"Raising Capital in the Securities Market" By Ali Abdul Kadir Chairman, Securities Commission On the Occasion of The National Conference on "Going Public - Moving Towards World Class Public Listed Companies" 14 November 2000 Istana Hotel, Kuala Lumpur First of all, I would like to thank the organisers of this National Conference for extending me their invitation to deliver an address on raising capital in the securities market. I was invited to say a few words on raising capital in the securities market. Given the breadth and diversity of issues this topic entails, particularly in the context of the audience today, allow me the liberty to address this topic by focusing on the recent developments in the raising of capital in the securities market. If barely a year ago someone gave you a map outlining how capital may be raised in our capital market, that same map would, unfortunately today, cause you to be lost on new paths or take you down some dead-end roads. The development in raising capital has broadened considerably in the past year or so, by means of a shift in regulation, policies and framework which are necessary for the continued development of the capital market. The Commission, as most of you may be aware, is taking the lead in progressing from a merit-based system of regulation to a disclosure-based framework of regulation. The SC is continually undertaking efforts in order to create a world-class capital market, one which will provide investors and issuers with world-class financial services and become the preferred choice for Malaysian issuers seeking to raise funds. Such a market should demonstrate efficient pricing, transparency and liquidity, and fully meet the expectation of issuers and investors. In addition, it could play a crucial role of facilitating the mobilisation of capital and savings to finance investment opportunities and economic sectors in the country. Towards meeting this objectives, the SC is currently in the process of moving the capital market from a merit-based regulation where the investment merits of securities offerings are assessed and determined by the SC, to a three-phase disclosure-based regulation which is commonly known by its acronym, DBR. In a DBR environment, the SC regulates the quality of information disclosed whilst the determination of the investment merits of the offerings is undertaken by the investors themselves. The SC embarked on the shift towards DBR in 1996 and expects to achieve a full DBR framework in the year 2001 onwards. Pricing of securities
In facilitating the move towards DBR, the SC had, with effect from January 2000, made changes to the requirement for pricing of securities under all types of corporate proposals. A listed company undertaking a rights issue is no longer restricted to price the rights-issue share such that the rights-issue price is set at a discount of not more than 30% from the theoretical exprice. Instead, post-january 2000, a listed company is now allowed to have full discretion to determine the issue price of the rights shares at a price-fixing date which is determined after approval of the SC for the rights issue. Where the corporation seeks to fix the issue price of the rights shares at a discount of more than 30% from the theoretical ex-rights price based on the 5- day weighted average market price, or commonly referred to in the securities market as WAMP, at the price-fixing date, the promoters and directors of the listed company are required to give an undertaking to the SC that they would not dispose of their shares from the "ex-date" of the shares until 10 market days after the listing of the rights shares. In regard to the pricing of special-issue shares, the Commission no longer imposes any restrictions on discount from the 5-day WAMP for companies wishing to undertake special issues for the purpose of meeting the National Development Policy. In relation to placement of shares for other purposes, a discount of not more than 10% from the 5-day WAMP is allowed, provided that - the shares are not placed out to the executive directors or existing substantial shareholders of the listed company or their associates; the total placement size does not exceed 10% of the issued and paid-up capital; and the shares allocated with any single party do not exceed 20% of the total placement. Notwithstanding the limitations I have just mentioned, where the listed company intends to undertake a placement exercise exceeding any of the said thresholds, a discount of not more than 10% could still be attached to the pricing of the shares, subject to the placees consenting not to dispose of their shares for a period of up to 6 months after the listing of the shares. We have not stopped there. In an effort to further minimise the intervention of the regulators in the pricing of securities, the price of shares issued by a listed company as consideration for an acquisition should be based on the 5-day WAMP set 1 day prior to the announcement of the proposal. Compare this with the earlier practice where the share price in consideration for an acquisition was determined based on either the date of announcement, date of submission or the date of consideration by the SC. To cater for any movements in the share price of the listed company, a revision of up to 20% is allowed up to the implementation of the proposal. Notwithstanding the flexibilities accorded, I ought to remind the directors amongst you that it is incumbent for a listed company to negotiate for the highest possible value of its securities to be issued as consideration for acquisitions. Valuation of Assets Previously, any re-valuation of asset for the purpose of incorporating the resultant revaluation surplus into the accounts, which forms part of an IPO scheme and also in the case of a bonus
