The Regulatory Challenge. Islamic Alternative Strategy Funds and Venture Capital. 13 November 2008 Securities Commission

Transcription

1 The Regulatory Challenge Islamic Alternative Strategy Funds and Venture Capital 13 November 2008 Securities Commission

2 Agenda Malaysia s Approach to Alternative Investments Regulatory Framework for the Venture Capital Industry Regulatory Challenges Moving Forward Supporting the Progress of the Malaysian ICM Malaysia as an International Islamic Financial Centre Securities Commission 2

3 Originally Malaysia had a Conservative Approach to Alternative Investments August 1997 Regulated short-selling (RSS) and stock borrowing & lending (SBL) activities suspended following the financial crisis Restructuring of the stockbroking industry September 1998 BNM imposed exchange controls (which were modified over the years) December 1998 Improvement in capital adequacy regulation April 2005 BNM liberalised exchange controls April 2006 Introduction of the Guidelines on Restricted Investment Schemes January 2007 RSS and SBL reintroduced Securities Commission 3

4 Initially under the Restricted Investment Scheme Are hedge funds permitted in Malaysia Offerings of hedge funds are restricted through sec 212 CMSA approval and licensing requirements Hedge fund-like strategies are permitted under Restricted Investment Schemes (RIS) or Wholesale Unit Trust Funds guidelines. (Note: The Guidelines on Wholesale Funds will be replacing the Guidelines on Restricted Investment Schemes) Entities that can offer hedge funds? RIS : Licensed fund managers Wholesale UTF: Unit trust management companies Structures Trust structures Custodian structure (only for RIS) RIS can cater for alternative investment strategies Characteristic of hedge funds already permitted under the RIS Guidelines: No restriction on investment strategy except for the prohibition on leverage Ability to charge performance fees (above management fees) Restricted withdrawals (may have long lock-in periods) May use custodian structure (not limited to unit trust scheme) Securities Commission 4

5 Development of Islamic Alternative Investments May Outpace Conventional Alternative Funds in Malaysia Providing the market with a wide range of products related to ICM MIFC Full range of compliant products & services for investment and fund management Due to the conducive environment for Islamic finance in Malaysia, development of Islamic alternative investments may outpace conventional funds in Malaysia E.g. favourable tax regime and more liberal exchange controls for Islamic products, comprehensive Islamic financial institutions in Malaysia Preliminary decisions by the SAC have been taken on the SC s studies on the common strategies employed by hedge funds to determine whether they can be made Shariah compliant Shariah principles such as salam, urbun and wa d are tools identified that may permit Islamic hedge fund structures SC will seek SAC resolutions on the permitted investment strategies for Islamic hedge funds Leveraging on the key advantages and competitive edge under the MIFC agenda, Malaysia can lead in developing Islamic alternative investment funds Securities Commission 5

6 What is Malaysia s Approach to Alternative Investments? Facilitate alternative investment styles The SC will adopt a more facilitative approach for alternative investment styles by developing Guidelines on Wholesale Funds ( Wholesale Guidelines ) Replacing the Guidelines on Restricted Investment Schemes ( RIS Guidelines ) Treat hedge funds as an investment style The SC treats hedge funds as an alternative investment style instead of an asset class Hedge funds will be subject to the same regulatory framework as traditional funds Regulation of the fund Regulation of the fund manager Ensuring alternative investments are Shariah-compliant The SC s Shariah Advisory Committee (SAC) will make determinations on which alternative investment styles as well as mechanisms are Shariah-compliant Securities Commission 6

7 Ensuring Investments are Shariah-Compliant Reliance on SAC for determinations on Shariah-compliant investment styles and mechanisms Provides greater clarity and enhances market confidence and integrity through dissemination of Shariah resolutions Facilitates development and regulation of new products Regular interaction with industry and other Shariah experts provide useful feedback for decision-making Participation at international conferences and dialogues enhances awareness and understanding of Malaysia s Islamic capital market (Note : Shariah resolutions are currently being compiled and translated into other languages including English) Securities Commission 7

8 Regulation of the Fund Approval for the Fund is required The fund must be approved under Section 212 of the Capital Market Services Act 2007 The fund must comply with the requirements of the RIS Guidelines/Wholesale Guidelines Approval of the fund will be under the disclosure-based regime Proposal submitted to the SC together with the completed information memorandum and other documents Limited to qualified investors The fund may only be offered to qualified investors High net worth individuals and companies Unit trust schemes or prescribed investment schemes Approved pension schemes (approved by the Inland Revenue Board) Trustee companies Under the Wholesale Guidelines there will be no prescribed limits on the number of investors Securities Commission 8

