YBhg Dato’ Zarinah Anwar
Chairman, Securities Commission Malaysia
Bursa Malaysia “Your Preferred Listing Destination” IPO Conference
12 December 2007
Sime Darby Convention Centre
Dato’ Yusli Mohamed Yusoff, Chief Executive Officer, Bursa Malaysia
Ladies and Gentlemen,
First, a word of thanks to Bursa Malaysia for inviting me to deliver this keynote address. Today’s conference provides a useful opportunity to deliberate on a highly topical issue – namely the challenge of positioning Malaysia as a “Preferred Listing Destination”.
Ladies and Gentlemen,
Transformation of exchange landscape
The global capital market landscape is undergoing radical transformation. Over the past decade, there has been intensifying competition among exchanges for several reasons. First, the exchange industry is no longer a “country club” business where membership is exclusive and the sole preserve of stockbrokers. Many established exchanges, including Bursa Malaysia, have transformed from a mutual structure or ownership by members to become demutualised and listed “for profit” entities. With their new commercial orientation, many exchanges have become increasingly aggressive in wooing issuers and investors across national boundaries – to the point where even the US is concerned by the recent loss of competitiveness of its capital markets.
Second, we see fast-growing exchanges in China, India and the Middle East emerging as prominent markets on the regional landscape, while on the other side of the globe, we see a trend towards integration with established players in US and Europe bidding to take over other exchanges. Hence, the exchange landscape is simultaneously getting crowded and undergoing consolidation at the same time.
Third, there has been a massive expansion in the pool of global liquidity and this, combined with the structural shifts in industry structure, has shifted the bargaining power from exchanges and intermediaries to issuers and investors in an increasingly demand-driven marketplace. Issuers increasingly have the choice of listing on international exchanges while investors can easily access through internet and other electronic channels to trade in many markets around the world. The implications of these landscape changes are that all capital markets must enhance the international dimension of their value proposition to maintain their competitiveness.
Ladies and Gentlemen,
Malaysia ‘s value proposition
Malaysia fortunately operates from a position of competitive strength. We are one of the most open and dynamic economies with a highly diversified base and capabilities. We are a leading trading nation and investment destination with high levels of foreign participation in its financial sector and capital markets.
Malaysia also has several unique attractions that allow us to differentiate ourselves from other markets. For example, Bursa Malaysia is the world centre for price discovery of CPO and home to several of the world’s largest plantation companies. It has an active market for corporate transactions with Malaysia ranking third after China and India for announced M&A deal value in Asia-Pacific ex-Japan by PwC in 2006.
More significantly, Malaysia has the most comprehensive Islamic Capital Market (ICM) in the world – offering the broadest range of Shariah-compliant products and services on an end-to-end basis. Bursa Malaysia is an integral part of Malaysia’s ICM with 86% of its listed companies accounting for 63% of market capitalization being Shariah-compliant. Malaysia therefore has sufficient strengths to provide a unique value proposition that differentiate ourselves from other regional markets.
Let me now turn to three key areas affecting competitiveness in greater depth – namely market liquidity, market quality and the Malaysian IPO market.
Ladies and Gentlemen,
Enhancing market liquidity
Currently, domestic retail, institutional and foreign investors each account for roughly one-third of Bursa Malaysia’s trading activities. While we are generally happy with the proportion, we would like to see the overall level of participation rise on all three fronts.
One of our priorities, therefore, has been to enhance market liquidity through addressing distribution bottlenecks and inefficiencies in the intermediation industry, comprising the stockbrokers, the investment banks and the unit trust companies. The experience of developed markets show that deregulation and liberalization can be a critical factor in deepening secondary market liquidity through ensuring that industry offers a wide range of high-quality services, products and prices to attract an expanding customer base.
Our measured approach to liberalization has yielded the desired benefits with an increase in trading, promotional activities and product development and research. The value of improving market access should not be under-estimated because it is necessary to attract even more players and investors to Bursa Malaysia as “liquidity begets liquidity”.
I would like to take this opportunity to point out that liquidity for stocks tends to be strongest in their home markets. It is a well-established fact that investors have a natural preference to invest in domestic companies as they are familiar with their operations and can easily track corporate developments as compared to a foreign stock. We therefore believe that Malaysian PLCs are generally likely to find that their home market offers them a loyal investor base that will reward quality companies with greater liquidity and attractive valuation premiums.