issue by way of capitalisation of the revaluation surplus, requires the SC's prior approval. With the relaxation, the SC's prior approval is only required if the market value of all the property assets to be revalued constitutes 25% or more of the enlarged paid-up capital of the applicant company seeking listing or 25% or more o f the shareholders funds' of the existing listed company. In addition, the SC would not intervene in the valuation of assets, which is used as the basis for the purchase consideration in support of an acquisition, as long as the aggregate purchase consideration for the acquisition is less than 25% of the acquirer company's shareholders' funds, the acquisition is not a related- or interested-party transaction or the acquisition does not result in a reverse take-over or back-door listing exercise. Utilisatio n of proceeds I am certain that the revisions made in relation to the SC's non-intervention in the utilisation of proceeds raised from the issuance of securities as long as the proceeds are channelled towards the core-business activities of the listed companies, were well received. Following the flexibility, companies are also given a free hand in determining the specific time-frame within which the proceeds are to be used. Nevertheless, a free hand does not equate to no transparency and accountability. Listed companies are, instead, now required to disclose in their annual reports the status of the utilisation of proceeds until the entire proceeds raised have been utilised. The past year had also witnessed other significant development in the capital market, namely revisions to the chain-listing rules and the splitting of the par values of shares. Flexibilities to the Chain-listing Rules Cognizant of the fact that the recent economic crisis had rendered several of the then chainlisting guidelines too restrictive, the SC had re-visited and consequently made revisions to the chain-listing guidelines in order to put in on par with practices of developed markets. The highlight of the revisions is that subsidiaries/associated companies which accounted for more than 50% respectively of the consolidated after-tax profit and/or net tangible assets of the listed parent over the track-record years are no longer denied direct access to the capital market and, thus, could now directly raise capital in the securities market. In addition, the listed parent of a subsidiary/associated company seeking listing on KLSE which is required to fulfil the historical profit track record requirement is only required to meet the aggregate after-tax profit-record test, but not necessarily the uninterrupted profit record test and minimum profit level for the most recent financial year. This dispensation serves to allow subsidiary/associated companies whose listed parents were affected by the economic crisis, but nevertheless, which still have the aggregate profit track-record numbers, the opportunity to tap the capital market. I would hasten to add and emphasise that the relaxation of the requirement is not detrimental to investor protection given that the other qualitative chain-listing requirements, namely that the company seeking listing should demonstrate its independence from the listed holding company
and other companies within the group in terms of its operations, including purchases and sales of goods, management, policies and finance, and that there should not exist any intra-group competition or conflict of interest situation between the company seeking listing and other companies within the group. I am obliged to reiterate that the revisions are not only made in terms of granting relaxation to certain requirements, but, on the other hand, also imposed additional safeguards for investors' protection. One of these safeguards includes the restriction on the listing of a subsidiary or associated company which was earlier injected into a listed company via either a reverse takeover or back-door listing exercise or a business which had previously obtained a direct listing. Companies are not allowed to list the same business twice. I am afraid you can't have two bites at the same "rambutan", to put in the Malaysian context! Par Value of Ordinary Shares Since mid-june of this year, companies seeking listing are no longer required to fix the par value of their ordinary shares at a uniform regimented RM1.00 par value per share. Instead, a company seeking listing is given the discretion to fix the par value of its ordinary shares at a level which it deems appropriate, subject to a minimum par value of not less than 10 sen per share. The objective of the exercise is to increase liquidity by making the shares which would otherwise be too expensive, more affordable to investors. What I have just done over the last few minutes was to give you an overview of the changes in respect of the guidelines on the issuance and pricing of securities. Another significant milestone charting the capital-market development in the past year was the amendments made to the Securities Commission Act 1993. Pursuant to the amendments, the SC is now positioned as the sole regulator for all fund raising activities in Malaysia. A principal development arising from the amendments relates to the identification of the SC's role as the approving and registering authority for all prospectuses in respect of securities, other than those issued by unlisted recreational clubs. In support of the