The 12th Malaysian Capital Market Summit
13-14 November 2007
“Powering the Malaysian Market To New Heights”
Keynote Address by
YBhg Dato’ Zarinah Anwar
Securities Commission Malaysia
Yang Berbahagia Datuk Haji Dusuki Ahmad, Chairman Amanah Raya Berhad
Yang Berbahagia Datuk Michael Yeoh, CEO ASLI
Ladies and gentlemen
I would like to thank the organizers, ASLI, for inviting me to deliver the keynote address at this 12 th Malaysian Capital Market Summit. This conference has the very timely theme of “powering the Malaysian market to new heights”. The Kuala Lumpur Composite Index has breached the previous all-time high of January 1994 and has ventured into new territory, although the subprime losses are still being tallied and markets may yet see some upheaval. Secondary liquidity is deepening with turnover velocity rising above 50% from 30% since 1998 and derivatives and futures trading have risen sharply. More global players are attracted to our markets. Rapid growth is evident in the bond market, the unit trust industry as well as the Islamic Capital Market. It is not just the stock market but the entire Malaysian capital market that is reaching new heights.
Malaysia ‘s attractive value proposition
It is remarkable to observe the sea change in perception among investors. Just last year, we were frequently asked on roadshows why investors should invest in Malaysia. This year, global investors tell us that Malaysians under-sold ourselves. They say we have many attractions but have not done a very good job at marketing; and this does not help us in competing internationally. We should all make it our resolution for 2008 to heighten the profile of the Malaysian capital market to the rest of the world.
We have an attractive value proposition to offer:
- Malaysia already has one of the strongest and most open economies in the world with a highly diversified base and capabilities. We are among the leading trading nations, considered highly competitive both as an investment destination and as an outsourcing centre. There are already high levels of foreign participation in our financial sector and capital markets – with the many familiar global names.
- Malaysia has a comprehensive and robust regulatory and legal framework to protect the rights of investors in both the conventional and Islamic capital market. We have reinforced this with pro-active enforcement through criminal and civil prosecution and administrative sanctions. I note sometimes the lack of recognition and appreciation from local players for the benefits arising from Malaysia’s strong investor protection regime. Internationally, these strengths have been well acknowledged.
- We were ranked 4th for investor protection by the World Bank in its “Doing Business 2007″ report – up from 5 th the previous year. We were ranked 5 th worldwide for compliance with the Financial Action Taskforce’s (FATF) standards on anti-money laundering and counter terrorist financing based on the recent evaluation by the Asia Pacific Group (APG). In the Report on the Observance of Standards and Codes (ROSC), Malaysia scored top marks for disclosure and transparency of accounting standards. I can assure you that most global investors are attracted to markets with a strong regulatory framework that strives to ensure high standards of corporate governance and professional conduct, high standards of disclosure and, in the case of the Islamic capital market, the comprehensiveness and reliability of Shariah-compliance. This translates into ensuring higher quality of assets and reduces financing costs through lowering risk premiums, and enhances the competitiveness of the Malaysian capital market.
- For investors,
- Malaysia offers the widest and largest selection of small and mid-cap companies in ASEAN. There is a good selection of high-growth and technology companies listed on Mesdaq. 86% of our listed companies accounting for 63% of market capitalization are Shariah-compliant companies; providing ample choice to the Islamic investor.
- There are many quality assets with reliable income streams with potential capital upside – ranging from equities with high dividend yields and REITs. The domestic currency bond market, both public and private, is the 4 th largest in Asia in absolute terms after Japan, Korea and China.
- Malaysia is the world centre for price discovery of CPO and home to several of the world’s largest plantation companies.
- In 2006, Malaysia ranked third after China and India for M&A transactions in Asia-Pacific ex-Japan with an announced deal value of RM120 billion based on a PwC review.
- We have the largest domestic unit trust industry in ASEAN with a net asset value of RM154 billion as at September 2007 and high levels of domestic savings in bank deposits, insurance and pension funds.
In summary, Malaysia offers investors an attractive range of conventional and Islamic investment opportunities, with the launch of the growth corridors adding even greater prospects for strategic investments.
Ladies and Gentlemen
Regulatory and developmental policy initiatives in 2007
As you can see, much has been done to restructure and reform the capital market in the past decade, post the Asian financial crisis. Over the entire length of the capital market spectrum, spanning issuers, intermediaries, infrastructure and investors, changes were undertaken to bring the Malaysian capital market to its platform today.
The SC in our dual role as regulator and developer of the capital market strives to be facilitative, transparent and accountable to our stakeholders. We are strongly committed to the delivery of high quality regulatory services. To promote greater accountability and transparency, we now publish our performance scorecard quarterly; and in line with our client charter, between 92% to 100% of all applications submitted to us are processed within committed timelines.
