Business

Friday July 3, 2009

Changes in IPO ruling market driven Previous method of gaining from IPO is no longer sustainable


KUALA LUMPUR: A vastly different market for initial public offerings (IPOs) today from the past might have been a factor in prompting changes to bumiputra equity requirement for new listings.

The changes to the Foreign Investment Committee rules would also open an avenue for the yet untapped large Malaysian companies to head towards a listing on the stock exchange.

“The previous method of making huge gains from an IPO is over and such a method is not sustainable,’’ said a market observer.

In the past, companies headed for a listing on the stock exchange reserved 30% of the equity for bumiputra investors. There was easy money to be made as the pricing for the IPO was set by the Securities Commission and new listings saw huge gains on the first day of trading.

The wealth generation from such activity was tremendous but that environment today does not exist anymore.

Pricing of IPOs today leaves little room for such capital appreciation and many times, newly listed companies have found their share prices below IPO pricing shortly after the company was floated on the stock exchange.

Such uncertainty has made a number of bumiputras hesitant in taking up their allocation of shares and as such, maintaining the distribution of wealth through such methods was becoming ineffective.

“For local companies, this rule was seen as an impediment. It was more of a distraction,’’ said the observer.

While there is a large number of local companies listed on Bursa Malaysia, there is a lot of companies with the potential to have a market capitalisation of half a billion ringgit. The removal of the 30% bumiputra quota rule for listed companies may help improve sentiment in getting those privately held companies onto the stock exchange.

The setting up of Ekuiti Nasional Bhd is also a way to improve the bumiputra involvement in corporate Malaysia. Vendor programmes and other entrepreneur development schemes have led to the creation of some of the listed companies on Bursa Malaysia such as Kencana Petroleum Bhd and Ahmad Zaki Resources Bhd.

“Wealth creation must go on and that method has worked well up to now,’’ said the observer.

Apart from freeing up listing rules, steps were also taken to open up the fund management business to foreign investors. By doing so, the hope is that the increased presence of foreigners would help improve competition and deepen the product offerings to potential investors.

The sweeping changes also included increased enforcement powers for the capital market regulator, the Securities Commission.

The establishment of an independent Auditor Oversight Board would help regulate, monitor and marshal auditors of listed companies to ensure that cases such as those involving Transmile Group Bhd and Megan Media Bhd do not occur again.

Those cases, which regulators are trying hard to avoid in the future, were a blot for the Malaysian capital market. “One thing investors look at is governance standards,’’ said the observer.


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