1. Regulatory Environment
For efficiency, all existing securities laws will apply to this new market, and any other regulatory issues which are specific to the new market will be addressed through new regulations prescribed by the Minister of Finance.
The proposed new market will operate in a full disclosure-based environment. The fundamental concept behind a full disclosure-based regulatory regime is the need to provide investors with all the information necessary to make an informed investment decision. This will involve compliance of higher standards of disclosure and due diligence by both the issuers and their advisers. The SC in approving any new issue or offer of securities to the public will not evaluate the merits or demerits of each proposal. Instead, the role of the SC as regulator will focus on issues of investor protection by ensuring that all information disclosed is adequate, accurate, material and timely.
Given the need to ensure that all institutions and intermediaries and their activities in the new market are governed by the Securities Industry Act (SIA) 1983, it is proposed that the new market operates as a stock exchange under the SIA. Although the market could have been structured as an exempt stock market, it was felt that such an structure would not be in the interest of investor protection.
In approving a body corporate as a stock exchange, the Minister must comply with the requirements of Subsection 8(2) of the SIA. He must, for instance be satisfied that there will be at least 10 members of the body corporate who will carry on the business of dealing in securities in that market before he grants his approval.
Once the new market is approved as a stock exchange under the SIA, all investor protection obligations will have to be complied with by the new market. These obligations include, among others:
- The new market must, by law, act in the public interest and should there be a conflict between such interest with any interest that is required to be served under the corporation law (e.g. interest of shareholders) the interest of the public shall prevail.
- The new market will operate as a self regulatory organisation (SRO), with the Commission having regulatory oversight through various provisions of the SIA.
- A Compensation Fund must be maintained by the new market in accordance with Part VIII of the SIA.
Furthermore the Minister and Commission will be in a position to exercise such residual powers under the SIA, especially under conditions of an emergency.
Similarly, given that most of the investigative powers of the Commission are tied to a stock exchange, the Commission's investigative and enforcement powers over the new market will be as wide as the powers with respect to KLSE if the new market is approved as a stock exchange under the SIA.
All provisions relating to market manipulation and insider trading would be applicable. So will the relevant record keeping provisions of the Act.
In order to encourage as many classes of intermediaries as possible to participate in this new market, it is proposed that its membership be extended beyond the existing stockbrokers. While all existing licensing provisions still apply, KLSE members will have their licences extended to the new market subject to terms and conditions. Non-KLSE members will be issued restricted licences to allow them to deal only on the new market.
The eligibility criteria and guidelines for brokers who want to assume additional roles as adviser/underwriter, sponsor and market maker will be determined by the new exchange and whose rules will be approved by the SC.
2. MESDAQ Bhd
The operating entity for the new market, to be known as MESDAQ Bhd, will be an approved stock exchange. It will be a wholly member-owned, not-for-profit body. Only a wholly member-owned entity can be totally devoted to service maximisation, and to ensure mutuality among its membership in promoting public participation in the market. It would be a focused association with a specific agenda, whose members would have a common interest in ensuring the success of the market.
MESDAQ Bhd will also be a self regulatory organisation (SRO) with statutory responsibilities to regulate its members and to efficiently run the market. In carrying out its duties as an SRO it may have to, among others:
- conduct examinations to ensure minimum standards of professionalism among intermediaries in the new market;
- enforce disciplinary procedures among members to promote high standards of commercial conduct and trade practices;
- conduct arbitration procedures to settle disputes and controversies;
- surveillance of market activities through the use of automated systems;
- ensure that market makers fulfil their obligations at all times; and
- above all, to promote investor trust and confidence in the new market by way of public disclosure programmes and efficient and transparent information dissemination systems.
This self-regulatory framework is premised upon the voluntary compliance of members with their own rules. The fact that members participate directly in the formulation and enforcement of rules, regulations, practices and procedures that govern the operations of the market not only ensures that the market develops in accordance with commercial needs, but is the best guarantee for compliance.
Nevertheless, statutory provisions permit the SC to oversee the operations of the SRO, and to ensure that the SRO will adopt best practices and enforce compliance of its own rules in accordance with the securities laws of the country.
3. Admission Criteria
The raison d'être for the establishment of this new market is to facilitate the raising of equity capital for technology-based and technology-related companies in particular, and 'young' companies with sound prospects for growth in general. The proposed primary market structure is designed to provide such companies with an avenue to raise funds to start up, upgrade or expand their operations.
