The Issues Guidelines, which have been effective since 1 January 1996, are an administrative set of guidelines applied by the SC in considering corporate proposals required to be submitted to it under section 32 of the Securities Commission Act 1993 (SCA). Various changes and revisions have been made to the requirements and obligations stipulated under the Guidelines in the past, the latest of which being the revisions made to the requirements for listing, reverse take-overs and back-door listings which were announced by the SC on 30 April 1999.
The current revisions to the Issues Guidelines mark the commencement of Phase 2 of a 3-phase implementation programme adopted by the SC in moving from merit-based regulation, where the investment merits of securities offerings are assessed and determined by the SC, to regulation based on disclosure, where the SC regulates the quality of information disclosed and investors determine the investment merits of offerings. The SC embarked on the shift towards DBR in 1996 and expects to achieve a full DBR framework by the year 2001.
The focus of the current revisions to the Issues Guidelines is generally on liberalisation of the requirements on pricing of securities, valuation of assets and utilisation of proceeds. Under Phase 2 of the DBR programme, the SC would minimise its assessment in these areas as long as the broad requirements/guidelines are complied with. A summary of the revisions is as follows:-
(i) Pricing of Securities
In addition to the pricing of securities under initial public offerings, which is already allowed to be based on market principles since 1996 under Phase 1 of the DBR programme, changes have now been made to the requirements for pricing of securities under all types of corporate proposals.
Rights Issues of SharesA listed company is now allowed to have the full discretion to determine the issue price of the rights shares at a price-fixing date to be determined after approval of the SC for the rights issue. However, where the issue price is set at a discount of more than 30% from the theoretical ex-rights price based on the 5-day weighted average market price at the price-fixing date, the promoters and directors of the listed company are required to give an undertaking to the SC that they would not dispose of their shares from the "ex-date" of the shares until 10 market days after the listing of the rights shares.
In cases where warrants are attached with the rights shares, the issue price of the rights shares should be set at a discount of not more than 20% from the theoretical ex-rights price based on the 5-day weighted average market price at the price-fixing date.
Special Issues/Private Placements of SharesA listed company wishing to undertake special issues for the purpose of meeting the National Development Policy (NDP) requirement can price the special issue shares without any restrictions on discounts from the 5-day weighted average market price at the price-fixing date to be determined after approval of the SC for the special issue.
For placements of shares not for NDP purposes, a discount of not more than 10% from the 5-day weighted average market price is allowed, provided that -
- the shares are not placed out to the executive directors or existing substantial shareholders of the listed company or their associates;
- the total placement size does not exceed 10% of the issued and paid-up capital of the listed company before the new issue; and the shares allocated with any single party do not exceed 20% of the total placement.
Where the listed company intends to undertake a placement exercise exceeding 10% of its issued and paid-up capital or intends to place out the shares to any single party exceeding 20% of the total placement, a discount of not more than 10% from the 5-day weighted average market price could still be attached to the pricing of the shares, but the placees of the shares would also be required to give an undertaking to the SC that they would not dispose of their shares for a period of up to 6 months after the listing of the shares.
Consideration Shares for Acquisitions
The price of shares issued by a listed company as consideration for an acquisition should be based on the 5-day weighted average market price set 1 day before the announcement of the acquisition. To cater for any movements in the share price of the listed company, a revision of up to 20% is allowed for any subsequent changes to the price set after the receipt of SC's approval for the acquisition but prior to implementation of the acquisition. The SC need only be informed of the price revision. Specific approval of the SC is, however, required for any additional issuance of shares arising from the price revision.
Price of Warrants/Convertibles
The exercise price of warrants or conversion price of convertible securities could now be set at a discount of not more than 10% from the 5-day weighted average market price of the underlying shares at a price-fixing date to be determined after approval of the SC for the issuance of the warrants or convertible securities. A "step-up" pricing mechanism is allowed to be incorporated in the exercise/conversion price of the warrants/convertible securities but the step-up price should be determined and disclosed upfront before the issuance of the warrants/convertible securities.
In addition, the offer prices of warrants/convertible securities are allowed to be based on their fair values, subject to the condition that any additional proceeds derived from the offer should accrue to the listed company.
Exercise Price of Options to Employees
For options offered under employee share option schemes, the exercise price of such options is allowed to be set at a discount of not more than 10% from the 5-day weighted average market price of the underlying shares at the date the option is granted.
Indicative pricings (either a single price or a range of prices) are required to be disclosed to the SC in submissions for the issuance of securities. The SC should also be informed when the price for securities is finally fixed. Any departures from the guidelines would require the specific approval of the SC.
