Resilience of domestic economy and government’s proactive economic management to support 2003 capital market performance

The Malaysian capital market for 2003 will be buoyed by the nation’s resilient domestic economy and the government’s proactive measures in economic management, Securities Commission (SC) Chairman Datuk Ali Abdul Kadir said in releasing the SC Annual Report 2002.

Datuk Ali said the proposed new strategies towards stimulating the nation’s economic growth will have positive effects on the capital market and should also provide both the domestic economy and the capital market with the resilience it needs to weather the challenges posed by a difficult external environment.

In this context, the Malaysian capital market will continue to support economic growth, in performing its function of mobilizing capital to finance economic development. In reviewing the achievements of the capital market in 2002, Datuk Ali noted that total funds raised within the equity and private debt securities (PDS) markets totaled RM49 billion in 2002 compared to RM44 billion in 2001.

“I am pleased to note the significant increase in equity issuance in 2002, totaling RM13.3 billion, more than double the RM6.2 billion raised in 2001. All 51 new listings were over-subscribed compared to the previous year where only 13 (out of the 20) new listings were over-subscribed. The number of listing proposals approved (42) were also higher in 2002 compared to the previous year.”

He also said that although the KLSE Composite Index (KLCI) was affected by the adverse global conditions, it was less severely affected compared to other global markets. The Index registered a 7.10 % decline in 2002, compared to other major markets, some of which fell as much as 40% over the corresponding period.

Datuk Ali said 2002 was also an “excellent year for Malaysian bond markets – lifted by sovereign rating upgrades and reduction of credit spreads. Improved domestic fundamentals led to upgrades of the country’s foreign currency credit ratings and the reduction of credit spreads”.

“Underlying the performance of the capital market in 2002 was the stronger Malaysian economy, which staged a recovery last year with real GDP growth expanding by 4.2% in 2002 from 0.4% in 2001. Domestic consumption, public spending and to some degree, recovery in external demand were attributed as the key sources of growth,” said Datuk Ali.

Notwithstanding substantial progress in many areas of the capital market in 2002, stock market liquidity has remained relatively subdued, reflecting the uncertain global market conditions and geo-political developments that affected investment activity during this period. To address this situation, “the series of actions embarked upon by the SC were aimed at finding solutions towards enhancing liquidity in the capital market to make it more attractive to investors, and we hope this will lead to more vibrant markets”.

The SC, working closely with industry, government and the Capital Market Advisory Council (CMAC) has been focusing its liquidity-enhancing efforts on several key areas, namely developing a strong base of premier companies on Kuala Lumpur Stock Exchange (KLSE), encouraging more active institutional investor participation, developing focused and consistent communication and marketing strategies and exploring potential strategic alliances with other markets.

Datuk Ali also stressed that market players and stakeholders should play their part in enhancing liquidity by further developing their distribution channels and being more aggressive in attracting investors.

Highlights of the SC’s work in 2002 in other key areas are as follows:

Ensuring the market remains the preferred fund raising center for Malaysian companies

The SC’s work in 2002 was also geared towards further enhancing the efficiency of the fund-raising environment to ensure that the Malaysian capital market remains the preferred fund raising center for Malaysian companies.

Datuk Ali said “the SC in March 2003 completed the transition of the market from merit-based to disclosure-based regulation and the SC’s work on the corporate bond market continued apace. In collaboration with the Asset Securitisation Consultative Committee the SC has put in place a more facilitative framework for asset securitisation through the release of the Report on Asset Securitisation in Malaysia – The Way Forward for the Malaysian Market, which was subsequently approved by the National Bond Market Committee”.

Enhancing the resilience and competitiveness of market institutions and intermediaries

2002 also saw significant progress in the SC’s efforts to enhance the resilience and competitiveness of market institutions. Primary among these were measures to consolidate the Malaysian exchanges and clearing houses into a unified entity. The KLSE merged with the Malaysian Exchange of Securities Dealings and Automated Quotation (MESDAQ) in March 2002, while the equities and futures clearing houses, the Securities Clearing Automated Network Services (SCANS) and the Malaysian derivatives Clearing House (MDCH) consolidated in August. There has also been considerable progress in the demutualisation of the KLSE and the process should be completed by 2003.