On the overall, the admission criteria will be less stringent than that for the KLSE. It should be noted that the admission criteria outlined below forms the basic entry requirements into the new market at the initial stage. As the market matures revisions to the admission criteria are to be expected to cater for new needs and changes in the business environment.
The proposed basic admission requirements are:
i. Eligibility
Companies which are involved in a single business activity or a set of related and complementary business activities in a particular sector of the economy having good growth potential, with particular focus on technology-based and technology-related companies. Technology-based and technology-related activities include, but are not limited to :
a. advanced electronics/electronics
b. biotechnology including pharmaceuticals and food supplements
c. environmental technology including alternative energy sources
d. advanced materials
e. information technology including software engineering
f. aerospace technology
g. telecommunications
h. education/training services for technology-based companies
ii. Method of offering
Admission shall only be by way of public issue of new securities.
iii. Issued and paid-up capital
Minimum paid-up share capital of RM2 million upon admission.
iv. Bumiputra equity holding
a. Where an applicant satisfies the track record requirement for listing on KLSE's Second Board at the point of admission, it must fully comply with the National Development Policy (NDP) requirement by having a minimum 30% Bumiputra equity participation upon admission; or
b. Where an applicant does not satisfy the track record requirement for listing on KLSE's Second Board at the point of admission, the applicant is encouraged to invite Bumiputra equity participation, but must also give a written undertaking to the SC and MESDAQ Bhd to fully comply with the NDP requirement within 5 years after generating operating profit which is capable of being distributed by way of dividends, bonus capitalisation or other modes of distribution. In any case, the applicant must fully comply with NDP requirement within 1 year after it has met the track record requirement for listing on KLSE's Second Board, whichever is earlier.
c. Where appropriate, an exemption may be accorded to companies which have been granted MSC status in the national interest.
v. Business operation and historical profit performance
No track record requirement but --
a. a minimum period of business operation of 1 year for non technology-based and non technology-related companies; and
b. no minimum period of business operation for technology-based and technology-related companies.
vi. Pricing
The price of securities to be offered shall be determined and agreed upon between the applicant and the underwriters.
vii. Post-admission capital raising, capitalisation and acquisition exercises
A company admitted to the new market shall comply with the continuing admission and disclosure requirements of the new exchange in respect of corporate exercises subsequent to admission.
viii. Reverse take-overs and back-door admission exercises
Reverse take-over and back-door admission exercises are prohibited while the company remains quoted on the new market.
ix. On-going obligations
Companies admitted and quoted on the new market must comply with on-going reporting and disclosure requirements of the new exchange.
In finalising the detailed admission criteria, the new exchange will have to take into consideration issues like shareholding spread, need for a profit forecast, moratorium on promoters, representation by independent directors, chain-listing provisions etc. It would also have to make recommendations to the policy makers in relation to foreign ownership requirements to facilitate secondary listings from exchanges in other countries as well as MSC companies which can be 100% foreign owned.
In order to determine whether the activities of the applicant can be classified as technology-based or technology-related, an Advisory Committee has been set up headed by the Malaysian Technology Development Corporation for this purpose. Members of the Advisory Committee will consist of experts in the field of science and technology as well as representatives from industry.
4. Approval Process
The new exchange will vet and approve all applications for admission into the new market. Any approval of the SC as required under the Securities Commission Act (SCA) 1993 will be based on:
- compliance with market admission requirements; and
- adequacy of disclosure made in the offering documents.
Any prospectus issued will be perused and cleared by the SC and filed with the SC and Registrar of Companies.
As it is the aim of the new market to provide easier access to equity financing for companies which fulfil the admission criteria, it is expected that the time taken for the admission process be shorter than that for a listing on the main market. All costs incurred to be admitted and to trade on the new market should also be lower. However, these costs must be fully and accurately disclosed in a manner that the potential issuer and an ordinary investor can understand.
5. New Role of Market Intermediaries
The efficiency and attractiveness of the primary market as a means to raise capital is closely related to the secondary market for the trading of shares. The demand for new share issues in the initial public offering (IPO) will be greater if the investors are confident that they can easily realise the value of their investments in the secondary market. The proposed new roles for market intermediaries have been developed with the aim of ensuring that only quality companies are quoted, and that the secondary market will have some form of liquidity.
