Capital Market Maintains Pivotal Role in Nation’s Growth

Kuala Lumpur, 10 March 2005

SC releases Annual Report 2004

The Malaysian capital market continues to play an increasingly significant role in financing the nation’s economic growth and assisting capital formation. This is consistent with national long term growth plans and government objectives, said the Securities Commission (SC) at a press conference in conjunction with the release of its 2004 annual report.

The SC brought forward the timing of the release of its annual report from May to March, as part of its efforts to ensure timely reporting of events and regulatory policy issues to capital market constituents as well as to increase the level of awareness and understanding of its priorities and responsibilities.

Underpinning the SC’s responsibilities is a commitment to a consistent long-term development strategy as outlined in the Capital Market Masterplan (CMP). In 2004, the SC focused on ensuring strong investor protection through effective surveillance and enforcement, as well as enhancing the level of competition in the marketplace and facilitating product innovation.

2004 also saw the SC taking steps to implement phased deregulation and liberalisation in the market, and enhance international compatibility to promote the competitiveness of the Malaysian capital market.

Going forward, the SC will leverage on the strengths of Malaysia’s strong market infrastructure, regulatory framework and economic base to facilitate a shift of the engine of growth to the private sector as well as move Malaysia up the value-added ladder. Two key focus areas for 2005 will be enhancing quality and holistic surveillance and enforcement.

CAPITAL MARKET REVIEW 2004

RM56.25 billion approved for raising through capital market

Corporate exercises approved in 2004 were expected to raise RM56.25 billion. The private debt securities (PDS) market continued to play a critical role in capital formation, with RM47.84 billion or 85% of the funds to be raised through 124 PDS issues.

Of note is that the rules were recently amended to attract supranationals to issue ringgit-denominated bonds. The Asian Development Bank soon thereafter made a RM400 million issue in November; this was followed by a RM500 million issue by the International Finance Corporation in December. Both issues were largely oversubscribed. The participation of supranationals adds another dimension to the Malaysian bond market that will enhance its attractiveness to both issuers and investors.

There was also a 25% increase in corporate proposals processed. This arose from the higher number of submissions as well as a reduction in processing turn-around times, reflecting an enhancement in SC’s delivery system.

Over RM1 billion now invested through venture capital companies

The capital market continued to play an important role in funding the growth of small and high-growth companies through the venture capital (VC) industry and the MESDAQ Market (MESDAQ). Venture capital investment rose by 20.36% in 2004 and now exceeds RM1 billion, while the total number of investee companies increased by 11.4% to 332.

In addition, MESDAQ fulfilled its potential as a conduit to improve the access of small high-growth companies to the capital market through attracting an increasing number of issuers. The number of applications approved for listing on MESDAQ jumped significantly from 22 previously to 38 in 2004.

Islamic capital market continues to expand role in capital market

The Islamic capital market is proving to be an increasingly important component of the capital market. Forty-nine Islamic bonds valued at RM15.16 billion were approved in 2004, representing an increase of 26.33% over the previous year.

Landmark issuances included the first domestic Islamic corporate bond based on the ijarah concept amounting to RM160 million, a five-year US$350 million global sukuk ijarah and the first Islamic ringgit bond issuance of RM500 million by a supranational body. The NAV of Syariah-based unit trust funds rose strongly by 42.32% to RM6.76 billion as at the end of 2004.

Unit trust NAV grows by 25% to RM 87.39 billion

Reflecting the high levels of private savings in Malaysia, the investment management industry enjoyed strong growth in 2004. Fund management assets also increased by 20.45% to RM114.13 billion. The NAV of unit trust funds grew by 24.54% to RM87.39 billion, accounting for 12.1% of market capitalisation that year.

Growth prospects for the investment management industry continued to look bright with initiatives such as the new REITs guidelines. To ensure this healthy growth is sustained, the industry is working closely with the SC on guidelines on compliance and best practices for fund managers. In addition, the SC had introduced in 2004 a compliance and risk-based supervision framework for the investment management industry and will follow up with a surveillance review of market conduct and internal practices this year.

Pro-active surveillance of PLCs

The SC remained vigilant in ensuring robust levels of investor protection to support capital market growth. Efforts in 2004 particularly focused on pro-active and pre-emptive surveillance. This prevented several questionable transactions from occurring during the year.

