Keynote Address


Ranjit Ajit Singh
Senior Executive Director
Securities Commission, Malaysia

at the

MAICSA Annual Conference 2007
16 July 2007
Kuala Lumpur

Capital Market Masterplan – Final Phase Roll Out

Yang Berhormat Dato Seri Mohammed Nazri Abdul Aziz, Minister in the Prime Minister’s department,

En Akbar Moidunny, President of MAICSA

Distinguished guests,

Ladies and Gentlemen,

Good morning.


1. Let me begin by first of all congratulating MAICSA for the organisation of this annual conference and lining up what looks to be a very impressive list of speakers and topics. I would also like to thank MAICSA for inviting the Securities Commission (SC) to present this morning’s address.
2. As I understand, the organisation has an illustrious history, being formed only two years after the country gained its independence. As the nation celebrates its 50th anniversary, MAICSA has clearly evolved as the premier professional body in company secretaryship. It is noted for its active participation in the enhancement of corporate governance and in promoting a continuous learning culture, ethical conduct and professionalism. It has been an important dialogue partner with the Commission on a variety of issues affecting the regulation and development of our capital market and I am pleased to be able to address its annual conference today.
3. The topic of my remarks this morning is on the capital market masterplan’s third and final phase. There are obviously some key areas that we are focusing on which I will elaborate on this morning. However, given that the audience is also closely associated with corporate governance matters, I will spend a little more time on the issues related to corporate governance and regulatory aspects of the CMP’s final phase.
4. To gain an overall perspective on the development of Malaysia’s capital market, it may be useful to start by reflecting on the vast changes that have taken place in Malaysia since the 1990s. Broadly, Malaysia’s economic base has expanded substantially and developed high levels of dynamism and sophistication. This economic transformation has been mirrored by a natural shift from bank financing to financial intermediation by its capital market.
5. Malaysia started with a narrow equity market in the mid-1990s but has now built a well-diversified capital market with many strong segments. This evolution in financial intermediation is highly desirable as it results in diversification of financing sources and improves the availability of long-term funds for large-scale projects. As an outcome, Malaysia’s economy has developed increased resilience to external shocks. A market-based system of financing also offers the advantage of more efficient mobilization and allocation of capital due to its inherent discipline. A modern capital market is a pre-requisite in our country’s quest to be a developed nation.
6. The magnitude of the transformation of Malaysia’s capital market has been significant by any yardstick. Adding the equity and bond market segments, the size of the Malaysian capital market as at end of June 2007 was RM1.6 trillion. In fact, the size of the capital market grew by RM191.1 billion in 2006 alone. That is almost equal to the total size of the entire Malaysian capital market of RM200 billion in 1990.
7. Malaysia’s achievements in building its capital market compares favourably in several areas even when benchmarked with other growth markets in Asia. For example, Malaysia currently has the third largest local currency bond market in Asia with outstanding issues of RM522.2 billion as at June 2007. Malaysia is often cited as one of the most successful and matured bond markets in the region. As another yardstick of its rapid growth, the SC approved private debt securities amounting to RM75.8 billion in 2006 – which was almost four times larger than what it approved in 2000. Liberalisation measures have also attracted multilateral institutions such as the Asian Development Bank (ADB) and the International Financial Corporation (IFC) and the International Bank for Reconstruction and Development (IBRD) to issue bonds in Malaysia; indicating that Malaysia has potential to compete for international issuance of bonds.
8. The unit trust industry is another thriving segment that has grown its net asset value from RM33.8 billion in 1997 to a sizeable RM139.7 billion as at April 2007. The achievement of a significant size implies that the unit trust industry has built sufficient critical mass to sustain rapid growth. This was borne out in 2006 where industry assets grew by 23.6%.
9. Malaysia is also regarded as one of the leading centres for Islamic capital markets. It offers a comprehensive regulatory infrastructure, a range of financial intermediaries and a wide array of products. Malaysia has gained a reputation for the innovation of sophisticated Shariah-compliant products which are becoming increasingly popular worldwide. Malaysia issued the world’s first sovereign 5 year global sukuk of US$600 million in 2002, the world’s first rated Islamic residential mortgage backed securities in 2005 and the world’s first listed Islamic Real Estate Investment Trusts in 2006. It is worth noting that Malaysia originated over two-thirds of the world’s total sukuk issued as at end-2006.
