Funds approved in capital market increased 54% in 2011

28 March 2012 | Kuala Lumpur

The Malaysian capital market continued to grow with fund raising approved by the Securities Commission Malaysia (SC) reaching RM118.93 billion at the end of 2011, compared to RM77.02 billion in 2010.

This marked increase reflects strong confidence in the fund raising environment and sukuk approvals which had more than doubled to RM78.9 billion from RM38.3 billion the year before. The approvals included the world’s largest corporate sukuk programme of RM23.3 billion by Projek Lebuhraya Usahasama Berhad, under which issuance commenced in January 2012. Malaysia remains at the forefront of the sukuk market, accounting for 73% of the total sukuk issued globally.

Total funds raised via the PDS market increased by 32.8% to RM71.2 billion in 2011 from RM53.6 billion in 2010. There has also been growing interest from global investors in search of stable income with higher yields and total foreign investment in private debt securities increased from RM14.3 billion as at end-2010 to RM15.1 billion at end-2011, of which RM10.09 billion was in conventional PDS with the remaining RM5.05 billion in sukuk.

The SC approved 14 IPOs for the Main Market in 2011. The capitalisation of the Malaysian equity market stood at RM1.28 trillion at end 2011, with overall average trading activity higher by a daily average of 1.34 billion units, an increase of 31.6% from the year before. Total funds raised via the equity market fell to RM12.6 billion in 2011 from RM32.1 billion the year before in line with a general slowdown in IPO activity worldwide. Despite continuing uncertainties in the global financial market, the FBMKLCI grew marginally to end the year at 1,530.73 points, having risen 11 points from its 2010 close of 1,518.91. Although growth was marginal, the FBMKLCI still outperformed the MSCI Emerging Asia Index and MSCI World Index during 2011, where both indices fell by 19% and 8% respectively.

The fund management industry managed a total of RM423.6 billion as at 31 December 2011, compared to RM377.5 billion in 2010, an increase of 12.2%. Unit trust funds continued to constitute the largest share of the Malaysian fund management industry and the aggregate NAV of unit trust funds grew by 9.99% to RM249.5 billion in 2011 (compared to RM226.81 billion in 2010), accounting for 19.42% of Bursa Malaysia’s market capitalisation at the end of 2011.

“Over the next 10 years, the capital market will have to take on an even bigger role to provide the long-term financing required to sustain domestic growth amid a challenging global environment for growth and jobs, while adapting and remaining resilient to major shifts in the economic and financial landscape”, said Tan Sri Zarinah Anwar, Chairman of the SC on the release of the regulator’s Annual Report 2011.

Charting the future for growth with governance

The Capital Market Masterplan 2 (CMP2) was launched in April 2011 to chart the direction of the capital market over the next decade and provide clear strategies to unlock its potential. CMP2 focuses on positioning the capital market to support national policies to transform the Malaysian economy while addressing concerns about the efficacy of markets to withstand the aftermath of the global financial crisis.

The first major CMP2 deliverable was achieved with the launch of the Corporate Governance Blueprint 2011 in July. The Blueprint sets out the policies, strategic direction and detailed recommendations for strengthening corporate governance in the Malaysian capital market over the next five years. Most of the recommendations will be implemented through a new corporate governance code and changes to Bursa Malaysia’s Listing Requirements, both of which would take effect in 2012.

Taking into consideration changes in the global and domestic financial landscape, significant amendments to the Securities Commission Act 1993 (SCA) and the Capital Markets and Services Act 2007 (CMSA) came into force on 3 October 2011 to strengthen the regulatory framework of the capital market in line with global standards and pursuant to the strategies outlined in the CMP2. The amendments focused on internationalising and enhancing the competitiveness of the Malaysian capital market with changes to expand the mandate of the SC to promote market stability, as well as to ensure effective regulatory oversight over trustees and custodians. The licensing provisions in the CMSA were also amended to promote ease of doing of business and facilitate a more cost effective regulatory regime without compromising investor protection. The regulatory reforms also strengthened the SC’s regulation of OTC derivatives with a trade repository to be introduced.

The amendments also included provisions for the development of the legal framework for the establishment and operationalisation of a private retirement scheme (PRS) to complement and supplement the existing mandatory schemes of the Employees Provident Fund (EPF). The PRS can be used by individuals who have disposable income to save as well as employers to make voluntary contributions above the EPF mandatory contributions on behalf of their employees. The SC released the eligibility requirements for private retirement scheme providers and is currently evaluating eligible firms. The SC is also working on establishing the central administrative agency to co-ordinate reporting to PRS contributors.

Continued emphasis on investor protection

The regulatory framework for fund-raising and product regulation was extensively reviewed for opportunities to increase efficiencies in the approval process through tailoring investor protection requirements to be more specific relative to product characteristics. In line with this, the fund-raising framework for private debt securities and sukuk was revised to create a more attractive environment for local and international issuers and investors.

As product complexity increases, disclosure requirements need to be strengthened to ensure more effective disclosure of product risks. In line with this, the sales practice regime was further strengthened through streamlining the categories of “sophisticated investors” to limit the distribution of high-risk and complex products. The sales practices for unlisted products were reviewed to clarify suitability assessment requirements under section 92 of the CMSA while disclosures were enhanced through requiring the issuance of product highlight sheets. Overall, standards relating to business processes and incentive structures were enhanced through the issuance of guidance on `Treating Investors Fairly’.

The shareholder approval threshold for PLCs wishing to dispose their assets was raised to 75% and PLCs are now required to provide shareholders with independent advice and detailed disclosure on the use of proceeds from the asset disposal, to increase transparency and ensure shareholders are equipped with adequate information for decision making. This will ensure that shareholders of listed companies, especially minority shareholders, will receive the same degree of protection regardless of the route that is chosen to privatise the company.