Datuk Ali said with a demutualised structure, the domestic exchange would be able to re-configure its business operations and initiate a fundamental transformation of its strategic position to meet stakeholder needs.

There was also further progress in the consolidation of the stockbroking industry. The number of stockbroking companies were reduced to 40 at end-2002 from 66 in 2000, when the SC first announced the policy framework for consolidation. As at May 2003, the number of stockbroking companies has reduced further to 39.

Six of these companies have attained Universal Broker (UB) status, giving them the opportunity to expand their revenue base through the wide range of capital market activities. UBs were also given further incentives in 2002 and this included the introduction of guidelines for UBs to deal directly in unlisted debt securities and the policy granting them access to RENTAS and act as advisers to corporate issue proposals for both equity and bond products. These incentives are in addition to a host of others, such as branching and the setting up of electronic access facilities, which were introduced in 2001.

Strengthening supervision and enforcement

Supervision and enforcement remained a key priority area for the SC in 2002 with the SC achieving its first conviction in illegal futures activities, more commonly known as “spot commodities/index trading.”

Two cases in 2002 involved high-profile corporate figures. These were the conviction of Datuk Tony Tiah Thee Kian in May and the commencement of prosecution against Dato’ Soh Chee Wen, who was on the SC’s wanted list for three years until his arrest in May 2002.

Moving ahead, the SC continues to take a pro-active approach to enforcement. Among others, the scope of the SC’s financial reporting and corporate surveillance team has been widened beyond reviewing the accounts of public listed companies. The unit has been mobilised into flying squads with the responsibility to undertake active monitoring and to alert the relevant authorities.

Promoting good corporate governance and risk management

Commenting on the issue of corporate governance, Datuk Ali said “last year’s spate of corporate scandals in the United States (US) and Europe reinforce the fact that no market jurisdiction can be complacent with corporate governance and accounting standards. Never has the need for good corporate governance and transparency been more critical, or more challenged.”

He noted that while the scandals galvanised a number of developed economies into coming out with a spate of regulatory responses, such as the Sarbanes-Oxley Act in the US and the Higgs Review in the United kingdom (UK), Malaysia has had many of these initiatives in place even prior to the 1997-98 East Asian crisis and its corporate governance framework has strengthened considerably since the crisis; ahead of the efforts in these developed countries.

For instance, the requirement for a statutory declaration to accompany the financial statements by a director or the person responsible for the correctness of the financial statements has been in place for more than 20 years. As a result of this, directors and financial officers are required to be suitably diligent in ensuring proper preparation of their financial statements.

“Corporations must build a culture of compliance with accounting standards for the right reasons-not because somebody is watching over them, but because they want to and it is in their own interests to do so,” said Datuk Ali.

“The SC’s work with regard to corporate transparency and governance remains very much a priority. Work is ongoing and requires the commitment of all involved, not just the regulators,” he said.

Datuk Ali said lessons from recent as well as not-so-recent corporate failures show that companies must address deeper risk management issues-such as robust internal controls, incentives for the involvement of senior management, accountability structures and reporting lines-in order to encourage management decisions that take all prevailing risks into account at all times. Companies need to develop a strong culture of risk management that permeates from top down.

Shareholder value maximisation

The SC in 2002 also worked to promote shareholder value maximisation by educating company directors and encouraging greater activism by investors and fund managers.

Datuk Ali cited shareholder value maximisation as the best reason to ensure a company is run properly and well.

“The basic concept of shareholder wealth creation remains a pivotal one to the long-term development of capital markets. In the Malaysian corporate sector, effective shareholder value management should be considered vital,” he said.

He added “a clearly-defined focus on shareholder value maximisation will enable Malaysian corporations to compete more effectively for global capital, and promote executive compensation structures that encourage the entry and development of skilled labour.”

Active participation in international regulatory initiatives

On the international front, the SC continued its close cooperation with international regulatory organisations and led several major projects relating to global financial regulation. It has also participated pro-actively in discussions on the international financial system.

