Guidelines on the Offering of Private Debt Securities

The Guidelines on the Offering of Private Debt Securities (PDS Guidelines) govern any issue of, offer for subscription or purchase of, or invitation to subscribe for or purchase, PDS which requires the SC's approval under section 32 of the SCA. In essence, the approval scheme under these Guidelines marks the accelerated transition towards a disclosure-based system of regulation (DBR). The SC would cease to apply a merit-based approach in the PDS approval process. In doing so, issuers would have greater flexibility in terms of time and cost savings in the structuring of their funding requirements.

The PDS Guidelines introduce the following significant changes in the regulation of PDS:

• A speedy approval of PDS issues is expected as issuers and their advisers need only comply with the transparent requirements laid out in the Guidelines by submitting a declaration to the SC that the SC's requirements under the PDS Guidelines have been complied with. There is no need for a full submission to the SC for PDS which comes within the ambit of the Guidelines. A written approval from the SC will be given within a period of not more than 14 working days from the date of receipt of such declaration.
• There is significant liberalisation in the specific requirements for PDS issues. Hence, whilst a mandatory rating requirement is maintained, there is now no minimum credit rating requirement. In addition, the mandatory underwriting requirement is waived as the issuer and its adviser would determine whether any underwriting is required for any issue of PDS. In giving this flexibility to issuers in relation to underwriting, financing through PDS may be competitive with bank financing. The Guidelines also do not mandate minimum shareholders' funds requirements on issuers. This liberalisation is seen necessary for the development of a vibrant primary market for PDS. Issuers would be able to enjoy greater savings in terms of time and cost. Investor protection is not compromised as there are stringent requirements for disclosure of the risks in relation to any PDS issue and stringent requirements imposed on borrowers and trustees. At the same time, investors would be able to access a more diversified range of PDS for their investments.
• Greater transparency to market participants on the circumstances under which PDS issuance would be allowed or disallowed. In this regard, funds raised from any issue of PDS in Malaysia will be allowed to finance any economic activity except for such activities as may be announced by the National Bond Market Committee on a periodical basis.
• In terms of cost, the fees that are required to be paid pursuant to section 32 of SCA i.e. a sum of between RM10,000 and RM25,000 is now waived. Hence, in a private placement of PDS, no fees are payable to the SC. In the case of an offering that requires a prospectus, a fee of RM5,000 is charged for the registration of a prospectus. The KLSE fee of RM5,000 that was imposed for the vetting of a prospectus by the KLSE is also waived since the SC is now the approving authority for prospectuses.
• At the same time, secondary market liquidity for PDS would be enhanced in the removal of the restriction that was imposed under BAFIA on a corporation that is not a licensed institution to engage in "repo" transactions in PDS. With effect from 1 July 2000, repo transactions may be entered into by all persons whether or not the person is a licensed institution or corporation.

Guidelines on Prospectus Contents for Debentures

The content of prospectuses will be instrumental in the SC's efforts to promote greater disclosure of information so vital for investment decisions. Under the new regulatory regime, the prospectus must include all other information that investors and their advisers would reasonably require and reasonably expect to find in the prospectus for the purpose of making an informed investment decision. The new legislative provisions impose significant criminal liabilities for false or misleading statements and/or material omissions in such documents namely a fine not exceeding RM3 million or imprisonment not exceeding 10 years or both. In addition, civil remedies are available to investors when they suffer loss or damage as a result of such misstatement. The SC is also able to institute public interest litigation on behalf of investors who suffer loss or damage as a result of the misstatement.

The Guidelines on Prospectus Contents for Debentures set out the minimum level of information that must be disclosed as an initial guide to the market. Ultimately, issuers must be guided by the "general disclosure test" in assessing if the information requires disclosure or not.

Disclosures that are required under these Guidelines include information pertaining to the issuer, terms and contents of debentures, financial information, risk analysis, utilisation of proceeds and details on related party transactions. In addition, the type of information that is required in a shelf prospectus and supplementary shelf prospectus is also provided in the Guidelines.

