Saturday August 1, 2009
By ERROL OH
Come Monday, a year-long of ideas, deliberations and consultations will culminate in the launch of the combined market and new facelift of Bursa Malaysia. This is the story of how it came about and what it means to investors.
BURSA Malaysia’s second board will be history come Monday. The main board will not be around either, at least not in the current configuration. The Mesdaq Market will have a name change, and more importantly, it will no longer be exclusively for companies in technology-intensive industries.
The main and second boards will be merged to form the Main Market. Instead of Mesdaq, we have the ACE Market.
ACE stands for access, certainty and efficiency, and that appropriately hints at the thinking behind these changes. In fact, Bursa’s new board structure is just one facet of the results of what the Securities Commission (SC) calls “a broad-spectrum review of the existing regulatory framework”.
The exercise was an enormous undertaking that crammed a lot of ideas, deliberations and consultations into a one-year span. And the changes that flow from it will have far-reaching impact on our capital market. How can they not be when they touch just about every aspect of equity fund-raising in Malaysia?
The reform yielded five new SC guidelines – those on equity, prospectuses, principal advisers, asset valuation and structured warrants. All but the last take effect on Monday.
The guidelines on structured warrants kicked in on May 8.
That was the day the SC and Bursa Malaysia launched the new fund-raising framework and board structure. On these changes, Federation of Public Listed Companies (FPLC) president Tan Sri Megat Najmuddin Megat Khas says: “We need to rejuvenate the capital market and create more excitement. The market needs a fresh face.”
If there was indeed a facelift, the aim was for the patient to somehow look friendlier and more helpful.
Speaking at the launch, Bursa chairman Tun Dzaiddin Abdullah explained: “We are right now at a significant juncture in the evolution of the Malaysian capital market. To further our aim of being a more competitive player ... we have embarked on restructuring the regulatory framework for easy and efficient access to fund raising.”
SC chairman Tan Sri Zarinah Anwar concluded her speech at the same event by describing the new framework as “a milestone in the development of the market for fund-raising in Malaysia”.
She added: “We expect that the new framework as well as the new board structure will enhance the attractiveness of Bursa Malaysia as a listing destination, providing efficient access to capital and investments.”
According to the SC, the review was initiated following Tun Abdullah Ahmad Badawi’s speech at the Invest Malaysia 2008 conference in March. The then prime minister and finance minister announced several measures to improve the equity market.
These included combining the main and second boards, and repositioning Mesdaq. In addition, he said the listing requirements would be tweaked to help attract more companies that can add to the market’s vibrancy and dynamism.
That was the cue for the SC and Bursa to start translating policy into action. Two months later, a high-level industry working group was formed, comprising 11 practitioners and experts from various segments of the capital market.
The group’s assignment was to obtain feedback and identify issues affecting the fund-raising regime in Malaysia. It also assisted the SC and Bursa in reviewing the regulatory framework for listings and equity fund-raising.
There were over 300 brainstorming sessions and focus group discussions with organisations such as FPLC, Malaysian Investment Banking Association, Malaysian Venture Capital and Private Equity Association, and Malaysian Institute of Accountants.
To obtain additional feedback, the SC and Bursa organised face-to-face consultation with industry groups and published consultation papers last February.
This was supplemented by research and benchmarking against other jurisdictions, particularly Hong Kong and Singapore.
The depth of the undertaking was itself novel in the Malaysian capital market. In his May 8 speech, Dzaiddin said a lot of thought was put into the initiative.
“It entailed the whole market coming together to review the current structure and the direction that the new board framework will bring to the market,” he added.
Zarinah provided a firmer perspective on the project’s uniqueness: “The regulatory review process that we went through is by far the most robust process that we have undertaken in reviewing our regulatory approach, and will set the benchmark for future reviews of our regulations.”
For now, though, the focus is on the new rules that come into force on Monday. They represent a strong bid to make Bursa a more attractive investment platform, principally by removing some elements that in recent years, have made it a poor cousin to some of its regional counterparts.
Says a senior dealer at a stockbroking firm, “We need to return to our heyday before the 1997 Asian financial crisis, when our market capitalisation was larger than Singapore’s.” It is about pulling in the right issuers, which will in turn draw the right investors.
