Issues Raised in Parliament

Reply to Parliamentary Question on eWorldofSport IPO

Date: For Parliamentary Sitting on 25 Aug 2000

Questions:
To ask the Deputy Prime Minister, in light of the recent unsatisfactory handling of the eWOS initial public offer, if the Government will (i) ensure that the public has access to minimum disclosure standards for future IPOs and (ii) intensify public education efforts.

Answer:

The unsatisfactory handling of the eWorld of Sports.com Limited's ("eWOS") initial public offering ("IPO") was the result of a failure to make full and proper disclosure. Although UOB Asia Ltd ("UOB Asia") did disclose United Overseas Bank Ltd's ("UOB") subscription of 10 million eWOS shares under the public tranche, it failed to distinguish these shares from those that UOB was absorbing as underwriter. The 1.3 times public subscription figure that was disclosed was misleading. UOB Asia also failed to disclose that 1 million shares under the public tranche had been allocated to GK Goh Securities. The Exchange has reprimanded UOB Asia for falling short of the high standards of disclosure that the Exchange expects of issue managers, and is essential to foster a fair and transparent market.

2. Separately, the MAS has stated that it reviews all such cases for possible infringements of the Securities Industry Act. It is an offence to create a false or misleading appearance in the market for a share counter. The MAS, after having carefully studied the text of the announcement published in the Straits Times on 4 August 2000, the text of the statement issued by the SGX on 11 August 2000 and the statement issued by UOB Asia on 14 August 2000, has formed the view that the 4 August announcement was sufficiently misleading to the ordinary investor to justify an investigation into whether an offence had been committed under the Securities Industry Act, in particular s99. This section makes it an offence for any person knowingly to make a false or misleading statement in a material particular that is likely to induce the sale or purchase of securities by other persons or is likely to have an effect in maintaining the market price of securities. Accordingly, the MAS has referred the matter to CAD for investigation.

3. Issue managers are professional advisers. If they fail to discharge their duties to the highest standards of care, competence and responsibility, especially after being expressly instructed by the Exchange, then they must face the consequences.

4. The problem in the eWOS case was a deficiency in professional judgement and conduct, rather than a shortcoming of the rules and regulations. Such conduct would have been unacceptable even under our previous merit-based regulatory approach, when companies seeking an IPO were screened on their commercial merits. High professional standards are all the more important under a disclosure-based regime, where investors need full information to evaluate what is on offer.

5. The Exchange cannot create explicit rules to cover every scenario, or to pre-empt all professional misjudgements. Nevertheless, in the light of this incident, the Exchange will review whether to prohibit underwriters from subscribing to IPOs that they underwrite, or to impose stronger disclosure requirements where they do subscribe. The Exchange will study practices in other developed markets before deciding on the best approach.

6. MAS has also been looking into the continuing disclosure requirements for companies once they are listed. These requirements are currently only non-statutory SGX listing rules, not legal requirements. They concern the disclosure of material information regarding a company's operations, and any matter that may materially impact its share price. The MAS is studying legislation to give these requirements the force of law.

7. The Government's role in investor education is indirect. MAS works with industry bodies and public associations such as the Exchange, Investment Management Association of Singapore and Securities Investors Association of Singapore, who are introducing programmes to educate the public. The CPF Board also intends to educate its members about the products available under the CPF Investment Schemes. The Government encourages industry efforts at education and will support them with funding from the Financial Sector Development Fund (FSDF). But the primary responsibility for educating retail investors lies with financial institutions and their representatives, who are in direct contact with their clients.

8. Shifting from a merit-based regime of securities regulation to a more liberal, disclosure-based regime is a process that takes time. Investors, listed companies, and financial institutions need to learn how the new regime works. Participants will have wider latitude to take business and market risks, and to judge the merits of investment proposals for themselves. But there will be absolutely no change in the high standards of professional conduct demanded of financial intermediaries, and in our strict enforcement of rules and laws to prevent unfair practices and false markets.

9. It is not surprising that during the transition from merit- to disclosure-based regimes, some participants will test the limits of what is permitted. But I am confident that after a few salutary test cases, they will discover where the limits lie and the consequences of transgressing these limits, and a new balance will be established.