The policy framework for consolidation provides a set of strategies which is aimed at promoting consolidation among Malaysian stockbroking companies by end of this year.
Efforts to strengthen the stockbroking companies began as far back as 1990. To allow stockbroking companies to increase their paid-up capital, expand and bring in expertise, the Government allowed the listing of stockbroking companies through their holding companies. However, to prevent over-crowding, only 10 were allowed to do so then. This was also to enable the priority sectors at that time, such as manufacturing and exports, to have meaningful access to the capital market. This limitation on the listing of stockbroking companies was lifted in 1995. Currently, there are 63 stockbroking companies, out of which 41 are subsidiaries of listed companies.
There is obviously a need to consolidate the stockbroking industry: the objectives of consolidation are to strengthen the industry and form a group of well-capitalised domestic stockbroking companies which can provide efficient and cost-effective intermediation for investors. These companies should also be robust enough to withstand the pressures from risks inherent in the stockbroking business. Over and above this, the consolidation of stockbroking companies is imperative to prepare the industry to face the challenges of liberalisation and globalisation.
The framework for consolidation is being introduced in tandem with a reduction in the costs of transactions done on the Kuala Lumpur Stock Exchange (KLSE) to create a more competitive capital market. In this regard, brokerage commission rates, which are the main component of these transaction costs, will be liberalised in two stages. Other fees and levies will be reduced concurrently.
The consolidation strategies and the reduction in transaction costs are expected to spur stockbroking companies to consolidate and diversify their business activities.
1. Policy Framework for Consolidation
The current freeze on the issuance of new licences for stockbroking will continue until the objective of industry consolidation has been achieved.
Under this consolidation framework, there would not be more than 15 Universal Brokers in this country, each of which should comprise a group of at least four existing stockbroking companies. Stockbroking companies will be allowed to find their own merger partners. In this regard, they are given until the end of this year to execute firm merger agreements under this framework. A stockbroking company which has not entered into such merger agreements by 31 December 2000 can expect its licence not to be renewed.
Upon completion of the consolidation exercise, every stockbroking company is required to:
- have a minimum paid-up capital of RM250 million, core capital of at least RM250 million and a capital adequacy ratio (CAR) of at least 1.50 times;
- satisfy the necessary quantitative and qualitative criteria, which would include good governance standards and management capabilities; and
- satisfy the necessary fit and proper criteria of the SC.
All stockbroking companies which have executed firm agreements for the merger of at least four stockbroking companies under the consolidation framework by 31 December 2000 will be granted tax credits for accumulated losses carried forward, and stamp duty and real property gains tax exemptions as announced in the Year 2000 Budget on 29 October 1999.
A Universal Broker will be allowed to offer the full range of capital market services. Immediately upon meeting the above criteria, a stockbroking company that has requisite personnel will be allowed to take on corporate finance work, make submissions of corporate proposals to the SC on behalf of clients and trade derivative products. In the future, it will be allowed to undertake additional business activities which include managing private debt securities, trading in fixed income products and other financial instruments, as and when introduced.
Under this framework, every stockbroking company whose licence is surrendered will be converted into a branch. A Universal Broker will be given latitude to open branches throughout the country from 1 January 2002, subject to the SC's approval. In this respect, the SC will formulate an implementation policy on branching. The SC will consider, among other things, the extent to which the stockbroking companies have effected consolidation, their capitalisation and other relevant criteria.
To enable a stockbroking company to operate under a single licence in both the equity and derivatives markets (one licence document), amendments will be made to the Securities Industry Act 1983 (SIA) and the Futures Industry Act 1993 (FIA). Currently, a stockbroking company licensed under the SIA is required to set up a separate entity under the FIA to trade in derivative products. However, pending these legislative amendments, a Universal Broker can by itself be licensed under the FIA to trade in derivative products.