“The SC’s participation at the international level ensures that Malaysia’s views are expressed and fully considered at the global level, and also achieves strong recognition for our country,” said Datuk Ali.

In recognition of the SC’s strong international presence in international standards development, Datuk Ali was elected chair of a special international taskforce on Islamic capital markets (ICM) established under the auspices of the International Organisation of Securities Commissions (IOSCO). As chair of this taskforce, the SC leads efforts to assess the development and regulatory implications of ICMs globally for the consideration of the high-level IOSCO Executive Committee. Their inaugural meeting of the task force was held in November in Kuala Lumpur, attended by members of the Task Force which included securities regulators from Australia, Indonesia, Italy, Jordan, Nigeria, South Africa, Thailand, Turkey, the United Kingdom and the United States of America.

Earlier, at the 2002 IOSCO Annual Conference held in Istanbul in May, Datuk Ali was elected to another term as the Chair of IOSCO’s Asia Pacific Regional Committee, comprising 19 securities regulators in the region. The SC is also a member of the Executive Committee of IOSCO.

The SC has also played an active role in the development of the multilateral memoranda of understanding (MOU) that has been developed by IOSCO and continues to be committed to international regulation cooperation.

The SC’s good relations and cooperation with its foreign counterparts were reflected in the MOU signed with the Securities and Exchange Commission of Sri Lanka and the Securities Commission of Jordan in February and October respectively, bringing the total MOUs signed between the SC and fellow international securities regulators to 16 from both developed and developing jurisdictions.

Developing the Islamic capital market

In developing the Islamic capital market, the SC, leveraging on the strength of the existing infrastructure within the conventional capital market, focused its work in 2002 on expanding the range of Islamic capital market products and services such as Islamic debt securities, equity-based derivatives, equity indices and managed funds.

“The Islamic capital market is a “niche market” contributing to broadening and deepening the Malaysian Islamic financial sector together with the Islamic banking and takaful systems,” said Datuk Ali.

He said he was pleased to see the implementation by the Government of the Capital Market Masterplan (CMP) recommendation which encourages the government and government agencies to issue global Islamic securities. In 2002, Malaysia became the first country in the world to issue global Islamic bonds namely the government’s Islamic sovereign bonds (Malaysian Government Sukuk – lease-participation trust certificate) deal of USD600 million and Guthrie’s Sukuk Ijarah of USD150 million.

The Malaysian Government Sukuk is Syariah compliant in all major Muslim countries and received Syariah endorsement by the international Syariah supervisory committees such as the International Islamic Financial Market (IIFM).

The SC also actively took steps to enhance the awareness of the ICM at the domestic and international levels. These included the Islamic Capital Market Week held in March 2002, which, among other things, highlighted the way forward for the promotion of Islamic capital markets globally, as well as provided insights on the developmental work carried out by Malaysian professionals in this field. A book of Syariah Advisory Council Resolutions, the first of its kind, was also launched at the opening of the ICM Week.

Consultation and engagement with market participants

Datuk Ali said that the SC continued to take a consultative approach towards formulating and implementing strategies, policies and regulations. He said the CMAC members and its various committees, frequent engagements with local and foreign industry participants and periodic consultative meetings have provided a useful feedback loop and channel for opinions to the SC.

“The SC, in considering the market perspective in the development of its policies, balances the sometimes conflicting needs of the various stakeholders. Our focus is to ensure the broader public interests of investor protection and market integrity are upheld.

We are also guided by the need to ensure that the Malaysian capital market remains competitive and well-positioned to facilitate the nation’s economic growth,” he said.

Enhancement of the SC’s overall efficiency and effectiveness

2002 also witnessed the SC intensifying its organisational transformation programme, which was initiated in 2001.

The SC has redesigned its work processes to enhance efficiency and effectiveness, minimise duplication of functions across the organisation, maximise utilisation of resources and expedite delivery of results to all its stakeholders.

This is the SC’s ninth annual report since its inception in March 1993. The annual report is available in hardcopy and electronic form on the SC website at this link.

30 May 2003