9 Regulation of the Fund (Cont) Disclosure and Reporting to Investors The fund must be accompanied by an information memorandum Minimum content requirement for the information memorandum is specified, however the fund manager is responsible to ensure all investment limits, restrictions & risks are disclosed Significant and material changes to the information memorandum must be disclosed Monthly statement of accounts and quarterly and annual reporting to investors No prescriptive investment limits The fund will not be subject to any prescriptive investment limits under the Wholesale Guidelines The fund manager must manage funds in accordance with the limitations identified and disclosed in the funds information memorandum Securities Commission 9

10 Regulation of the Fund Manager Entities must be appropriately licensed Issuance of units in the fund must be by a fund manager licensed by the SC for the regulated activity of fund management Subject to the requirements set out in securities laws & guidelines for fund management Delegation of any fund management function for the fund must be to: Fund manager licensed by the SC Fund manager licensed/authorised by a relevant authority Must appoint a Shariah Adviser The fund manager must appoint a Shariah Adviser to advise on Shariah issues pertaining to the fund Securities Commission 10

11 Incentives introduced to promote Islamic fund management activities Islamic fund management companies can be 100% foreign owned permitting global Islamic fund managers to set up operations in Malaysia Islamic fund management companies are allowed to invest all their assets abroad providing added flexibility in their investment strategy Fund management companies managing SC-approved Islamic funds will be given income tax exemption on management fees received until year of assessment Income tax exemption on income received by non-resident experts with requisite expertise in Islamic finance until 31 Dec 2016 A sum of RM 7 billion of government funds will be channelled to be managed by Islamic fund managers as an incentive to establish in Malaysia Resolution by SAC in the future will provide for a Shariah-compliant investment strategy for Islamic hedge funds Securities Commission 11

12 Regulation framework for the VC industry VC/PE industry Conducive & Targeted regulation Registration enables the VCC/VCMC to apply for tax incentives Related Guidelines for the VC & PE Industry: 1. Guidelines for the Registration of Venture Capital Corporations (VCC) and Venture Capital Management Corporations (VCMC) 2. Guidelines For The Annual Certification For Tax Incentives For The Venture Capital Industry 3. Guidelines and Best Practices on Islamic Venture Capital VCC/VCMC are investment vehicles that easily embody Islamic investment concepts of partnership and participation Securities Commission 12

13 Government support for the VC industry Source of Venture Capital funds (2007: RM3.308Bn) Insurance 1.00% Banks 15.51% Foreign 9.31% Pension & Provident 1.88% Individuals 4.69% Corporations 31.91% Government Agencies 35.71% Government continued to be the main source of VC funding in 2007 and 2006 with total committed funds under management at 36% and 41% (RM3.310Bn) respectively. Milestone initiatives: Allocation of RM1.6 billion under the Ninth Malaysia Plan ( ), a hefty two-fold increase from the previous plan. Establishment of MVCDC to facilitate the development of the venture capital industry by co-ordinating Government s initiatives and incentives in charting the industry s strategic direction. Allowance of various tax incentives in addition to liberalizing equity ownership for venture capital corporations and venture capital management corporations. Development of Government s VC companies namely Malaysia Venture Capital Management (MAVCAP), Malaysian Technology Development Corporation (MTDC) and Kumpulan Modal Perdana (KMP) to further develop certain strategic sectors of the economy. Securities Commission 13

14 Developmental agency for the VC industry Background In Budget 2001, the Govt proposed the setting up of a one-stop agency to serve as a platform for a co-ordinated approach towards developing the industry. In August 2002, the Venture Capital Consultative Council (VCCC) was established as the interim body, under the National Economic Action Council (NEAC). In January 2005, the Malaysian Venture Capital Development Council (MVCDC) was established replacing VCCC. SC was appointed as the secretariat. MVCDC s Task Provide vision and direction, and assist in the development of the VC industry; Advise the government on overall development of the VC industry; Facilitate greater co-ordination of strategies and initiatives relating to the VC industry; and Act as conduit between policy makers and industry players on matters relating to the development of the industry. SC s ROLES: Facilitate/coordinate development of the VC industry and collate and report data on the industry Securities Commission 14

15 Incentives for the VC Industry Tax Initiatives VCCs & VCMCs investing at least 50% of funds at seed, start-up and early stage (OR 70% of seed, start-up and early stage capital) given 10 year tax exemption. The Government recently announced in the 2009 Budget Speech that any venture capital companies investing at least 30% of their funds in start-up, early stage financing or seed capital would be eligible for a 5-year tax exemption. Listing of technology incubators VCCs granted registered person status under CMSA CMP Centralized coordination for the promotion & development of the VC industry Promote participation of local institutional investors in VC funds Allow greater foreign participation in VC industry Securities Commission 15

