Lawmakers question new rules

Although financial regulators yesterday insisted that the adoption of stricter accounting rules and measures to promote transparency among listed companies are not expected to disrupt domestic capital markets, lawmakers expressed concern that these measures may encourage insider trading.

This year, all publicly traded companies in Taiwan are required to adopt the new accounting rules -- the Statements of Financial Accounting Standard No. 35 -- by listing asset impairments stemming from long-term investments or decreased goodwill from mergers.

The Financial Supervisory Commission also plans to ease the ban on share sales for less than their closing price as of May 16 and is tentatively slated to widen the stock market's daily limit on price fluctuations to 15 percent from 7 percent in September.

Although the regulatory changes are meant to help internationalize the local bourse, People First Party Legislator Christina Liu (劉憶如) yesterday told the legislative finance committee that these changes would likely worsen insider trading.

Taking the new accounting rules as an example, Liu said that most investors have restricted access to figures on the depreciation of intangible assets. This would enable inside traders to take advantage of the information to profit from short-selling before a company announces its depreciated asset values.

The current debate about insider trading revolves around a shares transaction by China Life Insurance Co (中國人壽), which announced a huge asset loss amounting to NT$3.8 billion in compliance with the new accounting rules on March 28, Liu said.

Citing statistics provided by the Taiwan Stock Exchange, Liu said that China Life saw a combined short-sale of over 3 million stocks on March 24 and March 25 before the loss was announced. But on March 29, the stock exchange tallies showed that around 4 million stocks of China Life were brought back to cover the shortfall.

"Inside traders will be able to garner more profits from the stock market, as well as the futures and derivatives markets, once the daily trading limit is relaxed," Liu said.

After being grilled by legislators, commission officials admitted that the new accounting standard could result in a risk of insider trading through dummy share accounts before losses are made public.

"But the authorities have set up a monitoring mechanism for abnormal activities, including purchasing on the margin and short sales," commission vice chairman Lu Daung-yen (呂東英) said.

Commission chairman Kong Jaw-sheng (龔照勝) said a recent survey showed that only 20 of the nation's 973 listed companies, or 2.06 percent of companies, would see asset losses of more than NT$500 million in compliance with the new accounting standard.

Kong said that the impact on the stock market as a whole would not be significant.

As many as 25 state-run enterprises, including Taiwan Sugar Corp (台糖) and Taiwan Power Co (台電), would suffer a total of NT$49.7 billion in losses, while the government's non-operational funds would see combined losses of NT$26.5 billion, Chinese Nationalist Party (KMT) Legislator Lai Shyh-bao (賴士葆) said.