DEVELOPMENTS SINCE JANUARY 2000
Issues Raised in Parliament
Reply on CLOB - Committee of Supply 2000
For Parliamentary Sitting on 08 Mar 2000
1. Parliament was last updated on the CLOB issue in January this year. I briefed Parliament then on the legal obligations of the parties involved and provided members with copies of the agreement between the Central Depository (CDP) and Securities Clearing Automated Network Services (SCANS).
2. I also informed Parliament that the Minister for Finance Dr Richard Hu had written to his Malaysian counterpart Tun Daim Zainuddin on 13 Jan 00. Tun Daim replied on 17 Jan 00, and after a further exchange of letters the Kuala Lumpur Stock Exchange (KLSE) met Singapore Exchange (SGX) to discuss a mutually acceptable resolution to the CLOB issue.
3. The ensuing negotiations were fruitful and resulted in the SGX-KLSE agreement on 25 Feb 00. The agreement is legally binding. It provides two schemes for the migration and staggered release of CLOB securities into individual investors' securities accounts. The two exchanges undertake to implement the migration of CLOB securities for trading on the KLSE under these schemes, fully and unconditionally.
A COMPREHENSIVE SOLUTION
4. SGX and KLSE have jointly presented the two schemes of their agreement as a comprehensive solution to the CLOB issue. This is a major and timely development after the 17-month impasse since Sep 98, during which some 1.5 billion CLOB shares owned by more than 172,000 investors of different nationalities were frozen at the Malaysian Central Depository (MCD).
5. In negotiating the agreement, SGX insisted that it met SGX's and CLOB investors' key concerns. In particular, both alternatives had to be legally binding on the relevant Malaysian authorities, which should acknowledge their legal obligations to carry out any agreement. In addition, the solution had to be comprehensive, with a reasonable alternative for CLOB investors who did not wish to accept the private sector offer.
6. These two key points, which the Malaysian authorities had consistently refused to agree to, are now embodied in the SGX-KLSE agreement. The agreement also confirms that the two migration schemes allow KLSE to meet its duty to maintain an orderly market for the trading of securities in Malaysia.
Scheme A - ECSB's Amended Proposal
7. The first scheme is an amended proposal by Effective Capital Sdn Bhd (ECSB), which is the only private sector offer that has won KLSE's approval and endorsement. KLSE has made clear that ECSB's proposal was the only private sector scheme that had complied with all of KLSE's and MCD's rules to date.
8. Investors who opt for this scheme will pay ECSB a 1.5% transfer fee based on the closing prices in the KLSE on 15 Feb 00. There will be a 3-month set-up period (for the opening of individual securities accounts with MCD) commencing from 31 Mar 00, followed by a 13-month staggered release of the CLOB securities for trading on the KLSE.
Scheme B - CDP-SCANS Supplemental Agreement
9. The second scheme is effected by a supplemental agreement between CDP and SCANS. Investors will have their securities migrated into individual accounts and released for trading on the KLSE after 33 months from 31 Mar 00 - i.e. the migration will begin on 1 Jan 03. The release will be staggered over 9 months from 1 Jan 03 to 1 Oct 03. A 1% administrative fee is payable to SCANS. In this case the fee will be based on the average of the securities prices on the KLSE over the last 5 trading days of Oct 2002.
ENDORSEMENT BY BOTH GOVERNMENTS
10. On 26 Feb 00, after SGX and KLSE had signed their agreement, Dr Richard Hu wrote to Tun Daim Zainuddin. Tun Daim replied on 2 Mar 00. I am circulating copies of this exchange of letters to Members.
11. Dr Hu informed Tun Daim that the Singapore Government fully supports the KLSE-SGX agreement, which meets SGX's desire for a comprehensive, legally binding solution, and KLSE's aim of ensuring an orderly market. The Singapore Government had undertaken to ensure that SGX will abide by the agreement reached. Dr Hu asked Tun Daim to confirm that the Malaysian Government likewise supported the agreement reached by the two exchanges, and had undertaken to ensure that KLSE would abide by it.
12. In his reply, Tun Daim reiterated the Malaysian Government's stand, that CLOB is a wholly private sector issue. He pointed out that KLSE is a private sector organisation owned by its members. He stated that the agreements reached between KLSE and SGX confirmed this stand. However, Tun Daim went on to say that "As this is a comprehensive solution and the agreements are legally binding, I am confident KLSE will ensure that the obligations under the agreements are fully discharged. The Government of Malaysia looks forward to the smooth implementation of this comprehensive settlement."
