"The progress we have seen in 2001, with the release of the Capital Market Masterplan (CMP) and the implementation of its recommendations, has created the right pre-conditions and facilitative environment for a strong recovery of the Malaysian capital market.
"It has also demonstrated the SC's commitment to achieve the aims of the CMP, which are to provide a dynamic and vibrant marketplace within a more facilitative regulatory environment, as well as strategic clarity on the vision and objectives for the Malaysian capital market," said the SC Chairman, Datuk Ali Abdul Kadir.
He noted that, as at end-2001, of the 152 CMP recommendations, 14 key recommendations have been fully implemented, 24 partially completed and 48 are ongoing.
In this regard, particular progress has been made in fostering a stronger and more competitive market environment, especially in the areas of exchange consolidation, stockbroker consolidation, corporate governance and the corporate bond market.
"Market institutions the world over are operating in a highly competitive and dynamic environment, and there is increasing pressure on them to achieve greater efficiencies of scale and scope in their operations. In particular, they are looking at consolidation as an important way to retain and build liquidity in their markets," Datuk Ali said.
He expressed confidence in the ongoing exchange consolidation strategy, as recommended in the CMP, in view of the sharp increase in turnover on the market for high-growth companies following the merger of the Malaysian Exchange of Securities Dealing and Automated Quotation (MESDAQ) and the Kuala Lumpur Stock Exchange (KLSE) on 18 March 2002.
Datuk Ali also noted the continued progress of the market-driven stockbroking consolidation exercise, which has seen the total number of stockbroking companies reduced significantly to 47 (as at 9 May 2002), from the initial 66 companies prior to the introduction of the policy framework in 2000. Based on the announcements made by stockbroking companies and proposals received by the SC to-date, the number of stockbroking companies is expected to further reduce to 33.
In the area of corporate governance, Datuk Ali was heartened by the positive response to the incorporation of the Malaysian Code on Corporate Governance in the revamped KLSE Listing Requirements, and the increasing awareness and appreciation of Malaysia's measures to enhance standards of corporate governance and shareholder value recognition. He gave his assurance that the SC would continue to devote its efforts to this area.
Commenting on the bond market, Datuk Ali said that measures to streamline the regulatory structure and to further liberalise requirements for private debt securities (PDS) have allowed for a speedier approval of new debt issues.
"I am pleased to note that funds raised through the PDS market grew by 20% compared to the previous year, amounting to over RM37 billion, including Cagamas bonds," he remarked.
Turning to the prospect for traded equities, the SC Chairman noted that the positive outlook for the Malaysian economy is increasingly being reflected in the stockmarket, which has continued to be resilient in spite of the global pressures it faced towards the end of 2001.
"As highlighted by the Capital Market Review of the SC annual report, certain valuation and sentiment indicators appear to be pointing to an upside for Malaysian equities in the year ahead.
"In particular, liquidity will be an important determinant of market performance and could see a boost as a result of several major listings and a continuation of corporate restructuring efforts from the year before," the SC Chairman said.
Following these remarks, Datuk Ali focused on specific areas raised by the annual report.
Exchange consolidation
One of the key steps the SC took in 2001 involved the streamlining of market institutions, which called for the consolidation of the existing securities and derivatives exchanges and clearing houses within a single entity, to allow for greater economies of scale in terms of a more efficient management of resources.
The SC Chairman said that he expected the single Malaysian exchange to be demutualised and listed on the stock market in 2003.
He stressed demutualisation should not be a simple process of converting to a share-based entity. Instead, it should provide opportunities for the exchange to better position itself to respond to the collective interests of its broader stakeholders with the ultimate aim of becoming a more competitive, customer-driven and for-profit enterprise to serve as an efficient "anchor" to the capital market. A single exchange, which is demutualised and listed would also be in a better position to pursue international strategic alliances as part of the long-term strategy to attract critical mass, market liquidity and relevant expertise to the capital market.
Stockbroking industry consolidation
The SC continued with its efforts to facilitate the consolidation of the stockbroking industry in 2001. Aside from meeting with stockbroking companies to address issues relating to the stockbroking industry consolidation policy framework, the SC introduced additional incentives to encourage the formation of Universal Brokers (UBs) - UBs were allowed to set up electronic access facilities with the release of the Guidelines on Electronic Access Facilities.