In this context, Malaysia has a strong domestic investor base that accounts for largely two-thirds of trading on Bursa Malaysia. The domestic unit trust industry, which invests substantially in Malaysian equities, is the largest in ASEAN with a net asset value of RM154 billion as at September 2007 while individuals have high levels of savings sitting in bank deposits, insurance and pension funds – representing a large domestic pool of savings that can be tapped.
Strengthening the quality of markets
Ultimately, a market’s competitiveness is assessed by investors who feel they are getting a fair deal and return on their investments. In today’s world of a 24-hour trading book in a global marketplace, investors will tend to gravitate towards markets and companies that they deem to be of quality. Quality markets and companies are built on a track record of good corporate conduct and value creation.
On the first count, Malaysia has built a robust platform for corporate governance – with 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 by stepping up our pro-active enforcement through criminal and civil prosecution and administrative sanctions.
Internationally, the strengths of Malaysia’s investor protection regime have been well acknowledged. We were ranked 4 th for investor protection by the World Bank in its “Doing Business 2007” report. 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.
To enhance value creation, Malaysia’s PLCs must adopt strategic approaches to building their business value either organically or through mergers and acquisitions (M&A). Creating shareholder value is more than just about making profits. It is about generating sustained returns to shareholders in excess of the costs of capital as well as building franchise or brand value. In this regard, integrity and honest conduct can create a strong impact on core business levers including the costs of capital, consumer buying decisions and the ability to attract and retain talented staff.
Ladies and Gentlemen,
Enhancing the competitiveness of Malaysia’s IPO market
Malaysia ‘s stock market has many strengths and attractions. If there have been unflattering comparisons, this has arisen from the din of intensifying competition among exchanges for listings and for order-flow. While some of these comparisons are off the mark, it is important nonetheless to take cognisance that the benchmark for performance has gone upwards and that there is little room for complacency for both the Malaysian public and private sectors.
By most yardsticks, Malaysia has a highly competitive IPO market. The direct costs of listing, including advisory fees, are generally low by global standards and most new listings are well received by a broad investor base that has an insatiable appetite for quality assets. In keeping with this demand, the SC now generally assesses corporate proposals to ensure that IPO applicants meet quality requirements which emphasise on governance.
The SC has benchmarked its turnaround time for approval against the most competitive jurisdictions to ensure efficient time to market and that regulatory costs are low. I am confident that for many approval processes, the SC is broadly in line with other international jurisdictions in the crucial aspects of speed, efficacy and timeliness. The SC is fully committed to addressing any remaining areas of inefficiencies.
Examples of some recently improved areas include the fact that we now clear applications for straightforward private placements within 1 market day and rights issues within 5 market days. We publish our performance scorecard quarterly and, in line with our client charter, between 92% to 100% of all applications submitted to the SC are processed within committed timelines.
Promoting corporate sector growth
From a policy perspective, Malaysia has traditionally emphasised on the role of the exchange in promoting capital formation by small and medium-sized companies in recognition of their crucial contribution to the nation’s economic growth. The Second Board and MESDAQ were established to provide access for SMEs and start-ups to capital market funding with a view to accelerating their expansion.
It is due to the provision of access to financing to these small and medium-sized companies that Malaysia has now developed competitive strength in terms having the largest number of small and mid-cap companies in ASEAN – with a good selection of high-growth and technology companies listed on MESDAQ.
In particular, MESDAQ has been successful as a fundraising platform in propelling the growth of young technology-based and high-growth companies. MESDAQ has grown from only 4 listings and a market capitalisation of RM177 million in 2001 to having 126 listings and a market capitalisation of RM12.5 billion as at October 2007. We are seeing more and more companies being promoted to the Main Board after being nurtured via a MESDAQ listing.
We will continue to build on this success through promoting greater use of the Malaysian capital market to fund the growth of the Malaysian corporate sector. In this respect, the window of opportunity is opening with many Asian countries accumulating huge surpluses of savings that need to be invested in a diversified basket of assets. Malaysia has the opportunity to leverage on the substantial demand for regional assets to finance domestic corporate expansion in the international arena and to grow our capital market.
Certainly, opportunities abound right on our own 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.
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.