Malaysia’s CMP: Overview and Progress
10. The success of Malaysia’s capital market in this decade is an outcome of a dynamic economy, underpinned by sound government policies, and the fruits of a structured, pragmatic and phased approach towards development. In this context, the Capital Market Masterplan (CMP) launched in 2001 was a strategic blueprint that identified the critical building blocks that would lay the foundation for success. It was shaped through extensive consultations – with input from private and public sector stakeholders – with the outcome of a shared vision to position Malaysia as an internationally competitive capital market.
11. CMP implementation was spread over three phases and aligned with the 8th and 9th Malaysian Plans. Phase 1, implemented during 2001-3, can be described as a foundation-building stage with three distinctive achievements. First, it marked the introduction of reforms to strengthen Malaysia’s corporate governance framework to be on par with international best practices.
12. Second, it implemented the re-positioning of domestic institutions and intermediaries with a view to consolidate market liquidity and promote scale and efficiency. One prominent example was the consolidation of the five exchanges that we had into a single exchange. This was followed by the demutualization and eventual listing of Bursa Malaysia.
13. The third notable feature was the shift to a disclosure-based regime (DBR) from a merit-based regime across all market segments. The DBR regime enhanced overall standards of disclosure in the market and also placed greater accountability on advisers and intermediaries for higher standards of due diligence. Enhancements to the financial reporting framework also accompanied this shift. DBR was an important development that not only increased fund-raising efficiency, it also facilitated the rapid growth of the thriving bond market, the unit trust industry as well as contributed significantly to the development of a prominent Islamic Capital Market (ICM). Hence, the introduction of DBR was a pivotal factor that facilitated the significant broadening of the capital market.
14. Phase 2, implemented during 2004-5, represented a transition which saw an acceleration in landscape changes in several segments of the industry and gradual liberalisation to broaden access to the Malaysian capital market. The groundwork paved the way for the creation of Investment Banks and the entry of foreign stockbrokers and fund managers. The benefits of DBR and the post-vetting approach became more apparent as the SC re-engineered many of its processes to achieve sharp reductions in turn-around time for approvals. This led to tremendous cost-savings for the private sector and improved their capability to raise financing or develop investment products to meet market demands on a timely basis.
Final Phase Roll-out
15. We are now into Phase 3 implementation which covers the period 2006-2010. I am glad to say we are satisfied with implementation progress. Currently, more than 75% of the 152 recommendations in the 10-year CMP have been implemented. This would not have been possible without the commitment and support of all stakeholders in the Malaysian capital market. On behalf of the SC, I would like to express our sincere thanks to them for their substantial input and contributions towards achieving the aims and objectives of the CMP.
16. It is worth mentioning that the SC does not restrict its policy work to the 152 recommendations in the CMP alone. Like a lighthouse, the CMP has provided illumination through signaling Malaysia’s strategic intent; thereby allowing us to achieve greater consistency in policy implementation by being guided by the vision and strategic objectives enunciated in the CMP.
17. In the final phase of the CMP, the SC has identified several focus areas requiring regulatory attention while there are on-going exercises to further enhance industry and market structures to create a suitable architecture for an internationally competitive and advanced capital market in Malaysia.
Effective corporate governance
18. Given recent events and the role played by members of MAICSA in this area, the first area I would like to address is on corporate governance. It is widely accepted that Malaysia has an international standard corporate governance framework. In the 2006 World Bank Report on the Observance of Standards and Codes (ROSC) for Corporate Governance, Malaysia fared well and scored top marks for its disclosure regime and the transparency of its accounting standards.
19. However, we are mindful that there remain challenges ahead for Malaysia to give full effect to its corporate governance framework. The recent spate of financial reporting irregularities highlights shortfalls in the standards of governance and stewardship in some PLCs. Our immediate priority has been to investigate these wrongdoings and take the appropriate enforcement action. As you would have noted we were able to expediently complete our investigations and bring enforcement actions in the Transmile case last week.
