The aim is to see consolidated Universal Brokers fully in operation within two to three years. In order to realise this objective and bearing in mind the complexities of a merger arrangement, stockbroking companies must begin immediate preparations to consolidate. Stockbroking companies must speed up the process because even as the consolidation framework is being announced, other countries in the region are actively taking steps to strengthen and enhance competitiveness of their respective capital markets. Over the last few years, the government and the SC have reiterated and emphasised the need for industry consolidation. The issue has also been raised with stockbrokers at the various meetings and annual dialogue sessions that the SC has had with the industry. However, the broking industry has not responded with any significant efforts to consolidate so far.

As stated in the earlier press statement, stockbrokers are required to enter into firm merger agreements and comply with the new rulings on ownership and corporate structures within the deadline of 31 December 2000, or at least show that contractual arrangements have been undertaken towards achieving these requirements by that date. Appeals to the SC for an extension of time by affected parties who are unable to meet the ownership and corporate structure requirements by 31 December 2000 will only be considered if there are strong and valid reasons.Stockbrokers that fail to enter into firm merger agreements by the deadline will not have their licences renewed.Meanwhile, the task force chaired by the Ministry of Finance and comprising representatives from the SC and the KLSE will continue to review and monitor the overall progress of the consolidation exercises and will determine measures to be taken to further expedite the process, if necessary.

The SC, as stated earlier, has encouraged the consolidation exercise to be market-driven in the last couple of years. The government and the SC have continuously emphasised the need for industry consolidation. However, the stockbroking industry has generally failed to effect consolidation on a voluntary basis and has not heeded calls to merge. The government and the SC believe that the recently announced policy framework will effectively achieve the objectives of consolidating the stockbroking industry, which are to strengthen the industry and prepare it to face future competitive challenges. In fact, the policy framework provides the general guidelines for consolidation that brokers themselves had requested for in the past.

It is viewed that 15 stockbroking companies represent a suitable number of consolidated entities required to achieve an appropriate level of competition considering the size of our capital market, and take into consideration the degree to which mergers can be achieved, the level of capital required, the scope of intermediation services that are to be provided and the need to achieve effective consolidation.

Firstly, the reduction of the number of stockbroking companies to 15 Universal Brokers does not in any way imply that there is to be 15 locations for stockbroking companies. It is expected that many of the existing locations will be converted into branches of the 15 Universal Brokers. In addition, Universal Brokers will, from 1 January 2002, be allowed to open additional branches throughout the country. This means that there will be more stockbroking outlets after 2001. As such, there will be no adverse impact on investors' accessibility to stockbroking services. On the contrary, it is expected that there would be greater access following the removal of branching restrictions. Furthermore, the concurrent reduction in commission rates will provide incentive for on-line broking activity to grow, which will offer an additional, more efficient means of access to Malaysian intermediation services.

The objective of this is to promote consolidation by existing players within the stockbroking industry. This will ensure that, for the time being, consolidation is effected only by parties with relevant stockbroking experience and capabilities.

The policy framework is aimed at achieving industry-wide consolidation and identifying a group of Universal Brokers. To become a Universal Broker, the entity is not only required to achieve a certain level of capital and prudential strength but also undertake consolidation. As such, no exemptions will be granted for the requirement to effect mergers (with at least three other existing brokers) notwithstanding the existing capital and prudential strength of any single stockbroking company.

A valuation based on 1.5 times NTA is a fair basis given the fact that a consistent valuation will be used for all stockbroking companies participating in merger exercises under the framework. If a merger is to be effected via a share swap, the merger parties will be valued on a similar basis without undermining any particular party.What is important to bear in mind is that this is an exercise for consolidation and not one for some parties to cash-out. If certain owners of stockbroking companies want to cash out at a higher valuation, they can do so after the consolidation exercise.

The Danaharta scheme is based on a different mandate, that is, to revive distressed stockbroking companies and was initiated well before the consolidation framework was announced. The valuations of these distressed brokers are based on estimated realisable values and some considerations to pay off the creditors, pursuant to workout proposals prepared in accordance with Danaharta guidelines. Therefore, to enable the objectives of the scheme to be met, the original cost of acquisition incurred can be factored into the valuation of the acquiring stockbroking company for the purpose of any subsequent mergers under this framework. This would be fair to the acquiring stockbroking company. Otherwise, the cost of acquisition may be treated as an intangible asset in the book of the acquiring stockbroking company.

The policies contained in the framework take effect from the date of the announcement on 21 April 2000 and will not be applied retrospectively. Stockbroking companies which have already effected mergers or are in the process of doing so can expect to enjoy similar benefits accorded to stockbroking companies involved in this framework, as long as the relevant criteria have been met. In this regard, written proposals should be submitted to the SC for consideration.

The SC has been working with consultants and various other subject matter experts in formulating recommendations relating to various areas of the capital market, including the stockbroking industry, as part of the ongoing work on the Capital Market Masterplan. However, final recommendations are subject to review and close consultation with the Ministry of Finance before they are taken up.

The measures are part of the recommendations related to stockbroking companies within the CMP, which are aimed at, among other things, developing stronger, better capitalised stockbroking companies and the reduction of execution costs within the stockbroking industry. While a full set of recommendations for the capital market will be presented in the CMP, which is expected to be completed in the middle of this year, these proposals for the stockbroking industry have been announced early in order to allow participants sufficient time to be able to meet the timeframe which has been stipulated.

The SC has asked the Association of Stockbroking Companies Malaysia (ASCM) to set up a special committee for the implementation of the consolidation policy. Stockbrokers may forward their concerns or seek clarification on the framework from the SC via this special committee.