Overall, the successful implementation of the Capital Market Masterplan (CMP), with 85% of the 152 recommendations completed, has resulted in the extensive deepening and broadening of the Malaysian capital market. Malaysia now has one of the most well-balanced and diversified capital markets in Asia in terms of sizeable equity, bond and Islamic capital markets and investment management industry.

This feature provides Malaysia greater stability in terms of absorbing market cycles with issuers having a wide array of options to raise funds to sustain economic and financial activities. In addition, the building of a strong regulatory framework with emphasis on quality, corporate governance, market integrity and investor protection has reduced the areas of vulnerabilities.

Dato’ Zarinah said the SC’s priority for 2008 is to focus on further strengthening the competitiveness of our market as a source of efficient capital raising and maintaining an attractive investment environment for domestic and foreign investors. In this regard, the SC will continue to adopt strategies and policies that will ensure that emerging challenges to the Malaysian capital market are appropriately addressed and opportunities for growth identified.

The equity market remains an important conduit for capital-raising for companies and a strong pipeline of listings is expected based on the applications processed in the first quarter of this year. The merger of Bursa Malaysia’s main and second boards as well as the introduction of a sponsor driven and more broadly based Mesdaq market will provide even further opportunities for Malaysian companies to access the capital market.

The bond market is expected to further consolidate its position as one of the largest bond markets in Asia and the largest in the world for sukuk issuance.

“We continue to see sizeable issuance activity in the bond and sukuk markets from both local and foreign issuers with over RM38.3 billion approved in the first quarter of this year. With additional measures being implemented such as the introduction of an Electronic Trading Platform (ETP) for bond trading and price dissemination, the establishment of a third credit rating agency and further liberalisation in the approval process for bonds, we expect this segment of the capital market to continue playing a key role in the overall growth of the market,” Dato’ Zarinah said.

Another area of growth for 2008 is expected to be the investment management industry which was the fastest growing segment of the capital market in 2007. The SC has embarked on an aggressive set of strategies to promote the fund management industry and to position the Malaysian capital market as a leader in Islamic fund management. We have awarded licenses to leading global fund managers who are now operating in Malaysia and expect several others to establish operations here in the next 12 months. The latest license has been approved for Franklin Templeton Investments which is among the largest fund managers in the world with USD644 billion of assets under management. The establishment of fund management operations by leading global fund managers reflects their confidence in the growth prospects for the Malaysian investment management industry as well as the opportunities to manage the large pools of domestic savings and interest in Islamic fund mandates.

Our regulatory efforts will continue to be directed at ensuring that high standards of corporate governance, market conduct and professionalism prevail in the market. Two key areas that the SC will focus on with even greater vigor in 2008 are corporate disclosures and investor education. “The quality of disclosures made by companies, advisers and sponsors who work with them must be of an extremely high standard in terms of information content, relevance, timeliness and completeness. We expect this in all corporate submissions as well as on an on-going basis by all listed companies. We will act severely against any attempt to compromise on the quality of disclosures provided to the market place,” Dato’ Zarinah added.

In the area of investor education the SC will implement its investor education blueprint in 2008. The blueprint aims to develop knowledgeable and vigilant investors through a long-term strategy of promoting nationwide financial literacy and encouraging industry to strengthen their role in educating their customers. “Given the increasing complexities, product sophistication and levels of information required for informed decision making, we need to ensure that continuous and effective investor education efforts are in place,” Dato’ Zarinah stressed.

Further deepening and broadening of Malaysian capital market
2007 was a good year with strong growth in all segments of the capital market. The size of the capital market expanded by 24% to RM1.58 trillion. The ICM component grew by 29% to RM875 billion. The bond market grew by 12% to RM475 billion while the fund management industry by 44% to RM237 billion. The total value of fund-raising proposals approved was RM172 billion in 2007. This is a record amount and represents a doubling over the previous year. The number of approved proposals rose to 368 from 292.

