Presented with an environment where individual savings are growing into a more prominent pool of investible assets, the investment management industry is increasingly becoming a key intermediary in the intermediation of retail savings for financing economic activity.

To facilitate the growth of investment management the SC has worked in 2005 to further broaden the range of products and investment opportunities available for Malaysian savers and investors. Consistent with the government's objectives that were articulated in the 2004 and 2005 budget announcements, the SC introduced new guidelines to expand the range of products to cover real estate investment trusts (REITs), exchange traded funds (ETFs) and structured warrants.

The REITs guidelines were introduced to provide investors with an alternative investment opportunity and at the same time establish a vibrant and competitive REITs industry in Malaysia. These efforts were also supported by several tax incentives provided by the government to facilitate the growth of this product segment. The SC approved four new REITs in 2005, three of which were successfully launched with multiple oversubscriptions during the initial public offerings (IPOs).

To allow local investors opportunities to diversify their portfolios overseas as well as to facilitate cross-border activities in the capital market, the SC revised the regulatory framework with a view to provide clarity to the industry and ensure an orderly flow of funds. These revisions covered areas in relation to investment in foreign securities, secondary market trading of non-ringgit bonds, primary offering of non-ringgit bonds and offering of foreign shares in Malaysia. In addition, investment management companies were allowed to invest abroad up to 30% of resident net asset value (NAV). Domestic futures brokers and futures fund managers were also allowed to trade in 34 different foreign exchanges in 21 countries in June 2005.

These overall efforts contributed to the investment management industry continuing to grow strongly with funds under management growing from RM114 billion in 2004 to RM127 billion in 2005. The NAV of unit trust funds grew by 12.7% to RM98.49 billion, accounting for 14.2% of market capitalisation at end-2005. The total approved fund size of the unit trust industry also grew by 22% to 267.33 billion units in 2005.

Islamic capital market flourishes as important source of financing

The SC continued to play a key role in establishing the Islamic capital market as a significant component of the Malaysian capital market. This is consistent with the strategic objective of the CMP and supports the government's aim to position the nation as an international Islamic capital market centre.

2005 saw several important product innovations in the local Islamic capital market, which effectively broadened the products and investor base of the Islamic capital market. Leveraging on the earlier introduced REITs guidelines, a set of Islamic REITs guidelines was released in 2005, making Malaysia the first jurisdiction in the world to issue such guidelines.

As further tangible results of the SC's efforts, the Islamic bond market witnessed several landmark issuances in 2005, including the inaugural World Bank issuance of ringgit-denominated Islamic bonds; Cagamas' issuance of the first Islamic residential mortgage-backed securities; and issuance of the first floating rate istisna` bond.

These initiatives and overall efforts at developing and promoting the Islamic capital market have resulted in its emergence as a significant area of growth in 2005 - the SC in 2005 approved 77 Islamic bonds valued at RM43.32 billion and representing 71.4% of total new bonds approved; Islamic bonds accounted for RM9.7 billion or 27.2% of the total funds raised; and Shariah-based unit trusts contributed 8.6% of the industry's total NAV.

Widening the range of market players - domestic and international

The SC in 2005 continued with progressive deregulation and liberalisation of the market with the objective as outlined in the CMP to widen the range of market players and enhance the overall quality and competitiveness of intermediation services in the capital market. As a consequence, several key structural initiatives were implemented. The SC jointly with BNM, introduced a framework to facilitate the creation of investment banks which will be an additional entity operating within the capital market. In addition, Universal Brokers were granted access to the inter-bank market. Stockbroking companies that complied with the consolidation policy were also allowed to further widen their activities by being allowed to offer a full range of corporate advisory services as well as full branching.

As part of the SC's initiatives to enhance international access to and from the Malaysian capital market and further widen the range of players in the market licenses were granted to five foreign stockbrokers and one foreign fund manager. All of these foreign players had started operations by the end of 2005 and are expected to play an important role in contributing to the raising of the level of competitiveness and international compatibility of the Malaysian capital market.

Intensifying supervision, surveillance and enforcement

Underpinning the SC's work in 2005 were its surveillance and enforcement actions, which are integral to the fulfillment of the statutory objectives of the SC in ensuring market integrity and protecting investors.

The SC's work in this area is characterised by its proactive and pre-emptive surveillance, and swift enforcement actions that it undertook in 2005, as well as through continuous efforts to use a wider range of enforcement tools.

In 2005, the SC initiated prosecutions against 14 persons for transgressions of securities laws. At the forefront of these prosecutions were those in respect of two cases involving market manipulation in relation to the shares of Fountain View Development Bhd and Suremax Group Bhd.

Deterrence remained a key focus of the SC's enforcement objectives. The SC's criminal prosecution efforts have resulted in the courts imposing jail sentences of between 20 months and four years against five offenders.

The SC also succeeded in a civil enforcement action in 2005 to protect the interests of aggrieved investors, following the successful criminal enforcement action in 2004 in relation to the restructuring scheme of Omega Holdings Bhd by Energro Bhd. In addition, the defendants were ordered to repay and restore RM10.6 million (raised from the proceeds of sale of Energro Bhd shares) as restitution to the investors.

Equally significant in 2005 were the administrative sanctions imposed in respect of financial reporting irregularities, underlining the SC's stance that high standards of financial reporting are fundamental for promoting market integrity and investor confidence. In these instances, some public listed companies and their boards of directors were publicly reprimanded, and in one case, fined, while two companies were required to reissue their accounts.

Notwithstanding these enforcement efforts, the SC also believes that investor interests were best safeguard through a preventive approach that focused on quality in the market. The SC in 2005, continued to work and engage with market intermediaries to enhance the quality of IPOs. Promotion of high professional standards among advisers and sound corporate governance practices among issuers continued to be a main area of the SC's work in 2005.

These efforts were complemented by the Capital Market Development Fund (CMDF) grants to the Minority Shareholder Watchdog Group and the Bursa Research Scheme, to encourage shareholder activism and promote coverage on small- and medium-capitalised stocks, respectively.

2006 - promoting growth within a well-regulated environment

As part of its overall objective of moving towards a fully developed capital market the SC will continue to identify and introduce initiatives to build a full complement of market and regulatory infrastructure with the range of products and market participants that would support the sustained growth of the Malaysian capital market.

The developmental initiatives in 2006 will be aligned with the plans of Phase 3 of the CMP (2006-2010) with emphasis on enhancing the international competitiveness of the capital market and promoting growth within a well-regulated capital market environment. One priority area for 2006 will be to facilitate and sustain the rapid growth of the investment management industry to ensure it continues to play a key role in managing the growing pools of investment savings in the country. In addition, the SC will work with market participants to facilitate greater market vibrancy and enhance the overall efficiency of the intermediation process. The SC will also continue to focus its efforts at enhancing the overall quality of listed companies with strong emphasis through its corporate surveillance efforts at ensuring high standards of corporate governance and value creation by Malaysian listed companies.

With the capital markets becoming increasingly global in nature, it is essential that the Malaysian capital market is internationally competitive. In this respect, the SC will focus on enhancing the overall international compatibility of the market and would also expect market institutions and intermediaries to focus on embracing global standards and best practices. The SC will also place strong emphasis on the Islamic capital market and play a pro-active role in efforts to leverage on the country's first mover advantage to develop Malaysia as a global hub for Islamic capital market products and services.