amendments which are part of the broader DBR-implementation programme, the SC had prescribed the minimum disclosure requirements under the SC's Guidelines on Prospectuses for initial public offerings and private debt securities. Private Debt Securities It is encouraging to note that, in the case of PDS, the SC has fully moved into a full-dbr environment. This new regime has resulted in a speedy and transparent approval process for the issuance of PDS as corporations may now undertake PDS issues without SC's prior assessment of their merits as long as the requirements set out in the PDS Guidelines are fully complied with. This new regime is also characterised by liberalisation in certain specific requirements for bonds issues relating to minimum credit rating and mandatory underwriting requirements. The relaxation of the minimum credit rating allows prospective issuers more avenues to meet their
funding needs and, at the same time, provides the investors with a wider range of investment opportunities. Since underwriting is no longer a mandatory requirement, it is up to the issuer and adviser to determine whether any underwriting is required for the bonds issue. In the meantime, we have further enhanced investor protection by instituting stringent requirements for the disclosure of risks in relation to any bond issue as well as the strict requirements imposed on borrowers, trustees as well as guarantors. Among others, the requirements specify that the issuer ought to make its financial and other records available to the trustee and the SC, and that the issuer has a duty to provide timely and accurate disclosures on material events. We believe that the PDS framework will go a long way towards providing an efficient, costeffective and facilitative issuance process for issuers who need to access the capital markets through bond financing. Having mentioned what I believe are the major highlights of the changes in the financial landscape for raising capital in the securities market, I would be remiss if I do not touch on the efforts presently undertaken by the Commission to further the development of the securities market. DBR As I have alluded to earlier, the securities market is currently in the second phase of the DBRimplementation programme. The adoption of the DBR -based market regulation stems from the Commission's belief that the DBR system not only accords greater flexibility and efficiency in the process of capital raising, but also carries with it responsibilities of disclosure of information and accountability through self-regulation. I am sure you would agree with me, when I say that the most important ingredient towards a successful DBR environment must surely be the level of corporate governance that would give confidence that a company is professionally and well-managed in an even-handed manner in the best interest of all its shareholders. In addition, there must also be transparency in corporate activities and transactions, compliance with rules on investor protection and no corporate misconduct which are predicated on the following broad principles:- due-diligence by investment advisers; timely and complete information dissemination by companies; compliance with accounting and financial reporting standards; and fair treatment to minority shareholders. To this end, the SC, via the Securities Industry Development Centre or SIDC, has always been committed in creating awareness and continuous education of the roles of the Board of Directors and the principal officers of the company via numerous training and development programmes.
Over the past year, I am pleased to note that the SIDC-organised eve nts have been well received by the public. Market-preparedness for the implementation of DBR As with all preparation, the culmination has to be the time where the report card is presented to judge the success or otherwise of the preparation. After all, along with the phased implementation of DBR, coupled with the training and market-awareness programme, the SC is currently in the midst of undertaking a market study/survey to gauge the market-preparedness for the implementation of DBR. You would appreciate that, prior to full implementation of DBR, i.e. phase 3 of the programme, all market participants, together with the regulators, must be fully equipped and prepared to ensure a seamless and orderly transition. Capital Market Masterplan The SC's commitment to strengthening and broadening the capital market would be manifested in the Malaysian Capital Market Masterplan. The Masterplan seeks to chart the future direction of the Malaysian capital market over the next 10 years. As most of you would be aware, the SC had solicited industry's participation at every level in order to obtain a broad consensus for the plan. I hope that my talk this morning had enlightened you on the recent changes for raising capital in the securities market. It appears that, in our march towards a DBR-based market environment, the regulators have greatly facilitated the capital-raising process. Equally, on their part, market players including issuers, advisers and investors need to recognise the important roles they play in the development and maintenance of high standards in the fund-raising process. Whilst it is heartening to note that much has been done in the regulatory context, I believe that there is still a lot of work to be done. The Commission is always willing to listen to any suggestion that you might have on ways and means to facilitate the orderly development of an innovative and competitive capital market. Thank you. Securities Commission 14 November 2000