16 Regulatory challenges moving forward Regulatory Framework Develop facilitative and sound regulatory framework for both Islamic and conventional participants and products Introduce a conducive licensing framework to attract global players Ensure regulation facilitates innovation of ICM products Supervision Framework Ensure ICM intermediaries are true-to-label: Must have proper disclosure procedures for business operations that are Shariah-compliant Develop standards of corporate governance for Islamic capital market intermediaries Regional competitive positioning Malaysia operates in a crowded regional environment many markets have ambitions to position themselves as regional centres (Hong Kong, Singapore, China) Support Malaysia s value proposition to establish itself as an international Islamic financial centre Securities Commission 16

17 Regulatory challenges (contd) Developing human capital Develop professionals who have cutting edge knowledge of mainstream markets and of Shariah principles Creation of linkages between economies and markets Strive towards bridging the resources of the Middle East, Asia and Africa and develop a more integrated and connected Islamic capital market Integrate Shariah-compliant financial systems within the international financial system Promote ICM to non-muslims Promote awareness on the virtues of Islamic financial products Communication on Islamic products to focus on the positive values of Islamic finance, such as the concepts of partnership and participation Support the launch of Islamic products that are branded as ethical, socially responsible and environmentally friendly Securities Commission 17

18 Supporting the progress of the Malaysian ICM SC has embarked on an Islamic Capital Market Development Plan (Development Plan) The capital market-specific initiatives under the Development Plan are consistent with and are intended to complement, the Malaysian International Islamic Financial Centre (MIFC) agenda. An International Advisory Committee was set up, consisting of various notable experts which will be looked at to provide guidance and international perspective on the initiatives Introduction of the Islamic Capital Market Visiting Scholar Programme (collaboration with Universiti Malaya) In line with effort to promote and enhance scholarship and research in the area of the Islamic capital market Compilation of Shariah Rulings (collaboration with the World Fatwa Management Research Institute of Universiti Sains Islam Malaysia) SC is now working with various individuals and authorities from different jurisdictions to compile Shariah rulings from major jurisdictions around the world The compilation will be the first of its kind since the Mejelle, which was undertaken more than a century ago by the Turks during the Ottoman period ( ). Securities Commission 18

19 Malaysia has the critical elements to be an International Islamic Financial Centre... Product origination/ innovation History in pioneering innovative Islamic products: First Islamic RM bond issuance by World Bank in any market(2006) World s first listed Islamic REITs (2006) World s first rated Islamic residential mortgage backed securities (2005) World s first sovereign 5-year global sukuk (2002) A leading origination jurisdiction, 2 nd after Saudi Arabia Originates 70% of world s sukuks 1 & 23% of world s Islamic funds 2 Islamic products are developed as a viable alternative to conventional products and not merely an imitation of the latter Competitive cost structure Competitive living costs relative to regional centers (e.g. Singapore, Hong Kong) Low property cost Facilitative regulatory environment to mitigate impediments Securities Commission 19

20 ..and continue to play a pioneering role Efficient legal, regulatory/compliance & Shariah framework Sound Legal and Regulatory Framework Regulatory level Shariah Advisory Councils Proactive initiatives to accelerate Islamic finance industry growth (e.g. MIFC, SIDC, INCEIF) Dedicated judge at High Court for Islamic finance matters Kuala Lumpur Regional Center for Arbitration has specific capabilities to deal with Islamic contract matters Strong liquidity Growing savings pool provides larger source for conventional & Islamic funds to capitalize Growing middle class and favorable demographics presents opportunity for new investor base Malaysia has a comprehensive Islamic Capital Market co-existing with a conventional system that provides all participants with the same degree of clarity, certainty and protection Securities Commission 20

21 Conclusion Malaysia is committed to the development of the Islamic capital market (ICM) Actively promotes ICM in Malaysia and internationally, e.g. via MIFC initiatives and incentives Actively engaged in developing Shariah-compliant intermediaries and investment strategies The SC adopts a facilitative approach towards alternative investments and provides avenues for the offering of alternative investments to investors Regulation is not on a one-size-fits-all basis tailored to address the risks involved Adequate safeguards are in place to ensure investors are protected without compromising product innovation Proper regulatory and developmental framework is in place to support the development of ICM the SAC will be the pillar of reference for Shariah issues relating to ICM products The SC will continue to work with Shariah experts from other jurisdictions to add depth and breadth to the Malaysian ICM Securities Commission 21

22 Thank you Securities Commission 22