Ladies and Gentlemen,
New initiatives to strengthen the positioning of Bursa Malaysia as a preferred listing destination
It is therefore our objective to strengthen the positioning of Bursa Malaysia as a preferred listing destination for domestic companies as well as to attract foreign companies to consider a primary or secondary listing. We also wish to create a conducive environment that fosters more rapid corporate sector expansion both locally and abroad through capital-raising or through M&A activities. In conjunction with this, I am pleased to make the following announcements:
First, I would like to announce that we are providing greater flexibilities to facilitate dual listings by allowing companies to list their entire issued capital with 100% full trading fungibility across Bursa Malaysia and other exchanges. Full fungibility will promote efficient trading of shares by providing investors flexibility to trade on both bourses as well as facilitate cross-border mergers & acquisitions and international fund-raising exercises.
Second, to encourage foreign listings, we will streamline the regulatory criteria for the listing of companies with foreign operations. These companies will now be subject to the same listing criteria applicable to companies with domestic operations.
Third, to align our rules for cross-border listings with international practices, we will allow the listing of companies incorporated in foreign jurisdictions. However, we would require these foreign companies to provide in their Memorandum and Articles of Association standards of shareholder protection comparable to those in Malaysia.
Fourth, to facilitate M&A activities, acquisition of assets by listed companies will no longer be subject to profit track record requirements unless such acquisitions result in a change in the controlling shareholders, board of directors or core business. In this regard, SC approval will no longer be required for substantial acquisitions of assets for the listed company’s core business except in instances where such acquisitions are satisfied by an issue of securities.
Fifth, we also wish to facilitate greater opportunities for growth of companies listed on MESDAQ. Towards this end, MESDAQ companies will be allowed to undertake acquisitions which may result in a significant change in their business direction. Currently, only distressed companies on MESDAQ are provided such flexibilities.
Sixth, consistent with international practices, the requirement for mandatory profit forecasts will be removed. This will be replaced by an enhancement of the requirement for the Board of Directors to provide a “Management Discussion and Analysis” (MDA) on the financial condition and prospects for the company. The changes are intended to increase the quality of useful information made available to investors to assess a company’s prospects and to increase the accountability of directors for providing such information. The profit forecast requirement will only be retained in relation to corporate proposals involving distressed listed companies.
Seventh, to promote more efficient matching of supply and demand as well as orderly post-listing price discovery for an IPO, changes will be made to the regulatory framework to provide for a “greenshoe” option and price stabilization mechanism for IPOs. This will bring us in line with international practices and will enhance the efficiency and competitiveness of the Malaysian IPO market.
Eighth, to enhance the transparency of the fund raising process, we will introduce a public exposure period for IPO prospectuses. This will enable investors, market participants and members of the public to examine the prospectus pending its registration.
Details of the new initiatives will be reflected in the guidelines due to be released in January 2008.
Ladies and Gentlemen
In our dual role as regulator and developer of the capital market, the SC constantly strives to be facilitative, transparent and accountable to our stakeholders. In relation to IPOs, we have established clear rules, as well as robust and transparent business processes. We also publish our reasons for rejection of any new listing applications on our website.
Let me state quite firmly that the SC is open and interactive and will always welcome constructive feedback. We are pro-active in engaging issuers and intermediaries throughout the entire listing process. We encourage issuers and intermediaries to consult with us if they have any doubts on our rules or if they wish to seek guidance prior to making an application.
In this regard, the SC has invested significant effort to enhance its approval processes for all corporate proposals. We certainly hope that all our efforts to reduce turnaround time have provided efficiency, lower costs and greater timing certainty to market participants and issuers. We are now working closely with industry to identify potential efficiencies at the pre-IPO submission to the post-approval phase up to listing. We have put forward several proposals to industry and are waiting for them to revert with their feedback.
All the building blocks in terms of a world-class economy and regulatory framework are in place. What is required is for the policy-makers and private sector to collaborate to strengthen our execution capacity and for issuers and intermediaries to work closely with us to achieve our collective purpose of positioning Bursa Malaysia as a preferred listing destination.
As the regulator, we will continue to facilitate and support the private sector to identify and seize opportunities to be listed on Bursa Malaysia. It is becoming increasingly important for industry – comprising the intermediaries, market professionals and PLC management – to demonstrate their leadership in taking the Malaysian capital market to the next level.
With that, I bid you an insightful and productive conference.