Opposition quizzes MOF about GDR sale problems

Opposition lawmakers yesterday questioned finance officials about the government's role in recent sales of shares in the form of global depository receipts (GDRs) by state-owned banks, including First Commercial Bank (第一銀行) and Chang Hwa Commercial Bank (彰化銀行).

Chairing a legislative hearing, People First Party legislator Christina Liu (劉憶如) yesterday blamed finance officials for their failure to map out a fair trading mechanism, preventing potential arbitrageurs (traders who simultaneously purchase and sell the same securities, commodities, or forex in disparate markets to profit from unequal prices) from profiteering during recent GDR sales that were part of the banks' recapitalization plans.

"Similar flaws were found in both First Commercial and Chang Hwa GDR sales, yet the Ministry of Finance did nothing to review the problem," Liu said.

According to Liu, the pricing discrepancy between First Commercial's GDRs and local stock shares in July was NT$7 per share, which meant that there were capital gains of up to NT$7 billion in the bank's sale of 1 billion new shares.

Chang Hwa planned to raise NT$13.5 billion through the issuing of GDRs last week. Its pricing discrepancy was NT$3 per share, allowing capital gains of up to NT$1 billion in the deal, she added.

Liu said that the ministry should come up with a regulatory plan to prevent insider trading and other irregularities between securities contractors and private investors.

In response, Vice Minister of Finance Gordon Chen (陳樹) told the legislative hearing that a discount on GDR sales to overseas investors was inevitable and the government can do nothing to interfere with basic market principles.

"As long as no trading irregularities are found, a reasonable pricing discrepancy should be tolerated in the market," Chen said.

But he added that the government has revised laws to scrap restrictions on the GDR sale's lock-up period, which is expected to help narrow the pricing discrepancy and keep speculators away.

The lock-up period refers to an interval during which an investment may not be sold. In the case of an initial public offering (IPO), employees may not sell their shares for a period of time determined by the underwriter and usually lasting 180 days.

Displeased with Chen's answers, Liu said that original stockholders as well as private investors should be compensated and allowed to acquire the profitable GDR shares since the value of their old shares may be diluted by the sale.

Liu disagreed with the MOF's U-turn on its decision last week, asking the management committee of the Development Fund (開發基金) to take up a 5 percent stake in Chang Hwa's GDR sale.

After the ministry has relinquished its right to take up the shares, domestic investors should be allowed to purchase shares, Liu said.

"The Development Fund is not entitled to such profitable shares and the ministry's decision runs counter to its goal to privatize state-owned banks," Liu said.

The ministry previously asked a securities company to locate private investors for the 5-percent-stake sale, but later came under heavy criticism from opposition lawmakers, who accused the ministry of insider trading.

Another PFP legislator, Norman Yin (殷乃平), said the government should allow local investors to participate in the sale of GDRs domestically.