(ii) Valuation of Assets
Any revaluation of property assets for the purpose of incorporation into the accounts does not require the approval of the SC, except under the following circumstances:-
- In the case of an initial public offering where the public company and/or its subsidiary company/companies and/or companies to be acquired as part of the flotation scheme have/has undertaken or propose(s) to undertake a revaluation of property assets and have/has incorporated or propose(s) to incorporate the resultant revaluation surplus into their/its accounts, where the market value of all the property assets which have been revalued constitutes 25% or more of the enlarged issued and paid-up capital of the company; and
- In the case of a bonus issue by way of the capitalisation of revaluation surplus arising from revaluation of property assets, including surplus which has been incorporated earlier, where the market value of the property assets which have been revalued constitutes 25% or more of the shareholders' funds of the public company based on the latest available published audited accounts.
In addition, the SC would not intervene in the valuation of assets, which is used as the basis for purchase consideration in support of an acquisition, as long as:
- the aggregate purchase consideration for the acquisition is less than 25% of the acquirer company's shareholders' funds based on the latest available published audited accounts;
- the acquisition is not a related-party or interested-party transaction; or
- the acquisition does not fall under a reverse take-over/back-door listing exercise.
However, in all corporate proposals involving the valuation or revaluation of property assets, the valuation must be carried out by independent registered valuers who should ensure compliance with the "Guidelines on Asset Valuations for Submission to the Securities Commission" issued separately by the SC. In addition, the prospectuses or circulars to shareholders for such cases should include valuation certificates containing all particulars of and information on the property assets as required under the said Guidelines. The related valuation reports should be included as part of the submission to the SC notwithstanding that the valuation/revaluation does not require approval of the SC.
(iii) Utilisation of ProceedsChanges have also been made to the effect that the SC would not intervene in the utilisation of proceeds raised from the issuance of securities as long as the proceeds are utilised for core-business activities of the listed company. In addition, the listed company is given the full discretion to determine the specific time frame upon which the proceeds are to be utilised.
Listed companies are nevertheless required to disclose in their annual reports the status of the utilisation of proceeds vis-à-vis those that have been approved by shareholders and, where relevant, the SC. Such disclosure should continue until the proceeds have been fully utilised.
Any subsequent changes to the utilisation of proceeds that deviates by 25% or more from the original utilisation of proceeds require the approval of shareholders. Should the deviation be less than 25%, the shareholders would need to be informed of the changes. Any extension of time for the completion of utilisation of proceeds from that determined earlier should be approved by a clear resolution by the Board of Directors and should be clearly communicated to the market.
The revisions mentioned above shall be effective from 1 January 2000. All applications outstanding before the effective date of the revisions would be subjected to the existing guidelines but could, on request by the applicant, enjoy the pricing flexibilities accorded. Copies of the revised Issues Guidelines would be made available to the public by the end of January 2000.
In amending the Issues Guidelines, the SC has had extensive consultations with the Association of Merchant Banks in Malaysia (AMBM), Federation of Public Listed Companies in Malaysia (FPLC), Malaysian Association of Institute of Chartered Secretaries and Administrators (MAICSA), Malaysian Association of Certified Public Accountants (MACPA) and Malaysian Institute of Accountants (MIA). The SC would like to express its appreciation to the industry bodies for their contributions.
It is hoped that the revisions to the Issues Guidelines would propel the Malaysian capital market forward in line with the implementation of DBR and would further contribute towards the maturity and sophistication of the market. Investor protection would not, however, be compromised and, amidst the liberalisation of rules, the SC would not hesitate to take stern actions against parties who are found to be remiss in the carrying out of their due-diligence and corporate-governance responsibilities and those who do not have in mind the best interests of all shareholders and the investing public.
Given that there are now sufficient flexibilities in the pricing of securities and other requirements in the Issues Guidelines, the SC wishes to re-iterate that naked warrants, i.e. warrants which are not attached to any share or debt/convertible security, should only be issued to minority shareholders or creditors of the listed company for purposes of:
- strengthening the company's financial position pursuant to a restructuring exercise; or
- compensating minority shareholders of the company.
Where justified, however, naked warrants could be issued as a capital-raising mechanism to non-minority shareholders or non-creditors, provided that the naked warrants are issued at fair valuation.
In addition, listed companies wishing to issue and list new equity warrants to replace the existing equity warrants issued earlier are requested to make their applications to the SC not later than 30 June 2000. As the maturity periods of most of the existing warrants have been, or are in the process of being, extended, it is felt that replacement warrants would no longer be beneficial to the market. Thus, subsequent to the said date, the issue of replacement warrants would not be allowed.
The SC also wishes to inform that with improvements in the economy, the restrictions that have been imposed since the middle of 1998 on listings on the Second Board by companies involved in the manufacture of building materials, garments and textile operations, and production of automotive components would no longer apply. It needs to be emphasised, however, that the applications for listing by companies operating in over-capacity sectors should be able to demonstrate strong qualitative aspects and sustainable earnings.
