Issues Raised in Parliament

ANSWER TO PARLIAMENTARY QUESTION ON:
Mid-Continent Equipment Pte Ltd

For Parliament Sitting on 04 Sep 98

Question:
To ask the Deputy Prime Minister why the Stock Exchange of Singapore (SES) suspended the trading of shares of Mid-Continent Equipment Pte Ltd on SESDAQ, and whether the SES should have approved the 'Initial Public Offer' application by the company, especially considering the large percentage of private placement shares.

Answer:
Trading in the shares of Mid-Continent Equipment Group Ltd ("Mid-Continent") on SESDAQ began on 22 Jul 98 following its initial public offer ("IPO") of 18 million shares at $0.15 each. SES suspended trading in the counter on 31 Jul 98, following a sharp run-up in prices and large volumes during the first 8 days of trading, and confirmed on 11 Aug 98 that the shares in Mid-Continent had been cornered. The SES has referred the case to the CAD to investigate possible offences of manipulation under the Securities Industry Act. The attachment I have circulated sets out fully the facts of the case.

2 The SES approved Mid-Continent's IPO application because Mid-Continent met the listing requirements for a company to be admitted to SESDAQ, according to the existing rules and procedures. However, the Mid-Continent case revealed weaknesses in these rules and procedures that need to be put right.

Concentration of Placement Shares

3 The problem with the Mid-Continent IPO was an over-concen-tration of shares in the hands of a few persons. 90% of the IPO shares were placed privately with only 5 persons. The company's shares were therefore vulnerable to being cornered when trading started.

4 It is not MAS or SES policy to require companies to sell the majority of shares in an IPO by open subscription by the public, or to limit the private placement tranche to only a small percentage of the IPO shares. The listing rules for SESDAQ allow a company to use private placement for up to 25% of its IPO shares, or a higher proportion if the SES agrees that there are good reasons for doing so.

5 In practice, the SES has been flexible in allowing companies to sell IPO shares via private placement, particularly for Main Board listings ¹. SES has used this discretion more widely for SESDAQ listings since August 1997, in view of the difficult market conditions ².

6 Mid-Continent was similarly allowed a large private placement tranche of 90%. The problem was not this large private placement per se, but the small number of placees and the resulting over-concentration of IPO shares.

7 The present SES rules are inadequate to prevent such over-concen-tration. Moreover, neither the company nor the issue manager is required to inform the SES of the number of placees and their respective shares of the IPO issue. For several years now, the SES has left it to the issue manager to ensure a sufficient share-holding spread after an IPO so that trading in the secondary market would be orderly.

8 This needs to be reviewed. In Hong Kong and the United Kingdom, a company can distribute up to 75% of its IPO shares via private placement, but this is subject to a tight limit on the value of shares placed to each investor. Hong Kong also requires a minimum number of such placees. MAS has asked the SES to propose rules to prevent over-concentration of IPO shares, including the maximum percentage that can be placed privately and the minimum number of placees.

9 Once provisions to prevent over-concentration of IPO shares are put in place, issue managers will be responsible for complying with them and ensuring a sufficient shareholding spread for orderly trading in the secondary market.

10 The SES will also introduce requirements on standards of conduct for issue managers to bring them in line with the best practice internationally.

Responsibility for Approving Listing Applications

11 We are also reviewing the procedures for approving listings. Presently, the SES is solely responsible for approving applica-tions by companies to list on the stock exchange. In 1983, after a spate of listings of doubtful quality, the Minister for Finance had directed the Securities Industry Council ("SIC") to advise the SES on new listing applications. The final decision on listings still rested with the SES, but there was close consultation between the SES and SIC. But this arrangement ceased last year after the SIC decided that it no longer needed to review SES listing decisions ³.

12 The Corporate Finance Committee chaired by Mr Lim Yong Wah is studying the appropriate roles for the SES and MAS in approving listing applications and the issue of shares by companies. One issue is whether the MAS should be given the power to overrule decisions of the SES on listing applications, where it considers this necessary to protect the public interest. Regulators in some other jurisdictions can exercise such veto powers within a mandated time period. However, such powers should be used sparingly and only when the regulator has strong reasons to believe that doing so is in the public interest.

Approval of Listing Applications under a Disclosure-Based Regime

13 The MAS agrees with the proposal by the Corporate Finance Committee for a predominantly disclosure-based regulation regime. This will give more room for the market, rather than the regulator, to judge the commercial merits of transactions. It will help to develop deeper capital markets, with broader participation from institutional investors.

