At a press conference in conjunction with the release of its 2006 Annual Report, the Securities Commission (SC) said it had stepped up efforts to further strengthen governance through its gate-keeping, surveillance, supervision and enforcement functions.
In tandem with this, the SC increasingly relied on improving market and self-discipline through holding capital market participants to higher levels of accountability. This was achieved through the implementation of principles-based supervision and adoption of a strategic approach to enforcement.
The SC also introduced greater flexibilities to allow capital market intermediaries to respond more quickly to changing customer needs and to reduce their regulatory costs. The SC continued to strengthen the delivery of its services to all its stakeholders.
High growth in several market segments
The size of the Malaysian capital market, comprising debts and equities, expanded by 17 per cent or RM190.1 billion to RM1.3 trillion in 2006. This reflected the increasingly important role of the capital market in the national economy. The RM190.1 billion increase in the value of the market in 2006 over 2005 was almost equivalent to the total size of the market in 1990.
Total approvals for fund-raising exercises grew by 21 per cent to RM79.3 billion. With the increasing maturity of the Malaysian economy, there was greater reliance on private debt securities market (PDS) for financing. Funds approved through PDS grew by 25 per cent to RM75.8 billion. This is significant as PDS approvals in 2006 were almost four times larger than the value of PDS approvals in 2000.
The average size of the 30 IPOs approved in 2006 at RM45 million was significantly higher than the RM31 million average size of IPOs approved in 2005. The new listings brought the total number of companies on Bursa Malaysia to 1,027. Total market capitalisation stood at RM848.7 billion as at end of 2006, as compared to RM695.3 billion as at end 2005.
Among the fastest growing segment of the Malaysian capital market was the investment management industry. The NAV of unit trust industry rose by 23.6 per cent to RM121.8 billion while funds under management increased by 29.2 per cent to RM164.4 billion. This rapid growth reflects increased outsourcing of fund mandates, expansion in product range and an appreciation in portfolio values.
Islamic capital market—increasing internationalisation and innovation
Through increasing levels of internationalisation and enhanced product development, Malaysia strengthened its position as one of the Islamic capital market centres. A significant development has been Malaysia’s increasing ability to innovate sophisticated internationally accepted Shariah-compliant products.
Backed by a comprehensive and facilitative regulatory infrastructure, a wide range of financial intermediaries and a variety of products, the Islamic capital market grew rapidly. The SC approved Islamic sukuk amounting to RM42 billion in 2006. Today Malaysia originates 67 per cent of the world’s sukuk issues. The year 2006 also witnessed the listing of the first two Islamic REITs with 86 per cent of stocks on Bursa being Shariah-compliant accounting for RM548.4 billion or 65 per cent of total market capitalisation.
In 2006 Bank Negara Malaysia, SC and other stakeholders launched the MIFC initiative. This strengthened Malaysia’s position as an international centre of origination and trading of ICM and treasury instruments, Islamic funds and wealth management services.
Strengthened gate-keeping, surveillance and enforcement for investor protection
The SC adopted a pre-emptive approach of managing governance risks to investors. In 2006, greater emphasis was placed on ensuring the SC only accepts quality corporate proposals with greater accountability imposed on advisors and professionals. This led to an improvement in the overall quality of IPO submissions to the SC.
Over the years, the SC built its capacity and capabilities for detection of financial reporting irregularities by improving systems and competencies. In 2006, the SC extended its corporate surveillance to bonds issued by PLCs. During the year the SC maintained surveillance on 333 companies, where 242 were part of its routine coverage while 91 were review cases requiring greater scrutiny. Its active corporate surveillance led to the uncovering of irregularities and enabled quick enforcement action.
In 2006, the SC implemented a principles-based approach to supervision. The SC said domestic intermediaries that demonstrate high standards of market conduct will allow the SC to increase its reliance on their internal control systems and self-discipline. The principles-based approach will also involve increased oversight and on-site thematic examinations. In instances where breaches occur the SC has access to a wide range of regulatory actions, including prosecution and civil enforcement.
In 2006, SC’s enforcement efforts focused on cases involving disclosures, fair treatment of investors, and advisors in meeting their due diligence obligations. Administrative actions accounted for 90 per cent of enforcement actions and offered the advantage of timeliness. These actions can be quite severe such as barring submissions for a time period and public reprimand, which has reputational consequences, as well as fines.
Major cases include actions against Granasia Corporation Sdn Bhd and Hospitech Resources Bhd for misleading disclosure which led to reimbursement of public funds amounting to RM39 million. Hwa Tai Industries Bhd was reprimanded publicly and monetary penalties were imposed on its directors for failing to allocate shares fairly. The SC imposed a penalty of RM200,000 on Hwa Tai’s chairman and non-executive director, who was also the single largest shareholder. The other directors were fined RM50,000 each.
The SC held advisors and professionals to higher standards and took administrative actions against Deloitte KassimChan, Hwang-DBS Securities and Affin Merchant Bank for not meeting their due diligence obligations.
Efficient service delivery to meet market needs
Mindful of the needs of the market place, the SC achieved significant shortening of time frames for processing of corporate proposals. The approval time for big cap listings was down to one month from three months previously; registration of abridged prospectus was reduced to one day while approvals for stand alone rights issues in a mere five days. Between 84 to 100 per cent of applications met the time charter in 2006.
These time charters were benchmarked against international standards and, in the interest of greater transparency and accountability, the SC published quarterly scorecard. Reasons for rejections of corporate proposals are posted on its website.
Going forward
In 2007, the SC will focus on optimising regulatory efficiency to promote further growth and innovation. Its efforts in this direction will include promoting market efficiency and competitiveness, under which deregulation and liberalisation initiatives will be major aspects.
The implementation of the Capital Market Services Act will be a key component of measures to achieve an optimal balance between facilitative regulation and investor protection.
The year will see SC continuing initiatives to strengthen investor knowledge; entrench Malaysia’s lead as an international Islamic capital market and enhance the quality of regulatory services.
The annual report is available here.
