Corporate surveillance and enforcement SC drivers in 2003
|Heightened pre-emptive surveillance coupled with strengthened enforcement marked the Securities Commission’s (SC) drive in 2003 for a capital market of high integrity. This was balanced with strong steps to push the market to greater levels of efficiency and sophistication.|
The SC said in a statement announcing the release of the SC Annual Report 2003 that its enforcement work was increasingly being reinforced by proactive corporate surveillance, a feature that will be further emphasised going forward. These initiatives, together with steps to create greater efficiencies-highlights of which include faster processing of corporate proposals by the SC and a quicker-time-to-market-would provide further impetus towards enhancing the integrity and efficiency of the capital market.
The capital market continued to be a major source of funding with the SC approving corporate fund-raising proposals worth RM55.1 billion in 2003. Of this amount, 86% was for debt instruments, signifying greater maturity for the capital market, and success of the SC’s policy to streamline and enhance the debt market as a medium for capital-raising.
The Islamic capital market continued to grow steadily in 2003 with Islamic bonds accounting for RM8.1 billion or 19% of the total funds raised in the bond market. Of great significance is the SC’s work with the Government for tax incentives for Islamic securities, which came to fruition last year.
Work to enhance greater clarity and guidance based on Syariah principles for the market on unit trusts and on asset-backed securities last year also continued to support the growth of the Islamic capital market.
Significant milestones, from the implementation of the Capital Market Masterplan (CMP) such as the demutualisation of the stock exchange and the implementation of the final phase of the disclosure-based regime took place in 2003. Changes in various securities laws which facilitated the demutualisation process, increased the administrative and civil action powers of the SC, and streamlined the financial planning industry were also completed and passed by Parliament last year, and came into effect this year.Further details on the above initiatives and achievements are as follows:
i) Heightened corporate surveillance in 2003
Corporate surveillance is an integral complement of the SC’s more established enforcement arm, and enabled the SC to detect and prevent numerous dubious transactions in 2003.
Concurrently, protection for company officials and auditors with the passing of the whistle blowing provision under the Securities Industry Act 1983 (SIA) last year is expected to help curb abuses and promote better corporate governance.
The SC doubled the number of companies it scrutinised as part of preemptive measures against corporate abuse. As at 31 December 2003, the SC reviewed and analysed 117 companies compared to 54 in 2002. Seventy cases were initiated in 2003 while another 47 were brought forward from 2002 (Table 1).
The SC’s proactive and pre-emptive approach has led to the detection of multiple methods in siphoning funds out of public-listed companies. They include acquiring assets at a significant premium over market price, disposing of assets at undervalued prices and creating debts to offset contractual obligation.
The SC also identified doubtful schemes where parties or companies attempted to:
ii) More focused supervision of market intermediaries
The SC’s more focused approach on market supervision activities, which include its licensing activities and proactive audit of market intermediaries, complemented the SC’s surveillance of PLCs. These activities encouraged compliance among market intermediaries.
In particular, the SC increased supervision of fund management companies after several cases of transgressions of laws and regulations, and froze new fund managers licences and futures licence to companies owned by individuals for one year from
In addition, the SC launched its pilot project for a compliance and risk-based supervision (CRS) framework for market intermediaries and institutions. The CRS emphasises a more rigorous and risk-focused approach to supervision and coupled with enhanced self-regulation, would promote a higher level of regulatory compliance amongst market intermediaries.
iii) Enforcement firsts
The SC’s enforcement efforts were reflected in significant milestones in 2003. In the Oasis Asset Management Sdn Bhd case, the SC detected transgressions and went to court within three weeks of the case. This was made possible with the strong support of the Attorney-General’s Chambers.
The SC also secured its first criminal conviction for market manipulation. The case involved Actacorp Holdings Bhd warrants and the offender Puniyamurthi a/l Perianan was fined a total fine of RM3 million after he pleaded guilty.
The SC also secured a few other enforcement firsts including a custodial sentence against the former Managing Director of Tat Sang Holdings Bhd for a disclosure-related offence. The custodial sentence imposed by the court for the offence reflects the severity of these types of offences. The year 2003 also saw the SC reprimanding and setting a sanction against breaches of asset valuation guidelines (Andrew Chan Kian Seng and Messrs Dass Mohamad Chartwell Brooke Hiller Parker Sdn Bhd).
Apart from on-going trials, the SC commenced new prosecutions against 11 individuals. Over the last year, prosecutions brought by the SC saw one individual jailed and eight individuals fined.
Other than criminal prosecutions and administrative actions, the SC had offered to compound some offences as a way of punishment and deterrence. In 2003, six individuals and one company were compounded for amounts ranging from RM50,000 to RM1 million.
Aside from this, the SC also took administrative actions ranging from the issuance of public and private reprimands, refusal to renew licenses, and non-acceptance of submissions, to the issuance of caution, warning and reminder letters against defaulting parties. Some of the key administrative actions taken by the SC in 2003 are listed in Table 2.
iv) More efficient capital market
The SC is determined to create an environment which is “business friendly” and “with no more regulation than necessary”, and has continued to ensure that capital market processes are streamlined, simplified and made more efficient.