For the purpose of mergers under this consolidation framework, the valuation of a stockbroking company, whether listed or otherwise, shall be based on its Net Tangible Assets (NTA). In this respect, with the exception of distressed stockbroking companies under the Danaharta broker scheme, the maximum valuation for a stockbroking company will not exceed 1.5 times of its NTA. The NTA must be based on either the latest audited financial statements or the accounts as of the latest cut-off date, as agreed by the merger parties, that have been verified by external auditors.
Parties eligible to acquire an interest in another stockbroking company are confined to existing stockbroking companies and the controlling corporate shareholders of existing stockbroking companies, defined as shareholders with more than 50% shareholding, held directly or indirectly. Any such party must also fulfil the following conditions:
- demonstrate the ability to effect consolidation to the satisfaction of the SC;
- provide an undertaking to the SC to effect consolidation; and
- surrender the licence of the acquired stockbroking company in favour of a branch.
The shareholding structure of a stockbroking company will need to be streamlined in a manner that will eliminate conflict of interest situations, particularly where an individual is in a dominant position in both a stockbroking company and a financial institution.
Accordingly, an individual who has effective control in a financial institution is no longer allowed to have effective control in a stockbroking company. For the purposes of this exercise, a shareholder with effective control is defined as the single largest shareholder with at least 20% shareholding, held directly or indirectly, or with significant influence over the Board of Directors and management of the company in question.
In addition, the immediate holding company (listed or otherwise) of a stockbroking company can only hold shares in a stockbroking company and companies with stockbroking-related businesses. At the same time, it is not allowed to participate in other businesses not related to stockbroking. This is to promote greater focus on stockbroking activities and to prevent conflict of interests arising from cross holdings.
The existing Bumiputera shareholding requirement of 30% will be maintained and foreign participation in the equity shareholding of a stockbroking company is, at this point, limited to 49%. Foreign participation must be effected through capital injection in the form of subscription of new shares and not by purchasing shares from the existing shareholders in the enlarged or merged stockbroking company.
There will be no exemptions to these new rulings on ownership and corporate structures and all affected parties must achieve these requirements by 31 December 2000 or at least be able to show contractual arrangements which have been undertaken towards achieving these requirements by that date. Appeals to the SC for extension of time by affected parties who are unable to meet these requirements by 31 December 2000 will only be considered if there are strong and valid reasons.
A task force chaired by the Ministry of Finance and comprising representatives from the SC and KLSE will be set up to review the status and extent of broker consolidation.
2. Transaction Costs
The liberalisation of commission rates will be implemented in two stages:
- in Stage 1, which takes effect from 1 September 2000, commission rates for all trades above RM100,000 will be fully negotiable. Trades with contract values of RM100,000 and below will be subject to a fixed rate of 0.75%; and
- in Stage 2, which takes effect from 1 July 2001, commission rates will be fully negotiable for all trades, subject to a cap of 0.70%.
The SCANS (Securities Clearing Automated Network Services) clearing fee, the SCORE (System on Computerised Order Routing and Execution) fee and the SC levy, which form part of transaction costs, will also be reduced.
The SCANS clearing fee will be reduced from 0.05% to 0.04% with effect from 1 July 2001, subject to a maximum of RM200 per contract, while the SCORE fee will be reduced in two stages to 0.005% and 0.0025% with effect from 1 September 2000 and 1 July 2001 respectively.
The SC levy will be reduced to 0.015% from the present 0.02% with effect from 1 July 2001. This will be the second time the SC levy is reduced. The first reduction coincided with the previous reduction of commission rates in July 1995, two years after SC's establishment, when the levy was reduced from 0.03% to 0.02%.
The reduction in transaction costs on KLSE is based on consultation and feedback from KLSE and the Association of Stockbroking Companies Malaysia. It also considers transaction costs in other jurisdictions and takes into account competitive pressures facing the market.
3. Conclusion
The consolidation exercise coupled with the reduction in transaction costs will strengthen the domestic capital market, making it more efficient, robust and cost-effective, and position Malaysia as a competitive market in the region.