14 But disclosure-based market discipline is not an automatic formula for sound and orderly financial markets. In established markets which adopt a disclosure-based regulatory philosophy, the stock exchange or regulator does not totally suspend judgement on the proposals put to it. The stock exchange or regulator should not attempt to judge commercial merit, but in some instances it may have non-commercial grounds to conclude that a proposal is not in the public interest. For example, it may have reasonable cause to doubt the integrity of the directors or major shareholders of a listing applicant. In such cases, it may consider disapproving the listing proposal. We too need to develop such safeguard mechanisms.

15 I have explained MAS' position with regard to approving listing applications in order to clarify what a disclosure-based regime means, and not to comment on the specific case of Mid-Continent. MAS will evolve its regulatory style to allow more free play in the market. But it will not lower standards of integrity, or allow our financial markets to be brought into disrepute through manipulation and sharp practice.

Mid-Continent Equipment Group Ltd ("Mid-Continent") applied for admission to SESDAQ on 20 Apr 98. The Stock Exchange of Singapore ("SES") Listings Committee approved Mid-Continent's initial public offer ("IPO") application on 21 May 98.

2 Before its public offer, Ipco International and Ekong Investment each held a 50% stake in Mid-Continent. Ipco International is controlled by Malaysian-listed Promet Berhad. Ekong Investment is wholly-owned by Mr Ong Eng Kee, Mid-Continent's Managing Director, and his family.

3 For the IPO, Mid-Continent issued 18 million new shares at $0.15 each. Of these, 16.2 million shares or 90% of IPO shares were in the placement tranche. 1.3m shares (7.2%) were reserved for Mid-Continent's staff and business associates. Only 500,000 shares (2.8%) were distributed by way of offer.

4 Ipco International and Ekong Investment collectively owned 100m Mid-Continent shares. This represented 84.8% of the company's issued capital after the public offer. This complied with the SES rules for IPOs, which stipulate that at least 500,000 shares or 15% of a company's issued and paid-up capital (whichever is greater) have to be held by the public, i.e. persons who are not existing directors or substantial shareholders of the company. The substantial shareholders undertook not to dispose of their shareholdings in the Company within 12 months of the listing, a standard condition imposed by the SES on a SESDAQ listing.

5 Trading of Mid-Continent shares began on 22 Jul 98. Mid-Continent's share price rose sharply from the opening price of 16? to close at 33.5? on the first trading day, and peaked at 87.5? on the fourth trading day (27 Jul 98). At this point the SES started to investigate the possibility of market manipulation, because of the huge price run-up and heavy volume. The SES decided to suspend trading in Mid-Continent shares on the eighth day of trading (31 Jul 98) as it had reason to believe that the shares had been cornered.

6 SES investigations established that the 16.2m private placement shares had been placed with only 5 individuals. None of the placees sold their placement shares during the 8 days of trading. Further, one placee bought a substantial number of Mid-Continent shares (amounting to a net long position of 2.284m within the first 7 days of trading). By the time the counter was suspended, its free float had dwindled to just 626,000 shares, 3.5% of the total initial shares sold in the IPO. As a result, the buying-in of Mid-Continent shares by the SES on 30 Jul 98 against sellers who had failed to deliver on due dates was largely unsuccessful.

7 After considering all the facts, the SES confirmed on 11 Aug 98 that a corner situation existed in Mid-Continent shares. In other words, a few shareholders controlled the supply of Mid-Continent shares in the market so that the number of shares available or free float was insufficient compared to the number of shares already sold but not yet delivered to buyers. In the circumstances, the SES decided that all the outstanding trades should be settled in cash at a fair price, as provided for under SES rules. The SES formed a Settlement Committee to determine a Fair Settlement Price for all outstanding market trades ⁴. The Settlement Committee announced on 26 Aug 98 that it had fixed the Fair Settlement Price at 59 cents, except for trades involving individuals under investigation. 59 cents was the weighted average price of the shares over the eight trading days.

8 The SES inquiry revealed possible offences of manipulation or deception under the Securities Industry Act. These have been referred to the Commercial Affairs Department for further investigations. Any person found to have violated the Act or SES rules will be dealt with under the law.

¹ Of the 22 Main Board listings in 1997, 18 companies sold between 15-80% of their IPO shares by private placement.

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² 10 out of the 13 SESDAQ companies listed since August 1997 have sold more than 25% of their IPO shares by private placement.

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³ Since April 1997, the SES has decided on all applications for rights and bonus issues on its own. Since October 1997, the SES has also decided on all new listings without advice from the SIC.

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⁴ The Settlement Committee comprised two Committee Members of the SES, two public accountants and one solicitor.

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