As members of the new market, brokers may, in addition to their dealing functions, be allowed to assume one or more of the following roles subject to suitability criteria, which will include among others capitalisation, financial health and experience and expertise of their employees. Brokers who assume more than one role will have to maintain appropriate "Chinese Wall" procedures within the company to prevent the flow of classified information between the dealers, advisers/underwriters, sponsors and market makers. The performance of the brokers in assuming these new roles will be monitored and reviewed regularly by the new exchange.
5.1 New Role of Market Intermediaries
All potential issuers will have to seek the services of an adviser who will also act as an underwriter. The adviser/underwriter is responsible in ensuring that all admission criteria and disclosure requirements have been complied with in an IPO application. In performing its duties the adviser/underwriter will have to undertake extensive due diligence examination.
The adviser/underwriter is expected to undertake firm commitments. As good businessmen, the adviser/underwriter will only make such firm commitments when they are certain that the offering is of a quality that they can easily sell to investors at a premium. Therefore, suitability judgements on the prospects of the issuer will, in a sense, be made by the adviser/underwriter when they decide to bring the company to the market. And, to ensure that the adviser/underwriter has a continuing responsibility to the clients to whom they will sell the shares, it is proposed that the adviser/underwriter be obligated to provide updates and due diligence information associated with the offering for at least 1 year after the IPO is completed.
5.2 Sponsor
Studies have shown that greater transparency in the trading process and readily available up-to-date information on the quoted companies enhance market liquidity. Investors tend to shy away or demand a higher risk premium by paying a lower price for the shares of companies which are not well researched.
It is proposed that all companies quoted on the new market be required to secure and maintain the services of a sponsor for at least 5 years after the IPO. Responsibilities of a sponsor include promoting the company to investors by providing research materials, ensuring that the company complies with market rules and on-going disclosure requirements, and acting as the point of contact between the company and the investor; and the company and the new exchange. A company without a sponsor during the obligatory period will have to find a replacement within a specified time period, failing which the trading of the company's shares will be suspended and subsequently not be allowed to remain quoted on the new market.
Sponsorship provides investors with a view of the status of the company and its business activities. A company that is unable to maintain the services of a sponsor or does not want to retain the services of a sponsor after the obligatory period without sound fundamental reasons, may be seen as sending 'negative' signals to the market. Existing investors may find it difficult to exit from such companies, thereby reinforcing the fact that investors need to be fully aware from the onset that investing in the new market is definitely riskier than the KLSE.
5.3 Market maker
In addition to sponsorship, another liquidity-building measure is the introduction of market makers. There will be no limitations on the number of market markers for each stock as well as the number of stocks a broker would like to make markets on. However, every time a broker wants to market make for a particular stock, it would have to obtain the approval of the new exchange.
In addition to being adequately capitalised, authorised market makers will also be required to adhere to specific record-keeping and financial-responsibility standards. The new exchange should also have in place rules, regulations, surveillance systems and enforcement procedures to ensure ethical trade practices among the market makers.
6. "Know Your Client and Product" Rule
Given that investing in the proposed new market entails high risks, brokers will be required to observe stringent applications of the 'know your client and product' rule. A broker should have a reasonable basis for recommending a stock on the new market to a client who may reasonably be expected to rely on it. In addition, the recommendation must be appropriate for the investor, given the investor's known financial situation and investment objectives or needs.
The 'know your client and product' rule is one form of investor protection measure, an assurance that only 'qualified' investors are allowed to participate in this high risk market. While enforcement of this rule can be subjective, the SC will attempt to inject some measure of objectivity in operationalising these qualifications . Specific criteria will need to be established requiring the brokers to know their customers and their risk/reward profile. Such criteria could be based on, inter-alia, the investor's minimum net worth, a minimum number of years of investment experience, his sophistication or otherwise his willingness to seek professional advise.
7. Market Infrastructure
Since the KLSE's CDS programme has been completed at the end of 1996, it is also proposed that the new market should start in a fully scripless environment. Furthermore, as the KLSE is proposing to improve its delivery and settlement system, it is proposed that the new market follow the same procedures. This is because one identifiable downside in introducing a different delivery and settlement system would be the confusion this move may cause to investors who have to differentiate between trading on the KLSE and on MESDAQ in more ways than one.
To ensure efficiency, the new market should, wherever possible, utilise existing infrastructure in respect of clearance, settlement, custody and information dissemination.
However, the trading and surveillance systems may have to be tailored in accordance with the requirements and architecture of the new market.