Bond market – facilitative framework and international documentation brought in more foreign issuers and investors

Malaysia has built a broad and diversified bond market to vary the sources of financing and to strengthen the country’s financial resilience. In 2007, the value of debt securities fund-raising approved by the SC doubled to RM158 billion. Measured as a ratio of GDP, the Malaysian bond market is the third largest in Asia and is characterised by a diversified issuer and investor base. The average size of issuance was RM640 million with an average tenure of 5 years, with some maturities extending to 20 years or more. To maintain a well-regulated market, the SC had extended regulatory oversight over bond rating agencies one year before the sub-prime crisis identified this as an area of concern in global bond markets.

Since 2004, the SC has created a facilitative framework to attract quality foreign issuers to issue local and foreign currency denominated bonds and sukuk in Malaysia. In 2007, to increase the international competitiveness of the bond and sukuk market, the SC facilitated the use of international documentation as well as the use of international ratings to lower the cost of issuance. This has resulted in increasing levels of foreign participation in the bond market. In 2007, foreign issuers accounted for RM3.2 billion or 5% of RM-denominated gross issuances. In addition, 12 proposals from foreign issuers for USD-denominated issues totaling USD12.3 billion were approved. Foreign investment in the domestic bond market has risen from a negligible level to RM14.3 billion currently.

Equity Market - better quality proposals resulting in high over-subscription rates

The equity market also saw an increase in fund-raising activities by 89% to RM13.8 billion from RM7.3 billion the previous year. While there was a fall in Initial Public Offerings (IPOs) from RM4 billion to RM2 billion, listed companies raised additional equity via rights issues and private placements which saw a three-fold increase to RM11.8 billion. There was a significant improvement in the quality of proposals received as reflected by 3 rejections as compared with 40 in 2006. The higher quality of IPOs clearly attracted investors to the IPO market with saw an average over-subscription rate of 25 times, with 63% of IPOs trading above their offer price as at end 2007.

Investment Management – the fastest growing segment in the Malaysian capital market

The investment management industry continues to be the fastest growing segment of the Malaysian capital market. Funds under management grew by 44% to RM237 billion and the net asset value (NAV) of unit trust funds grew by 39% to RM169.4 billion. Malaysia has the largest domestic unit trust industry in ASEAN. Further deregulation and liberalisation initiatives enabled the industry to innovate and launch new products on a timely basis. In addition, the SC promoted increased transparency of fees through the single pricing regime. Distribution channels were also widened to facilitate greater reach to customers and to make possible an increase in value added services. This includes facilitating the participation of financial supermarkets and financial planners. Foreign ownership in fund management and Real Estate Investment Trusts (REITs) management companies was liberalised to 70%.

Strong growth in Islamic capital market – de-regulation and continuing innovation brought about landmark launches

The Islamic capital market also registered strong growth with the market capitalisation of Shariah-compliant stocks rising by 28.6% to RM705.1 billion. As at the end of 2007, Shariah-compliant stocks accounted for 64% of total market capitalisation. The number of Shariah-compliant stocks accounted for 85% of all listed stocks.

The SC approved sukuk proposals totalling RM121.3 billion in 2007, three times the value approved in 2006. There were 59 sukuk proposals, predominantly based on the principle of musyarakah. The strong growth also extended to the Islamic unit trusts which grew by 84% in 2007 while the number of Islamic unit trust funds increased to 128.

Malaysia is regarded as the leading centre for Islamic finance and sustained its track record for product innovation with landmark launches such as the largest sukuk funding programme of RM60 billion by Cagamas, the largest corporate sukuk of RM15.4 billion by Binariang GSM, the Khazanah exchangeable sukuk, the Islamic stapled securities by Telekom and Hijrah Pertama and the first Asian Exchange Traded Fund (ETF) by i-Valuecap Management this year.

In line with the Malaysian International Islamic Financial Centre (MIFC) initiative, we fully liberalised international participation in the Islamic fund management industry with the removal of restrictions on ownership and investment abroad. Additional incentives were provided in terms of tax exemption on fees while the EPF has undertaken to provide RM7 billion in mandates to Islamic fund managers. Three new stockbroking licenses are to be given to brokers that are able to source and intermediate cross-border business with the Middle East. Income tax exemption was provided to attract non-resident Islamic finance experts.

The SC has received international acknowledgement for its pioneering efforts and leadership in the development and promotion of the ICM. The SC was named “Best Regulator for Islamic Funds” at the Master of Islamic Funds Awards. This award represents an endorsement of national efforts to promote Malaysia as a global hub in the origination, distribution, and trading of Islamic funds and wealth management.