Securities Commission (Shelf Registration Scheme for Debentures) Regulations 2000

A more facilitative scheme known as a shelf registration scheme ("SRS") is also introduced for the issuance of PDS via regulations issued under section 49 of the SCA. This scheme is available for issuers who wish to make multiple issues of PDS over a period of time and who wish to have the flexibility to determine when to issue the PDS into the market. SRS is only available to issuers who are able to meet more stringent requirements such as the following:

• Issuers must be good corporate citizens and must not have had prosecution instituted against them for breach of any securities or company laws or defaulted on borrowed monies which result in the immediate recall of the borrowed monies by the lender in the preceding 12 months prior to the registration of the shelf prospectus and during the effective period of the shelf prospectus;
• The total offering must be not less than RM 100 million in nominal value; and
• The PDS must have obtained investment grade rating at the time of the registration of the shelf prospectus and throughout the validity period of the shelf prospectus.

This scheme enables the issuance of bonds to be carried out in as short a time frame as possible and within a validity period of two years without the need to seek prior regulatory approval for each issue of securities.

This system would enable issuers to time a PDS issue in such a way as to take advantage of current market conditions, exchange rates, and particularly in relation to a bond issue, movements in interest rates, thus entailing lower costs for issuers.

Under the shelf registration scheme, an issuer will be required to prepare a shelf prospectus containing all the relevant information with respect to the issuer and the proposed issue of PDS. The shelf prospectus will contain all such information except particulars in relation to the price, number of securities and the timing of the issue. In order to ensure the accuracy of information provided to investors, the shelf prospectus must be supplemented with a supplementary shelf prospectus that updates the information which is contained in the shelf prospectus, and which states the pricing information outlined above.

Guidelines on Minimum Content Requirements for Trust Deeds

The new provisions in the SCA introduce a requirement for the issuance of a trust deed in any issue or offer of PDS. This is unlike the position under the Companies Act 1965 before the amendment to the SCA where it was optional for private placement of PDS.

The proposed amendments under Division 4 of Part IV of SCA alter the present regulatory scheme for trust deeds in a number of ways. First, whether a PDS issue is made by public or private limited companies, there is a requirement to have a trust deed that complies with the Guidelines on Minimum Content Requirements for Trust Deeds. Secondly, the Guidelines provide for more extensive content requirements and ensure flexibility of application in regard to each PDS transaction.

Hence, these Guidelines set out the minimum contents of trust deeds entered into between a borrower and a trustee(s) in relation to PDS. The key areas, in which the Guidelines require provision under the trust deed, include the following:

• The borrower's covenant to pay principal and interest due on PDS and compliance with other covenants contained in trust deed;
• Additional borrowers covenants and powers and responsibilities of trustees; and
• Events constituting default and remedy of such default

The minimum content requirements for trust deeds would strengthen protection to bondholders in the form of clear obligations and responsibilities imposed on borrowers and trustees.

Details of the above mentioned guidelines and regulations will be made available on the SC's website (www.sc.com.my) from 1 July 2000 onwards.

Equities

Guidelines on Prospectuses for Equity and Equity-linked Issues

The Guidelines on Prospectuses for Equity and Equity-linked Issues are introduced in line with amendments to the SCA which makes the SC the approving and registering authority for prospectuses of all equities and equity-linked issues (other than for the issue, offer or invitation of shares or debentures by an unlisted recreational club).

These guidelines, which take effect on 1 July 2000, were released and made available to the public on the SC website on 9 June 2000.

Unit trust schemes

The Guidelines on Unit Trust Funds 1997 (Unit Trust Guidelines) have been reviewed to incorporate any changes and replace, where applicable, the lapsing provisions of the regulations.

The four new practice notes, mentioned in the earlier part of this press release, stipulate the new provisions of the Act and its implications over provisions contained in the Unit Trust Guidelines. The complete set of practice notes are available on the SC website.

The Prospectus Guidelines for Unit Trust Funds to be issued will specify the minimum disclosure requirements for prospectuses for unit trusts. Management companies and all persons who are party to the preparation of the prospectus must ensure that the information given in the prospectus is not false or misleading or from which there is material omission. Hence, they must ensure a rigorous due diligence review prior to any submission made to the SC.

Arising from amendments made to the SCA, advertisements and promotional materials that are to be published after the registration of a prospectus relating to unit trust will no longer require the SC's written consent prior to publication. Notwithstanding this, the SC will conduct a post-vetting of such advertisements and promotional materials on a random basis to ensure compliance with Practice Note 13 at all times.