20. However, these events also provide additional impetus for further reforms, where necessary, to close the gaps in Malaysia’s delivery of corporate governance. Phase 3 of the CMP will focus on further strengthening the effectiveness of Malaysia’s corporate governance framework by incorporating best practices in areas relating to the role and quality of the board of directors, the composition and effectiveness of audit committees, the role of the internal audit function and the role of auditors, audit quality and the oversight of audit firms.
21. Members of MAICSA acting as company secretaries play an important role in the overall corporate governance process and have been characterized by some as de facto chief corporate compliance officers. You have an important role in guiding and advising board members on corporate governance standards and practices and can complement overall efforts at enhancing corporate governance in companies.
22. I must emphasise here that further advances in corporate governance must be driven by internal change within public-listed companies and the various market intermediaries involved with companies. We note that the ethical and compliance culture in the corporate sector requires further deepening and that some corporate management and professionals do not yet fully appreciate the benefits and behavioural norms implicit in meeting international benchmarks whether in terms of financial reporting or ethical conduct.
23. In addition, we must move away from a box-ticking approach towards corporate governance to internalizing a corporate governance culture. Ethics, integrity and good governance cannot be legislated into a company. Statutory regulations can only deter and punish fraud and other activities that damage the public interest. There must be self-discipline in the market with self-restraint and compliance with market norms that will prevent abuses that act against the public interest.
24. As we move forward, our role as regulators will be to provide the right infrastructure for corporate governance and strengthen this infrastructure where necessary. We will focus on enhancing the quality of disclosure made to the market. In this regard, we are continuously strengthening various aspects of our value chain such as the gate-keeping process for approval of corporate submissions to ensure only quality proposals are accepted, increasing the accountability of advisors and professionals. We have and will continue to enhance our surveillance and enforcement capacity and capabilities with a view to enhance detection of misconduct and bring effective enforcement actions, as demonstrated by the recent enforcement successes.
Principles – based approach to supervision
25. While SC continues to ensure a strong investor protection regime, it is also our regulatory philosophy that there should be “no more regulation than necessary”. To remove inefficiencies and rigidities in the capital market and enhance competitiveness, the SC continuously weighs the primary objectives of imposing regulatory requirements against relative costs and considerations such as the practicality of compliance and potential for circumvention.
26. Towards this end as we moved into phase 3 of the CMP, we shifted to a principles-based approach to supervision. We believe prescriptive rules prevent capital market intermediaries from responding quickly and efficiently to changing market needs and add unnecessarily to their operating costs. We believe where intermediaries are able to demonstrate to us high standards of internal controls, compliance standards and market conduct, they should be subject to less regulatory intensity. To achieve this, we have reviewed and reduced rules extensively and now emphasize on principles of good conduct in supervising intermediaries. Hence consistent with our aims in the CMP, we have are moving towards a more de-regulated and less prescriptive environment.
27. However, we have supplemented the principle-based approach with increased oversight and on-site examinations. The on-site examinations can either be based on themes or be part of the normal inspection cycle and is also based on a risk assessment approach that allows us to focus on specific firms or specific areas.
A facilitative regulatory regime
28. Several major legislative reforms to modernize Malaysia’s securities and corporate legal framework will be implemented in CMP Phase 3. The SC recently completed drafting a single legislation to regulate the entire capital market and to provide a single licensing framework for all intermediaries. The Capital Market and Services Act or CMSA will replace the existing Securities Industry Act 1983 and the Futures Industry Act 1993. Apart from creating an omnibus legislation, there are other amendments to increase efficiency in fund-raising, strengthen investor protection, provide a facilitative regulatory framework for technology and for self-regulation. The CMSA is expected to take effect this year.
29. In addition, the Companies Commission is spearheading corporate law reform to modernize the Companies Act. The corporate law reform is also expected to contribute to more efficient corporate regulation as well as to strengthen the corporate governance framework. It is also worth noting that Malaysia fully adopted International Accounting Standards in 2006.
Increasing savings intermediation efficiency