A key step in this direction was the introduction of quicker time-to-market for initial public-offerings (IPOs). Process enhancements by the SC have resulted in the timeframe for approvals being shortened-for IPOs and reverse take-overs/back-door listings from six months to one to three months, rights issues from one to three months to 21 market days and for registration of abridged prospectuses from one month to seven market days.
All these were made possible as a result of the intense efforts put into the re-engineering of work processes at the SC as well as the launch of the final phase of disclosure-based regulations (DBR), both of which saw major changes in how the SC reviews corporate proposals involving the issue, offer and listing of equity and equity-linked securities.
Essentially, the review of corporate proposals are now based on two approaches-“assessment” or “declaratory”-depending on the types of corporate proposal. These new approaches have resulted in faster approvals from the SC without undermining the need for some merit-based assessment on certain types of proposals. The revised Policies and Guidelines on the Issue/Offer of Securities which came into effect on 1 May 2003 illustrate the types of activities for the two approaches.
These efforts to create a more efficient capital market, which put greater responsibility on the companies and their advisors, were complemented with greater legal accountabilities on these parties. Investors, in the meantime, had to be educated on their rights and responsibilities in a DBR environment and this was achieved through a host of training and education programmes conducted by the Securities Industry Development Centre.
The heightened responsibilities for companies and their advisors, and greater awareness and exercise of rights by investors, together with the SC’s strengthened stance on enforcement and surveillance are essential in ensuring the effective functioning of the market under a DBR environment.
Other notable steps taken by the SC in 2003 to enhance efficiency and facilitate fund-raising in the Malaysian market include:
v) RM55.1 billion to be raised via capital market; bonds accounting more than 80 per cent
Companies obtained the SC’s approval to raise RM55.1 billion through the capital market last year, of which 86% or RM47.3 billion of the funds was to be raised via debt instruments (Table 3). The balance of RM7.8 billion was to be raised via initial public offerings (IPOs) – RM3.88 billion, equity – RM3.87 billion, and preference shares – RM7.5 million.
There were 33 submissions for IPOs, 44 for fund-raising via equity, 64 submissions (comprising 118 issues) for fund-raising via debt, and one for preference shares.
vi) Funds managed by fund management companies grew by 25.6 per cent
Fund management companies in Malaysia, comprising licensed fund management companies and approved unit trust management companies managed a total of RM94.75 billion in 2003-a 25.6% increase from the previous year (Table 4).
The bulk of funds managed by licensed fund management companies comprised unit trust funds which amounted to RM54.98 billion, forming about 70% of total funds managed by licensed fund management companies at end-2003.
Other types of funds under management by licensed fund management companies include funds of charitable bodies, corporate bodies, EPF and EPF contributors, government bodies/agencies, individuals, insurance companies and private pension funds (Table 5).
As for foreign funds under management, the bulk of these funds comprised funds of foreign corporate bodies (62%), following the same pattern as at end-2002 (Table 5).
vii) Significant growth in unit trust industry
The unit trust industry showed encouraging growth in 2003, with the number of unit trust funds offered to investors increased from 188 at end-2002 to 226 at end-2003. The number of unit holder accounts also increased from 10.18 million at end-2002 to 10.22 million at end-2003.
In terms of net asset value (NAV), the industry grew from RM53.70 billion at end-2002 to RM70.08 billion at end-2003 – a 30.5% increase year-on-year. The total NAV of unit trust funds at-end 2003 represented 10.95% of the market capitalisation. Conventional unit trust funds contributed RM65.33 billion of the total NAV while Islamic unit trust funds accounted for RM4.75 billion.
Table 6 provides a snapshot of the unit trust industry at end-2003 as compared to end-2002.
viii) Developmental work
As at end-2003, marking the end of Phase 1 of the CMP, 79 recommendations were completed. These included the successful completion of the consolidation and demutualisation of the stock exchange and efforts towards enhancing the competitiveness of the exchange, which would see greater efficiency in the capital market.
The SC also took steps to ensure that financial planning which serves as a link between investors and the various products and service becomes a regulated and licensed activity this year to ensure that investors are better protected. The changes to the SIA were effected last year.
The SC also pushed forth with the development of the Islamic capital market in 2003 which saw, among others the launch of the first institutional Islamic stockbroking service, the listing of Malaysia’s Global Sukuk on the Bahrain Stock Exchange and the listing of the first Islamic ABS.
In addition, the SC increased its focus on international promotion and communication initiatives to further enhance the international profile of the Malaysian capital market. An important step in this direction, endorsed by the Government, was the establishment of the high-level Committee on International Communication for the Capital Market (ICCM) to provide holistic, co-ordinated and strategic advice on international communication and promotion initiatives.