Overall, the scope of corporate surveillance coverage was broadened considerably as part of initiatives to emphasise early detection and pro-active engagement to prevent questionable transactions. As at 31 December 2004, the SC maintained surveillance over 184 companies – on a routine and selective basis. Issues were identified in 29 companies and these were addressed either through compliance actions, or were subject to investigation or referrals to other agencies.

Strengthened enforcement efforts

The SC also widened the scope of its enforcement powers and actions in tandem with the growth and increasing complexity of the capital market. In particular, enforcement on corporate governance improprieties was intensified.

During the year, the SC embarked on several major criminal prosecutions against principal officers of PLCs and professionals, including external auditors and accountants, for corporate disclosure-related offences. These actions include the first civil action for insider trading which resulted in a civil penalty and disgorgement of profits.

Additionally, the government approved the SC’s proposal on the establishment of a dedicated court for capital market offences, which is expected to expedite the disposal of such cases. In support of SC’s commitment, the Attorney General also appointed three of the SC’s senior enforcement officers as Deputy Public Prosecutors, the first to be appointed outside of the Attorney General’s Chambers.

The year also saw the establishment of the High Level Enforcement Committee on Corporate Governance and the Post-Approval Surveillance Action Team (PASAT). PASAT has already contributed to the identification and prosecution of breaches of the securities laws. It has also prevented several approved proposals from proceeding with listing, which are being followed up with criminal investigations.

62% of CMP implemented as at end-2004

The SC reported significant progress in implementing the recommendations of the CMP. As at 31 December 2004, 94 of the 152 recommendations were completed.

Key capital market initiatives in 2004 included orderly and sequential deregulation and phased liberalisation to enhance competitiveness and strengthen international positioning; enhancing the competitiveness of market institutions; the establishment of the Capital Market Development Fund (CMDF); facilitating greater use of technology; and accelerating the growth of the Islamic capital market.

As announced during Budget 2005, five international stockbroking companies and five global fund management companies are to be allowed to establish operations in Malaysia. In addition, entry into the futures and venture capital industry is to be liberalised in tandem with measures to strengthen international positioning.

The demutualisation of Bursa Malaysia was completed in early 2004, unlocking the value of the exchange and allowing the establishment of the CMDF. Several guidelines were released to facilitate greater use of technology including the introduction of revised guidelines on electronic prospectuses and Internet securities application, and new guidelines for online unit trust transactions.

To further accelerate the growth of the Islamic capital market, guidelines on the offering of Islamic securities and pre-IPO assessment of Syariah compliance were also introduced, and Budget 2005 provided further measures to ensure greater tax neutrality for Islamic debt securities.

GOING FORWARD 2005

Focus on Quality

One of SC’s priorities in 2005 is to focus on quality in order to strengthen the Malaysian capital market’s position as a premier market. Quality is a key factor in ensuring long-term sustained growth of the Malaysian capital market.

“Ultimately, the vibrancy of the capital market and its ability to contribute to corporate capital formation and economic growth – whether it be through nurturing small companies or transforming large ones – is dependent on whether the capital market as a whole is offering quality investible products to investors,” said Dato’ Md Nor.

“This demands quality issuers, quality intermediaries at both primary and secondary stages, and a quality market framework,” he continued.

Holistic Surveillance and Enforcement

The SC will complement the efforts of capital market players to enhance their quality through continued comprehensive surveillance and enforcement action in 2005.

This includes strengthening the gate-keeping function through greater emphasis on governance quality of companies seeking listing, and shifting to a risk-based approach to surveillance. There will also be a greater use of administrative and civil actions in effecting market discipline.

The SC will seek to leverage on technology to strengthen its capability. It will build on its strong relationship with fellow regulators in the International Organization of Securities Commissions (IOSCO) to promote and provide assurance to international capital market participants.

Focus on Continuous Improvement

In support of the priorities for 2005, the SC will also focus on continuous improvement efforts, including capacity building, continually increasing performance standards and enhancing efficiency of processes.

“I am proud to say that it is a hallmark of SC’s commitment to the capital market that it will continuously focus on raising the quality and efficiency of its services to capital market stakeholders,” said Dato’ Md Nor.

“Though we have completed a major organisational transformation project more than a year ago, we will continue looking at raising the bar on performance,” he added.

Please click here to view the Annual Report.

SECURITIES COMMISSION MALAYSIA