Enforcement remains a key area of focus for the SC. We have invested significant efforts and resources over the last few years to strengthen our capabilities and capacity. One significant development arising from this has been the evolution of a strategic approach to enforcement by increasingly employing civil and administrative approaches to achieve swift and effective resolution. This year we have shifted our focus towards a more holistic outcome where restitution for investors is the desired goal even as we continue to exercise our criminal prosecution powers in appropriate cases. We adopted pre-emptive measures to freeze assets, disgorge ill-gotten gains and to make restitution to investors.
In the Swisscash case, the SC obtained a Mareva injunction to prevent disposal of assets and secured an order to compel the return of RM35 million from 14 bank accounts in Hong Kong and Singapore. Twenty-two accounts in Malaysia were also frozen. Recently we facilitated a meeting of regulators from eight different countries in Hong Kong to trace fund transfers from bank accounts in one country to another.
We injuncted RM20 million in proceeds from Ayer Molek Rubber Company’s sale of land; restituted RM12.8 million to investors of Powerhouse Asset Management Co; filed a civil suit against the company and the fund manager for the shortfall of RM1.9 million and commenced civil suit against the Managing Director of FTEC Resources for restitution of RM2.5 million that he is charged with utilising for his own benefit. These 4 cases alone involved a sum of over RM73 million covered by this new approach.
In our enforcement efforts, cross border cooperation with fellow regulators in other jurisdictions is key to success. These efforts will be further reinforced by the SC’s acceptance as a signatory to the International Organisation of Securities Commissions (IOSCO) Multilateral MOU – an international benchmark for co-operation and information sharing to fight cross-border fraud and other securities laws violations. The SC is one of 41 signatories out of the 188 member countries of IOSCO, an acknowledgement of our capacity in prosecuting violations of securities laws.
Ladies and Gentlemen
A key element of a competitive capital market is a strong corporate governance framework. This should come through increasing accountability of industry, professionals and PLCs for ethical conduct. They must inculcate strong internal compliance and CG cultures.
On this note I must say that there is only so much of governance practices and market discipline that can be legislated. The culture of good CG must be galvanized and imbued into the Board and management; substance over form must work its way into the system. Industry must embrace the tenet that doing business within a moral framework helps companies prosper and serve society at the same time. There is profit from ethics and premium in share value of companies with good CG.
As Malaysia moves into the radar screen of investors, these aspects of governance and discipline must not falter. The Code of Corporate Governance has been amended to incorporate best practices and the Public Companies Accounting Oversight Board is on its way to formation. The time for adherence has come.
Our market resilience and capacity have been tested but emerging trends associated with larger flows from traditional and new sources and the attendant risks of higher volatility have raised the bar.
Ladies and gentlemen
The major legislative reform in 2007 was the introduction of the Capital Market Services Act to consolidate the securities, futures and fundraising laws into a single legislation. The CMSA was significant in terms of new provisions to strengthen investor protection, the introduction of a single licensing regime and a framework for recognition and oversight of Self-Regulatory Organisations (SROs) to promote a market-based approach to regulation.
Guided by the vision of the Capital Market Masterplan (CMP) to position Malaysia as an internationally competitive capital market, much has been done to transform the entire spectrum of the capital market value chain during this decade. At this juncture, about 82% of the 152 CMP recommendations have been implemented.
One of our priorities has been to address distribution bottlenecks and inefficiencies in the intermediation industry. The experience of developed markets show that deregulation and liberalization can be a critical factor in accelerating the growth of the capital market through ensuring that industry offers a wide range of high-quality services, products and prices to attract an expanding customer base.
Our measured response to opening the gates of liberalization has been met with the desired benefits so far. Market volumes, velocity, promotion activities, research talent development and compliance skills have achieved major strides in improvement.
The liberalisation process started at a greater pace in 2004 through the easing of equity ownership of foreign brokers and fund managers operating in Malaysia. These efforts were further complemented by liberalization efforts in the bond market. Multilateral development banks and foreign multinational corporations are allowed to issue RM and non RM denominated bonds and sophisticated investors are permitted to execute secondary trades in non RM bonds.
Similarly product expansion and efficient intermediation are required to unlock the potential of the investment management industry as a key driver of growth for the Malaysian capital market. In 2007, we have considerably reduced time-to-market for new funds from 4 months to 21 days, and facilitated the introduction of fund supermarkets. Global participation in the industry was further liberalised with foreign ownership in fund and REITs management companies raised to 70%. As at September 2007, there are already more than 400 unit trust funds and the industry NAV has accelerated to RM154 billion, representing 26% growth from the end of 2006. The unit trust industry represents almost 15% of the total market capitalization of Bursa Malaysia. Comparing this to the level of the US market which stands in the region of 35 to 40%, it strongly suggests the tremendous potential for growth.
