest between the unitholders and shareholders. This explains thevarious corporate governance and audit committee requirements which we have placed which go somewhat beyond what the normal Companies Actrequirements do.

It will be a little onerous for small companies. Mr Ongis right. But I think it will typically be large companies running infrastructure businesses that will avail themselves of this new business structure and this new legislation. Smaller businesses, if they wish to run business trusts, can always offer units in the business trust to accredited institutional investors; in other words, non-retail investors and they will not be bound by the requirements of the Business Trusts Bill. So that opportunity is there.

Both Mr Ong and Mr Andy Gan have raised the issue of creditors' rights. It is a very important issue. We are not going to deviate from the trust law position on creditors' rights. The trust law position

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will continue to apply to business trusts. We have received comments from various parties during the consultations, both for and against this position. We have decided that we should stick with this position - the trust law position will apply. It means that creditors can be repaid from the assets of the business trust provided the trustee-manager has not acted in breach of trust in incurring the liability.

Australia and Canada also have not departed from trust law in this regard. In the UK, there have been some discussions as part of their corporate law review but there has been no change implemented as yet.

Mr Ong is right that creditors will have the added responsibility of verifying whether the trustee-manager is acting in breach of trust and, consequently, whether creditors can claim the assets of the business trust. This is something that creditors will have to do. It is, of course, open to the sponsoring entity of the trustee-manager to provide some form of guarantee to creditors, if necessary. The loan agreement can contain such guarantees so as toprovide some further assurance to creditors. But we would not want to depart, at this point, from the basic positionin trust law that you can only claim the assets of the business trust if the trustee-manager had, in the first instance, acted in good faith and without breach of trust in incurring liability.

We are also a little wary of departing from this position because it could encourage creditors to be complacent in performing their due diligence checks, and the trust property may be diminished by such creditors' claims to the detriment of unitholders.

In response to Mr Andy Gan's specific question, creditors would not have rights that go beyond what is provided for currently under trust law. That is the other side of the coin.

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Mr Andy Gan had also raised the issue of penalties being a little high under the Business Trusts Bill. MAS has revised the penalties in all the Acts that it administers - the Securities and Futures Act, the Financial Advisers Act and so on not very long ago. In fact, they were revised upward substantially. Some of these penalties in the Bill may look a little higher than Members are familiar with but they are in line with all the other Acts that MAS now administers. They are not particularly high. For instance, if Members look at breach of duty by a trustee-manager, the penalty is $100,000. I would say that it is meaningful enough but it is not so onerous as to deter people from going into the business of running business trusts.

Mr Andy Gan had also asked about advisory committees and appeals procedures. The details of appeals procedures will be set out in the regulations that MAS will release and names of appeal panel members, which he had asked about, will be made public.

Mrs Fang Ai Lian had several suggestions on how we could further develop the capital markets including REITs. Mr Ong Kian Min had also specifically

mentioned the market for bonds, including listed bonds, and I agree with their observations that these are instruments worth developing. They add diversity and depth to our capital markets. MAS is promoting both these instruments. In the bond market,we are working very hard trying to promote a diversity of borrowers, both local and foreign, government and non-government, multi-lateral agencies as well -even the African Development Bankhas raised funds inSingapore. We will continue to do this through road shows, through the investment banks as well as on our own. MAS is going out with the industry to market the Singapore Dollar bond market. As it develops greater liquidity, I think you will find that there will be greater

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incentives for corporates to participate in the bond market. And the growth of the corporate bond market has been quite significant in the last two years.It has been much faster than the growth in other funding instruments. So we will continue to do this.

The tax position on REITs, if they choose to register under the Business Trusts Act, will be no different from what it is for other business trusts. In other words, the fact that they are REITs and they can alternatively be registered as a collective investment scheme will not change the tax treatment if they register as a business trust. So, REITs have a choice as to where they want to register. If they register under the Business Trusts Act, they will not be able to use the name "REITs" and they will be subject to the tax treatment that appliesto all business trusts. In other words, they will be taxed at the corporate rate, at the trustee level, and distributions of the trust would be treated as exempt one-tier dividends in the hands of unitholders. I am sure the Minister for Finance heard Mrs Fang Ai Lian'sarguments and will consider them. But the position at this point remains quite clear.

Mr Speaker, I think I have covered the main points that were raised by the three speakers. So, once again, I would like to thank them.

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 Tharman Shanmugaratnam].

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

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Mr Speaker: Order. I suspend the Sitting and will take the Chair again at 4.40 pm.

_Sitting accordingly suspended
at 4.18 pm until 4.40 pm. _

Sitting resumed at 4.40 pm

[Mr Speaker in the Chair]