The Securities Industry Dispute Resolution Center (SIDREC) was launched in January, to provide free services for the adjudication of claims below RM100,000 between investors and capital market intermediaries. SIDREC, the first dispute resolution body in Malaysia which caters exclusively to address small claims in the capital market, without the need to resort to expensive litigation, will also enhance investor protection.

Robust supervision and oversight

The SC has pursued a more intensive and comprehensive approach to the oversight of firms and markets. This included more thematic audits of market intermediaries, compliance and risk assessments of stockbroking companies and an enhanced market surveillance approach, which resulted in pre-emptive regulatory action over trading activities in a number of counters.

In line with this, the SC recognised the Federation of Investment Managers Malaysia (FIMM) as a self-regulatory organisation (SRO) for the unit trust industry. As an SRO, FIMM will regulate its own members while also ensuring that investors are protected and public interests are upheld. This complements the SC’s efforts to ensure a more efficient and effective regulatory regime without compromising investor protection.

In addition, the Guidelines on Compliance Function for Fund Managers were revised to enhance client asset protection and raise compliance standards to safeguard the interests of investors. The Guidelines on the Registration of Credit Rating Agencies were also revised to raise the CRAs’ standards in key areas such as the transparency of rating criteria and policies, objectivity of the rating process and the management of conflicts of interest, and expanded the ability of the SC to supervise CRAs in a more vigorous manner.

Significant outcomes achieved in terms of deterrent custodial sentences

The SC’s steady focus on enforcement by criminal actions in 2011 achieved the highest number of custodial sentences in the history of the SC’s enforcement efforts. 2011 was a benchmark year in terms of custodial sentences handed down by the courts where 13 persons received custodial sentences and the courts imposed fines totalling in excess of RM13.7 million.

In a landmark decision for securities cases, the Court of Appeal upheld a six-month jail term imposed by the High Court on two former directors of MEMS Technology Bhd for authorising a misleading statement to the stock exchange in the company’s financial statements. In a case involving criminal breach of trust, a former director of Multi-code Electronics Industries was sentenced to 12 years imprisonment while another director received a jail sentence of six years. The Kuala Lumpur Sessions Court also sentenced a director of FX Consultant Sdn Bhd and FX Capital Consultant Sdn Bhd to five years’ imprisonment and a fine of RM5 million for operating a ponzi scheme and taking part in money laundering, marking one of the heaviest punishments against a capital market offender.

International regulatory efforts and cross-border co-operation

In 2011, the SC continued to participate in, as well as led, a number of major international initiatives, especially at IOSCO^[1], the Financial Stability Board (FSB) and the ACMF^[2].

The SC co-chaired, with the Securities Exchange Board of India, the IOSCO Emerging Markets Committee Task Force on Development of Corporate Bond Markets. The Task Force, in collaboration with the World Bank Group, reviewed the state of development of corporate bond markets in emerging markets and developed a comprehensive set of recommendations to regulate and develop corporate bond markets.

As part of the ACMF Implementation Plan, the SC participated actively in various ASEAN capital market development and integration initiatives, and led the work on the promotion of cross-listings and enhancement of corporate governance standards in the region through the development of an ASEAN Corporate Governance Scorecard.

The SC also signed two key memoranda of understanding (MoUs) with the Office of the Agricultural Futures Trading Commission of Thailand in May, and the Central Bank of Ireland in November. The MoUs aim to strengthen bilateral ties to enhance cross-border regulatory efforts, as well as to pave the way for Malaysian intermediaries to internationalise their product offerings.

Increasing organisational effectiveness

To meet the greater demands of our supervisory, oversight and enforcement responsibilities, the SC has focused on enhancing data and information handling which will facilitate the compilation and analysis of comprehensive data to detect trends, anticipate risks, identify issues and formulate policies.

An electronic repository to enhance the collation and sharing of market intelligence was put in place and a collaboration established with Bank Negara Malaysia and the Department of Statistics to improve the collection of data on the Islamic capital market, which will eventually be extended to other capital market sectors. The automated Auditor Registration Application System (ARAS) was implemented for the AOB to facilitate online registration of auditors serving public interest entities. To address the increased complexity of trading techniques, the SC’s automated detection and surveillance analysis system, SMARTS, was upgraded to reduce turnaround time and improve operational efficiency.

Priorities for 2012

2012 will be a year for the operationalisation of several major market developmental initiatives such as the PRS scheme, greater profiling and internationalisation of the Islamic capital market, the launch of a new Code of Corporate Governance as well as for effecting changes that would increase the efficiency of the licensing regime.

Retail investors can look forward to an expansion in product range and asset class to cater to their investment needs. In addition to the retirement products, initiatives being undertaken include improving the access of retail investors to fixed income, derivative and regional products. To facilitate retail participation in sukuk and conventional bonds, the SC and Bursa Malaysia are working together to facilitate the offering of corporate bonds to retail investors. In order to further widen asset classes, the SC is also working on launching the framework for business trust, creating a regional funds passport which will facilitate cross-border unit trusts investment within the region and expanding the derivative product range.

An electronic copy of the SC Annual Report 2011 is available here.

SECURITIES COMMISSION MALAYSIA

^[1]International Organization of Securities Commissions, the leading international policy forum and standards setter for securities regulation with a membership of more than 95% of the world’s securities markets in 115 jurisdictions

^[2]The ASEAN Capital Markets Forum (ACMF) is a high-level grouping of ASEAN securities regulators established under the auspices of the ASEAN Finance Ministers in 2004.