UBs were also given the flexibility to provide discounts of up to 25% of the current commission rates applicable to trades with contract values of RM100,000 and below, for all electronically-routed trades executed by them.
Enhancing cost effectiveness
In moving towards market-driven pricing of capital market services, the SC took steps to gradually deregulate fees and reduce the cost of transactions on the exchanges.
In July 2001, the first stage of the plan to reduce transaction costs, kicked-off. The SCANS and SCORE fees, as well as the SC levy were all cut as planned.
Additionally, various fees in the derivatives industry were made fully negotiable in December 2001. This exercise involved the futures broking and clearing commission rates, the commission sharing structure between futures brokers and their representatives as well as the shared commission rates between trading members and institutions.
Stage 2 of the liberalisation exercise expects to see further reductions to be implemented in July 2002, where commission rates will be fully negotiable, subject to a cap of 0.7%.
Facilitating capital raising
The year 2001 also saw the SC introducing steps to further strengthen and develop the regulatory framework governing the issue, offer and listing of securities. The SC liberalised existing rules in relation to capital-raising and securities issuance via the introduction of several flexibilities in its guidelines.
"In consideration of the weak market conditions, which may hinder the process of fund-raising by viable and healthy companies, the SC accelerated the liberalisation of certain aspects of its guidelines in line with efforts to shift to a system of disclosure-based regulation (DBR)."
"These flexibilities allowed companies sourcing funds from KLSE to have more options in structuring their corporate proposals and respond more effectively to changing market conditions," Datuk Ali said.
The SC also introduced several flexibilities to facilitate the issue, offer and listing of securities by Malaysian companies. The flexibilities introduced to facilitate the issue, offer and listing of securities by Malaysian companies involved the revision of the profit track record requirement for proposed listings whereby companies seeking listing on KLSE were allowed to fulfill the historical profit-performance requirement on the basis of a four-year track record, in addition to the existing bases of three-years or five-years.
In addition, the Employees Share Option Scheme (ESOS) Guidelines were revised and the merit-based criteria for bonus issues arising from capitalisation of share premium and other reserves was removed.
Development of private debt securities market
The PDS market experienced significant development in 2001. All in, 137 PDS issues were approved under the Guidelines on the Offering of Private Debt Securities, with a total value of RM56,765.21 million. In 2001 alone, the SC approved 114 PDS issues totalling RM45,688.64 million.
Noting the measures already undertaken to allow for speedier approval of PDS issues, Datuk Ali was confident that these measures would contribute to the further growth of the corporate bond market in Malaysia, leading to a more liquid and vibrant secondary market.
"Many other initiatives to develop the bond market have already been undertaken, including the release of guidelines on asset-backed securities in early April 2001," Datuk Ali said.
He added the guidelines are only the first step towards developing asset securitisation in Malaysia and further efforts will focus on, among other things, the tax and accounting framework surrounding securitisation transaction.
Promotion of corporate governance
Datuk Ali said aside from the introduction of the revamped KLSE Listing Requirements which brought into effect the recommendations of the Finance Committee on Corporate Governance and encouraged compliance with the Malaysian Code on Corporate Governance, further changes to the securities and company laws will come in due course.
He also stressed notwithstanding the steps taken in terms of introducing new guidelines and reviews of the law, it is important to remember that that laws and regulations can only do so much to enhance corporate governance.
"Rules are not and have never been intended to be a panacea for all that ails the corporate sector."
"Corporate governance begins with self - hence, market participants are reminded that they should do their part and enhance their level of self-discipline, exercise due diligence, and observe high standards of governance," Datuk Ali said.
Islamic capital market development
One of the highest priority area for the SC is the development of the Islamic capital market, in line with the CMP's objectives, which aims to establish Malaysia as an international Islamic capital market centre.
In this regard, in 2001, the SC through its Syariah Advisory Council continued to analyse the companies listed on the KLSE to determine the Syariah status of these companies. This was followed by the issuance of the List of Securities Approved by the Syariah Advisory Council, twice in the year, in April and October.
Further, on 14 August 2001, the SC released the Consultation Paper on Additional Requirements for Islamic Unit Trust Funds.
To enhance the expertise of market participants in the Islamic capital market, a seminar on Islamic PDS was jointly organized by the Securities Industry Development Centre (SIDC) and the Islamic Banking and Finance Institute Malaysia (IBFIM).