Greater regulatory efficiency and strong investor protection

The SC has sought to create a highly efficient environment to enable the Malaysian capital market to be internationally competitive. To this end, important changes were made to the regulatory framework, including the bringing into force of the Capital Markets and Services Act in 2007 to streamline securities laws and to introduce the single licensing framework to reduce administrative costs and increase efficiencies.

In seeking to optimize regulatory efficiency, the SC has expanded the role and accountability of directors and management of PLCs, intermediaries and that of professionals such as accountants, auditors, valuers and lawyers

The Malaysian capital market has gained tremendous respect for its efforts in combating breaches of securities laws and its investor protection regime is highly regarded internationally. Malaysia was ranked 4th for investor protection by the World Bank in its “Doing Business” survey for the second consecutive year. It was ranked 5th for compliance with international anti-money laundering rules. The acceptance of SC as a signatory to the multilateral memorandum of understanding by the International Organisation of Securities Commissions (IOSCO) represents international acknowledgement of the SC’s regulatory and enforcement capabilities.

Tackling market abuse and corporate misconduct

In shifting to a market-based approach to regulation, the SC has strengthened its surveillance and supervision to ensure that PLCs and intermediaries fortify their internal control capabilities and practice of corporate governance and compliance. The SC’s routine surveilance coverage of PLCs was increased to 240 in 2007 while the number of PLCs under our active review dropped from 69 to 22, a positive development

The SC invested in state-of-the-art surveillance systems and, given the importance of the investment management industry, set up a specific department to supervise the industry. In 2007, it conducted a series of diligence reviews and undertook targeted and risk-focused inspections. The SC has taken firms to task for shortfalls in meeting expected standards and imposed various sanctions ranging from substantial fines, reprimands and imposed appropriate restrictions on business activities.

The SC’s strategic approach to enforcement has again enabled it to take swift and apposite enforcement actions. Through widening the scope of civil and administrative actions to complement our criminal actions, the SC was able to pursue the most appropriate enforcement action in a timely manner. In 2007, numerous civil actions were initiated to freeze assets, disgorge ill-gotten gains and to make restitution to investors.

The SC undertook 16 criminal prosecutions, took civil actions against 11 persons, obtainied civil injunctions freezing RM20 million, filed civil orders seeking restitution totaling RM69.4 million, imposed administrative fines totaling RM800,000 and compounds totaling RM1.5 million. It successfully completed investigations and filed criminal charges for false financial reporting in five high profile cases – GP Ocean, Nasioncom, Transmile, Megan Media and Polymate.

The year also saw the SC gaining international recognition among fellow regulators with respect to its efforts to deal with internet investment scams. The SC led and coordinated an international team of regulators to freeze assets in several jurisdictions in relation to Swisscash. It also set up a dedicated task force and worked with related agencies to effectively block many websites and conducted investigations in other cases

Addressing investor complaints and increasing their knowledge

In 2007, the SC implemented an active complaints management program to ensure that investors received timely service and responses. Overall, the SC was able to respond to 96% of complaints within our time charter. The SC developed an Investor Education Blueprint to ensure comprehensive and targeted approach to investor education. The CMDF-Bursa research scheme was extended to ensure that investors had access to research on small and medium-sized companies. The SC also launched an extensive publicity campaign against illegal Internet investment schemes which helped to significantly reduce the level of such activities.

Efficient and Accountable Regulator

Various initiatives were introduced to strengthen its capabilities, effectiveness and accountability. Invest in people and information technology, the SC continues to strive to achieve operational excellence. Overall, the SC met its time charter in 92% to 100% of cases – above the KPI benchmark of 90%. Its performance scorecard is published quarterly and the SC took steps to strengthen its public consultation process.

The SC will continue to focus on attracting and retaining talent with innovative strategies. It introduced a high performance culture and continues to promote integrity and accountability among its staff. The SC also undertook a feedback survey with internal and external stakeholders and received positive feedback that the SC has strengthened its professionalism and that stakeholders were happy with its focus on investor protection and increased efficiency in processing applications.