Speech by Datuk Ali Abdul Kadir,
Chairman of the Securities Commission
at the
Securities Commission-Kuala Lumpur Stock Exchange Press Conference
to announce the
Approval for the Demutualisation of the KLSE
21 November 2002
Securities Commission

Good afternoon, Dato’ Mohd Azlan Hashim, Chairman of the Kuala Lumpur Stock Exchange (KLSE), Datin Mariam Yusof, Chairperson of the Association of Stockbroking Companies, Mr Jeyaratnam Pillai, member of the Capital Markets Advisory Council (CMAC) Committee on Market Institutions. I would like to welcome the members of the Press to this joint conference.

The Capital Market Masterplan (CMP), which was launched in 2001, articulated the strategic positioning and future direction of the Malaysian capital market in increasingly competitive and challenging global conditions.

Towards this end, several measures have already been implemented to strengthen the domestic broking industry through consolidation while transaction costs for investors have been reduced. These were reinforced by increases in efficiency through streamlining the issuance framework and through significant improvements in the levels of enforcement, corporate governance, disclosure and transparency.

One key objective in the CMP was to strengthen the strategic positioning of the capital market through improving the competitiveness and efficiency of the Malaysian exchanges and clearing houses.

The initial step, as identified in the Masterplan, was the consolidation of the various market institutions. These recommendations have since led to the consolidation of the various market institutions – the Kuala Lumpur Options and Financial Futures Exchange (KLOFFE), Commodity and Monetary Exchange of Malaysia (COMMEX), Malaysian Exchange of Securities Dealing & Automated Quotation (MESDAQ), as well as the Malaysian Derivatives Clearing House Bhd (MDCH)-within the KLSE Group.

The benefits from the consolidation of exchanges are already evident. For example, there has been greater investor interest and significant improvement in the liquidity of MESDAQ stocks since the merger of MESDAQ with the KLSE in March 2002.

In this regard, the pending demutualisation of the KLSE represents an important milestone in the development of the Malaysian capital market.

Demutualisation is an important strategy to meet the challenges of a more dynamic and competitive global business environment. Challenging market conditions and keen competition for business have meant that exchanges worldwide needed to re-look closely at how they created value for their customers; that is, investors, issuers and intermediaries.

In an environment of intensifying competition, traditional mutual member-owned exchanges increasingly find it necessary to be nimble in responding to fast-changing customer needs and competitive challenges. It is clear that the business of exchanges is likely to be radically different from the way exchanges conducted their businesses in the past.

This is why demutualisation is a key consideration for all exchanges in moving forward successfully and little wonder that it is now a widespread global phenomenon. With a demutualised structure, exchanges will be able to re-configure their business operations and initiate a fundamental transformation of its strategic position to meet stakeholder needs.

I am happy to say that the industry has been forward-looking and recognised the significance of demutualisation even during the consultative phase when the CMP was being developed.
On 30 July 2001, the KLSE decided to convert from a mutualised to a demutualised structure. Since then, the KLSE has, in consultation with its stakeholders and with oversight from the Securities Commission (SC), been driving the demutualisation process.

Following extensive preliminary studies by the exchange-appointed consultants, the KLSE prepared a detailed framework for demutualisation. The work included a review of the strategies and experiences of international exchanges, substantial engagement with local and international parties, as well as with the Capital Market Advisory Council, and the formulation of a comprehensive integrated demutualisation plan. The KLSE Committee endorsed demutualisation on 28 May 2002.
In this regard, the Securities Commission is now pleased to announce that the Minister of Finance has given his approval for the Kuala Lumpur Stock Exchange to proceed with the demutualisation of the exchange.

As part of the demutualisation exercise, the government also reviewed proposals submitted by various parties on the allocation of value derived from the demutualised exchange. The government was keen to ensure that due recognition was given to the contributions made by as many stakeholders as possible that played a role in building up the exchange and fostering its development.

The final decision was based on the value of the contributions of the various stakeholders, given their legal status with regard to ownership and control, as well as the direct and indirect historical economic contributions made by the various parties to the growth of the exchange over time.
It was decided that a total of 40% of the value of the demutualised exchange would be allocated to the stockbroking industry of which 30% would be allocated to stockbroking companies and 10% to remisiers.

The allocation to the stockbroking companies will be based on a fair reflection of the share due to Universal Brokers and other stockbrokers that have been supportive of the government’s consolidation policy. For this purpose, the basis used for the computation would be 66 licenses prior to the consolidation efforts. Following this announcement, we hope that there would be no further reasons why the brokers that have yet to consolidate would not pursue a minimum of the 1 +1 merger to which they had committed earlier.

In making the allocation to remisiers, the government wanted to ensure that the value of the exchange was shared by all who contributed to the development of the exchange. In doing so, it recognised the contributions of remisiers and the business risks that they had taken in building up strong retail participation in the Malaysian stockmarket. The details on this entitlement will be worked out by the SC in consultation with the remisier associations.

There will be a 30% allocation which will go towards the setting up of a Capital Market Development Fund (CMDF). The CMDF will be a statutory trust fund established to facilitate the development of an efficient, innovative and internationally-competitive Malaysian capital market. It is also aimed at assisting the building of capacity in skills, knowledge, research and education to enhance the standards of expertise and professionalism.

The establishment of CMDF will have a beneficial impact on a broad spectrum of stakeholders including intermediaries, investors and issuers through the strategic impact that the fund will have on the future direction and growth of the Malaysian capital market – thereby ensuring that as many stakeholders as possible benefit from the value allocation. The CMDF would be funded by proceeds from selling down the shares of the demutualised exchange during the IPO.

The remaining 30% of the value is allocated to the Minister of Finance Incorporated (MOF Inc.). The value allocation exercise recognised that the government played a significant role in the success and development of the market. This included the role played by large government-sponsored institutions in mobilising capital and participating in the stock market and the government contributing towards the overall enhancement of the value of the exchange.

The demutualised exchange is the only exchange in Malaysia. Given the critical role that it plays in the development of the Malaysian economy, it is important that the Malaysian government retains a strategic stake in the demutualised exchange.

The eventual listing of the demutualised exchange will enhance the value proposition of the Malaysian exchange by adding to the list of premier companies which are highly capitalised and liquid.

The future ahead for the demutualised exchange is very exciting. It is our aspiration that the demutualised exchange evolves and transforms its business and, in the process, acts as a catalyst for the further growth of the Malaysian capital market.

With that, I would like to invite the KLSE chairman, Dato’ Mohd Azlan Hashim, to share with you detailed plans and strategies for the demutualised exchange. Thank you.