Efforts initiated in 2001 paved the way to the successful implementation of the inaugural Islamic Capital Market Week by the SIDC in March 2002. Anchored by the Kuala Lumpur International Islamic Capital Market Conference, the event attracted people from all walks of life to the various specially-tailored programmes.
Enforcement measures
Complementing the SC's efforts to promote and develop the capital market are its enforcement measures.
In 2001, the SC dealt with 31 investigation papers. Eight cases were brought to court for prosecution, nine compounded, one warning letter issued and 12 closed without further action upon the Public Prosecutor's approval.
The SC also meted out 15 compounds in 2001, which amounted to approximately RM2 million. The highest compound for 2001 was imposed on South Johore Securities Sdn. Bhd. and C.I. Holdings Bhd. Both companies paid a compound of RM500,000 each. South Johore Securities had abetted with several individuals to deal in securities without a licence and as a result contravened section 12, read together with subsection 122(1) SIA. C.I. Holdings Bhd breached subsection 32(4) SCA when it carried out a proposal without the approval of the SC. Both companies paid the compounds.
In terms of prosecutions, the SC charged seven individuals in 2001 for transgressions of securities laws. The prosecutions include offences in relation to the use of manipulative and deceptive devices in connection with the purchase or sale of securities, the submission of false and misleading information in relation to a corporate proposal and shortselling. These cases were still pending trial at the end of 2001.
The year 2001 also saw nine individuals pleading guilty to various offences. Those offences include the falsification of records under the FIA, the use of manipulative and deceptive devices in the purchase or sale of securities and shortselling.
The SC Chairman said the SC also made significant inroads into curbing illegal futures trading in 2001 with the arrest and subsequent guilty plea of a director of a so-called "spot commodities" company.
He said the SC will continue its raids against such illegal futures traders, hoped that the publicity the raids attracted serves as a warning to the public on the risks of investing with such dubious firms.
International affairs
In the international arena, 2001 saw the SC continuing to be recognised by the international regulator community through its involvement in the work of international regulatory organisations and leadership of several major projects related to international financial regulation. The SC also participated pro-actively in international discussions on the international financial system. Major objectives include strengthening ties with its foreign counterparts, ensuring Malaysia's views were expressed and fully considered and achieving strong recognition of the country among the international regulatory and financial community.
Commenting on the September 11 tragedy, the SC Chairman said the incident underlined the importance of international co-operation. During the trying period, the SC had benefited greatly from wide channels of communication that were established between IOSCO members, whereby information of the impact of the attacks on the markets and related crucial information were readily shared by member nations.
"As many will recall, there was much market uncertainty the world over, but I am glad to say that there was full co-operation in the exchange of information between fellow regulators and enforcement actions.
"Following September 11, the IOSCO set up a special project team, of which the SC is a member, to explore actions that securities regulators should take," Datuk Ali said.
The SC Chairman also highlighted that the SC was actively involved in the work of the Committee on Payments and Settlement Systems (CPSS)-IOSCO report on "Recommendations for Securities Settlement". The SC, as a member of the joint CPSS-IOSCO Task Force on Securities Settlement Systems, sits with 26 central bankers and securities regulators from 18 countries and the European Union to develop these benchmarks for an efficient, sound and safe securities settlement systems.
The report made various recommendations to promote the implementation by securities settlement systems of measures that can enhance international financial stability, reduce risks, increase efficiency and provide adequate safeguards for investors.
To facilitate the provision of information and co-operation with its foreign counterparts, the SC signed another two MoUs in 2001, with fellow regulators in India and Poland. This brought the number of MoUs signed between the SC and its counterparts to-date to 14, the rest being with Argentina, Australia, Brazil, Chile, China, France, Hong Kong, Indonesia, Kenya, South Africa, Taiwan and Thailand.
Moving ahead
Moving ahead, Datuk Ali said the task to achieve a more efficient and dynamic capital market requires the commitment of all parties, and the regulator itself is not spared in this regard.
"Throughout 2001 and continuing into 2002, stronger efforts are being directed towards enhancing efficiency and developing greater capacity within the SC. We will look into improving the efficiency of regulatory structures and processes as well as internal processes and systems," Datuk Ali said.
This is the SC's eighth annual report since its inception in March 1993. The annual report is available in hardcopy and electronic form on the SC website here.