The Malaysian investment management industry – particularly the unit trust industry – has the potential to sustain high levels of growth over the next two decades given Malaysia’s high domestic savings, young demographics and expanding labour force. The increasing sophistication of Malaysian investors is also becoming increasingly evident as reflected by their appetite for international and structured products manufactured or distributed by domestic intermediaries.

31. In CMP Phase 3, the SC is targeting to enhance the efficiency of savings intermediation to position the investment management industry to be a driver of growth for the Malaysian capital market. In 2006, the SC announced a set of initiatives aimed at providing greater transparency to investors, reducing costs, expanding product choice and enhancing distribution channels to create a more competitive environment. This was complemented by the introduction of DBR to shorten approval times for industry to bring products to the market on a timely basis.
32. In addition, the SC is seeking to further enhance standards of investor protection in the unit trust industry. In line with the objective of promoting market-based regulation, the Federation of Malaysian Unit Trust Managers (FMUTM) will be transformed into a Self-Regulatory Organisation to strengthen industry disciplinary capabilities.
Ensuring a competitive environment for intermediation services
33. The capital market intermediation services landscape in Malaysia has undergone substantial transformation in the first two phases in the CMP with the consolidation exercise, the entry of global stockbroking firms and fund managers and the creation of the Investment Banks.
34. In CMP Phase 3, we anticipate that the landscape will becoming increasingly diverse with the emergence of differentiated business models as the process of deregulation and liberalisation continues in an orderly manner. Increasing the competitiveness of domestic intermediaries and facilitating intermediaries to extend their reach and coverage of the potential customer base is necessary to create to a more vibrant capital market.
35. There are also several other on-going initiatives to ensure continued improvements in market infrastructure to facilitate convenient and cost-effective customer access, reduce latency time for trade execution, reduce friction costs, deepen liquidity and to bridge liquidity pools in various segments of the capital market.
Enhancing Malaysia’s positioning as an international Islamic Capital Market
36. CMP Phase 3 will also continue with further initiatives to further strengthen the nation’s position as an international centre of orgination and trading for Islamic instruments and for wealth management services. Bank Negara, SC and other stakeholders have collaborated to launch the Malaysia International Financial Centre initiative (MIFC) with a view to creating an increasing liberalized environment for Islamic financial activities and tax incentives were provided to attract global players and capital flows to conduct Islamic intermediation activities in Malaysia’s ICM.
37. In parallel with this, initiatives are being undertaken to increase the connectivity of Malaysia’s ICM to a global Islamic capital market network. Early this year, the SC and the Dubai Financial Services Authority (DFSA) signed a mutual recognition agreement, the first between two Islamic markets, for the cross-border distribution and marketing of Islamic funds between the two Islamic centres. This has been followed up by a two-way flow of marketing activities between Malaysia and the Gulf countries.
Developing human capital
38. The SC is committed to promoting human capital development both within the organisation as well as throughout the capital market. Internally, the SC aspires to strengthen skill sets, re-engineer its processes and infuse the values that would strengthen the SC as an institution of high standing, integrity and accountability. Within the capital market, the SC has proposed a major five year industry training initiative to raise skill sets among capital market intermediaries and their agents. This extensive project will be funded by the Capital Market Development Fund (CMDF) and implemented by the Securities Industry Development Corporation (SIDC).
Ladies and Gentlemen,
39. Let me conclude by saving that Malaysia has indeed made tremendous strides in growing its capital market – to the extent that we are frequently cited as a model for many other emerging markets. We note that the recent emergence of several large Asian capital markets will pose competitive challenges. Nonetheless, they will also create many opportunities for greater cross-border transactions with the region. Indeed, the respective governments and regulators have been collaborating to develop initiatives to foster greater integration of capital markets within the region.
40. The changing Asian capital market landscape requires the SC to adopt and implement forward-looking policies to ensure that Malaysia is well positioned to face these challenges and to capitalise on opportunities. It is clear that there is a need to step up the pace of development to become an advanced capital market. This requires a further deepening of the partnership between regulators and industry and more work ahead for everyone but it also promises that we can all look forward to an exciting and vibrant future for the Malaysian capital market.

Thank you.