The SC and Bursa believe that Malaysia’s ability to compete rests on market-based rules and the positioning of Bursa.
Under the new framework, rules and processes for equity fund-raising have been streamlined to provide greater certainty, shorter time to market and lower regulatory costs. Often, these mean certain flexibilities have been introduced. For example, only certain substantive corporate proposals will require the SC’s approval under Section 212 of the Capital Markets and Services Act.
These include initial public offerings (IPOs), backdoor listings/reverse takeovers, secondary listings and cross listings, and transfers of listing from the ACE Market to the Main Market.
The Section 212 provision essentially means a corporate proposal can happen without the SC going through the application and giving the green light. At the moment, this applies to secondary fund-raising exercises such as rights offerings, private placements and restricted issues and. That will no longer be the case on Monday.
With this change, the idea is that while the SC keeps its gatekeeper function at the point when companies enter the public investing domain, Bursa alone will assume the approval duties once the companies have gone through the gate.
The rationale here is that some rules can be overly protective and there is a cost to regulatory weight. Requiring listed companies to submit applications to both the SC and Bursa each time they want to raise funds is cumbersome and takes time.
Another difference in the regulatory approach is that the SC will not assess corporate proposals based on business viability.
Instead, the decision to approve a proposal will hinge on compliance with minimum quantitative requirements, corporate governance standards, resolution of conflicts of interest between the issuer and its promoters and directors, and preservation of public interest.
Says a corporate observer, “The thinking is that the SC is hardly qualified to take a view on the viability of a business. The advisers should be the ones assessing the applicants.”
Also, to ensure speed, certainty and efficiency, listings on the ACE market will not need SC approval, although the regulator will review the prospectuses. The sponsors will be empowered to evaluate the suitability of the applicants.
Naturally, such changes raise the spectre of more swindles involving listed companies because the regulator will seemingly take a lesser role in the supervision of such companies. However, the SC maintains that it is not relinquishing its responsibilities and that its reach remains the same.
Said Zarinah on May 8: “I would like to stress that this shift in regulatory approach does not mean any lowering of investor protection standards.
“The SC will be vetting and registering prospectuses for IPOs and securities offerings to ensure that investors are provided with comprehensive information to enable them to make informed investment decisions.”
The SC’s guidelines on equity will now allow the listing of special purpose acquisition companies (SPACs), which are companies without any businesses that are listed with the aim of using the IPO proceeds to undertake mergers or acquisitions.
This is the first equity market product to be introduced here since real estate investment trusts, or REITs. It is hoped that the listing of SPACs on Bursa will promote and facilitate private equity activities and encourage corporate mergers and acquisitions.
However, not all the amendments to the rules are major moves. Some address relatively minor issues such the need for listed companies to have websites and the duration of trading halts. Nevertheless, most market participants understand that all the measures, big or small, are meant to boost the Malaysian equity market.
“The SC recognises the need for the corporate sector to have quick access to capital. Hence, enhancing efficiency and shortening the time-to-market has always been a priority for us, but without compromising investor protection,” said Zarinah at the launch.
OSK Investment Bank Bhd director and head of equity capital markets Gan Kim Khoon points out that the new guidelines are a lot more disclosure-based and thus offer investors better protection.
On the flipside, he adds, these can be more onerous for the companies to comply with. “But I think there’s a fair balance. It’s not as if the SC is asking the companies to give an excessive amount of information or that the companies are required to reveal trade secrets.”
On the overall reform, he says, “The revamp comprises enhancements and further liberalisation of the existing guidelines. The authorities are not making it more difficult. They are not tightening the rules.”
Similarly, SJ Securities Sdn Bhd deputy managing director Peter Lim has no concerns about new framework. “These are moves for the future. For us, market velocity is important and these changes will help,” he explains.
However, others are neutral about the measures. “It’s about implementation, implementation, implementation. We have very good plans; we just have to get them going,” says the senior dealer.
“We are trying to catch up with the rest but let’s not forget that they’re still running. They haven’t stopped for us to catch up. We work hard but so are the others. We’ve got a lot more to do. We can’t stop here.”
He is right, of course. But that should not diminish the importance of the new equity fund-raising framework and board structure. If the slew of adjustments lead to the expected improvements, this will show that the review process – one that engages many market participants – is the right way to go.