13. The KLSE-SGX agreement therefore has the full support of both the Singapore and Malaysian Governments.
WHY SINGAPORE DID NOT PURSUE LEGAL ACTION
14. Some CLOB investors have written to the local press expressing disappointment with the solution reached. Some feel that SGX and CDP should have insisted on CLOB investors' strict legal rights and taken a firm stand with the Malaysian authorities, particularly if Singapore was on sound legal ground. A few went further to suggest that by agreeing to the resolution, SGX has conceded that CLOB International was illegal and had merely been "talking tough" in the past months.
15. SGX has not conceded any such thing. CLOB International was never illegal, and the SGX's confidence in its legal position was based on informed legal advice. The Singapore authorities had also taken legal advice from leading experts on WTO matters. Our position was strong, both under Malaysian law and at WTO. But legal action would have involved further delay, perhaps as long as several years. Meanwhile the prospect of delay and uncertainty would have caused many CLOB investors to feel compelled to accept private sector offers which were less favourable and had no legal assurance of being carried out by KLSE. This included, in particular, ECSB's earlier staggered release proposal, which would have involved a 4 + 18 month delay, starting from 22 Feb 00.
16. The fact that there were clear and unambiguous legal rights involving more than 172,000 investors of different nationalities, and that we were prepared to enforce these rights as a last resort, were clearly significant in helping SGX to reach a comprehensive and legally binding solution with the KLSE to serve the needs of CLOB investors.
17. In getting KLSE to finally negotiate and enter into a legally binding agreement spelling out specific terms of the staggered release of CLOB securities, SGX was acting in the best interests of investors. The terms of the schemes presented to CLOB investors are significantly improved from those previously offered. Each CLOB investor is in a different situation and has different interests, especially with regard to how long they are able to wait before being able to trade their shares. No resolution, whether through legal action or negotiation, could have met the needs of all investors equally. But the final negotiated settlement is a pragmatic one in the circumstances.
18. The Securities Investors Association of Singapore (SIAS) has throughout this episode provided independent representation of a substantial group of investors. It made clear its members' preferences, and took a resolute stand against earlier private sector offers that were to the disadvantage of investors.
19. SIAS has on 26 Feb 00 stated its view that the two schemes address the needs of most CLOB investors. It noted that its concerns had been addressed with the reduction of the ECSB proposal's staggered release period from 18 to 13 months, and with KLSE's legal undertaking to fully and unconditionally implement the migration. SIAS has further explained on 6 Mar that although it was not involved in the negotiations, it was providing in-principle support to the two exchanges' agreement because Scheme A had come very close to what SIAS had itself proposed to the KLSE (ie 12 months staggered release and 1% migration fee). SIAS noted that "many investors have been anxious for an early settlement and been pressing CDP and SIAS for it."
20. By holding firm on its stance over the last year SIAS has demonstrated its effectiveness, and contributed significantly to the eventual solution to settle the CLOB issue fairly in keeping with the interest of all parties.
21. It is conceivable that some investors may decide not to accept either option. They are entitled to do so, as under law neither SGX nor CDP can waive the rights of beneficial owners to decide for themselves whether to accept any offer.
22. The agreement commits KLSE, SCANS and their related companies to implement fully the two alternative schemes. So long as the implementation proceeds as agreed, neither SGX nor CDP will have cause to take legal action against KLSE or its group of companies. However, should there be any failure on the part of KLSE or its related corporations to implement either of the two schemes, SGX and CDP will naturally have to take action to enforce the migration and release, if necessary through legal means.
23. Individual investors who still wish to commence legal proceedings on their own behalf are entitled to do so. They should seek professional advice and decide according to their individual circumstances.
24. SGX and CDP negotiated the agreement to the best of their ability. It believes that the outcome is in the interests of the majority of CLOB share-holders. Investors must assess the situation for themselves to determine the best course of action, and decide if they wish to opt for either scheme.
25. Some investors have written to request that SGX go further and pay the 1.5% and 1% fees under the two schemes, on behalf of CLOB investors. SGX is unable to do so. It is beyond the scope of SGX's legal duties to defray the costs to investors of the migration and staggered release plans. Furthermore for SGX to do so would raise a serious issue of moral hazard, because fundamentally the risk of investing in securities on CLOB, or other markets provided by SGX, has to be borne by investors themselves, and not by the exchange or the government.
26. Singapore has taken a constructive approach in trying to resolve the issue. Singapore has consistently maintained that an expeditious and just resolution to the matter is in the interests of both countries, as well as that of CLOB investors. It is well that after almost one and a half years, a legally binding and comprehensive solution that has the support of both Singapore and Malaysian governments is in place, to resolve the CLOB issue once and for all.