Ladies and Gentlemen
As you are aware, Budget 2008 also announced significant liberalization of foreign participation to promote Malaysia’s ICM as an international hub. Supporting the value proposition of the Malaysian capital market, the Islamic capital market can be positioned and has been our sustainable competitive advantage. It is also the most liberalised sector in the Malaysia capital market and has derived tremendous growth; lifting us onto the global stage.
This segment of our capital market has been a trailblazer in innovations. Since 2002, the Malaysian capital market has recorded 13 Islamic firsts within the arena of Islamic capital market. We can stake a rightful claim that we have one of the most innovative and comprehensive Islamic capital market in the world.
In this regard the SC and the Dubai Financial Service Authority had signed a mutual recognition agreement for cross-border distribution of Islamic funds earlier this year – the first between 2 Islamic markets.
I am really pleased to share with you the announcement that the SC, together with the Dubai Financial Services Authority, has been named the “Best Regulator for Islamic Funds” in conjunction with the Islamic Funds World 2007 Conference in Dubai which is now taking place even as I speak.
The award acknowledges the SC’s pioneering efforts and leadership role in the development and promotion of a comprehensive Islamic capital market and is also an endorsement of the government’s efforts to position Malaysia as a global hub in the origination, distribution and trading of Islamic funds and wealth management.
Ladies and Gentlemen
Challenges in moving to the next level of performance
The window of opportunity is opening with the re-alignment of global business – with petrodollars and growth shifting momentum to Asia. Many Asian countries are accumulating huge surpluses of savings that need to be invested into a diversified basket of assets. The challenge ahead for all Asian markets is how we are to go about building bridges between our currently fragmented pools of liquidity, how we can facilitate active trading across different time zones and how we can channel our wealth into economic growth and prosperity. In this regard, it is important for Asian markets and firms to promote greater collaboration to maximize cross-border value generation and growth. Clearly, some Asian markets have already begun to leverage on the substantial demand for regional assets to finance domestic corporate expansion in the international arena and to grow their domestic markets.
Malaysia must therefore look for opportunities to tap regional liquidity to create an exciting and internationally-oriented corporate and market landscape and to expand the scale of Malaysia’s capital markets. In this context, I would like to see greater use of the Malaysian capital market as an origination platform to fund the growth of the Malaysian corporate sector. Certainly, opportunities abound right on our door-step in the form of the Malaysian growth corridors as well as in financing ASEAN infrastructure development. It is estimated that regional infrastructure financing needs will create approximately USD150 billion of funding and products opportunities over the next five years.
Therefore, it is urgent for us to build up domestic intermediation capacity and capabilities as the Malaysian capital market must gear up to handle large-sized transactions and build a bigger pipeline for debt and equity flows for both the conventional and Islamic markets. To achieve this, Malaysian players need to increase their visibility abroad, to expand their regional and global focus, to be more aggressive in competing for deal flows and to consider partnering with other regional and global players.
In this context, the SC will pursue further developmental initiatives to enhance the architecture of Malaysia’s capital market to support international transactions. This would include regulatory and infrastructure changes that would increase the connectivity to other markets as well as widen our ability to access regional and global investors and issuers.
I look to the capital market intermediaries to play a lead role in broadening and deepening the Malaysian capital market through the creation of new quality and attractive products, to expand into new markets and to profile and brand Malaysia’s market. Malaysian intermediaries should look for opportunities to work with regional and global players to leverage off each other’s strengths, products and capabilities for mutual benefit.
Markets and intermediaries can only grow faster if there are increasing cross-border transactions and investments between the various Asian countries.
As the Malaysian capital market moves to its next level, the increased product complexity and sophistication will pose higher risks to investors. The correct approach is not to restrain product innovation but to educate investors and improve their knowledge of products so that they can keep pace by being more savvy and better equipped to manage risks of investments.
It will also become increasingly important for industry – comprising the intermediaries, market professionals and PLC management – to demonstrate their leadership in building the necessary capacity to take the Malaysian capital market to the next level. They must invest not only in their capabilities for compliance, risk management and corporate governance but must also discharge their responsibility in ensuring that investors understand their investing choices and the risks associated with various investing strategies and products. There will be no better advertisement for Malaysian intermediaries, professionals and PLCs than the dedication to building a relationship of trust with their key stakeholder.
Ladies and Gentlemen
I had earlier spoken about the need to position Malaysia among the most dynamic capital markets globally; particularly in the ICM space. The Malaysian economy and the capital market already have a solid foundation and all the necessary ingredients for lift-off are present. As the regulator, we will continue to facilitate and support as the private sector shifts into high gear to explore and crystallize the vast opportunities in new frontiers. It is important for all of us to work as Team Malaysia with a coordinated strategy to maintain and sustain the competitiveness of the Malaysian capital market and to profile and promote the Malaysian market in the global marketplace.
On this note, I wish all the participants an insightful and productive summit ahead.