Keynote Address at Conference on Due Diligence for Corporate Finance
23 July 1997 |   By : Dato' Dr Mohd Munir Abdul Majid, Chairman, Securities Commission
Keynote Address 

Dato' Dr. Mohd. Munir Abdul Majid
Chairman, Securities Commission

at the 

Conference on Due Diligence for Corporate Finance

Crown Princess Intercontinental, Kuala Lumpur
23-24 July 1997

Ladies and gentleman - good morning.

Let me first thank the AIC for organising this conference and for inviting me to give this keynote address.

I am heartened to see you all here today as the issue of due diligence is an important one - both from a commercial perspective as well as being a cornerstone in our vision for the future of our capital market.

Let me begin this address by painting a brief scenario of how the raising of finance in our capital markets has changed before sketching in the role of due diligence in Malaysia today.

Much has happened: If 3 years ago someone gave you a map outlining how finance may be raised in our capital markets, that same map would, today, cause you to be lost on new paths or take you down some dead-end roads. The opportunities for raising finance have broadened considerably in the last 3 years whilst closing off some old practices and methods by means of a shift in regulation policies and frameworks - not to mention capital market development.

It is not just domestic companies with operational records that have access to these markets. Today, we have other "creatures" such as infrastructure project companies, closed-end funds and foreign based companies. In addition, with the introduction of MESDAQ, companies will soon, have alternative equity markets to access. Continued efforts are also being made in order to bring about a vibrant ringgit bond market which will give issuers and other intermediaries even more options to choose from in the matter of capital raising.

The Commission, as most of you may be aware of, is taking the lead in progressing from a merit based system of regulation to a disclosure based framework of regulation. One example of the progress made is in the pricing of securities in initial public offerings.

Previously, the pricing of securities was determined by the Commission. That framework gave rise to an unresponsive, lumbering mechanism for securities offerings. Investors and underwriters became spoon-fed and too protected as a result. Investing and underwriting then were perceived to be quite unrelated to risk-taking.

Today, the pricing of securities in an initial public offering has been "freed up" and the issuers and their advisers/underwriters now price these issues without unnecessary regulatory intervention. In addition, both the issue of call warrants and listing of infrastructure project companies are allowed under a full disclosure based environment. Soon, MESDAQ will also operate in a full disclosure based system, as well. Indeed, the Commission takes the view that a disclosure based system is necessary, and critical in order for our capital markets to become more efficient, active, vibrant and to facilitate the reduction of the cost of raising capital.

The Commission's Policies and Guidelines on Issuer/Offer of Securities (commonly known as the Issues Guidelines) which were released at the beginning of 1996 are continually reviewed and revised to facilitate market changes, allowing for more market-led decision making where it is deemed commercially expedient to do so while tightening prudential criteria in other respects. The most recent revisions to the Issues Guidelines were announced at the beginning of this month and these were in relation to chain listings, profit guarantees, as well as clarifying issues such as shareholding spread and the backdoor listing of property development companies, to name but a few.

In recent months, the Commission has also been actively seeking the views and thoughts of industry on the challenges and opportunities that deregulation and liberalisation in the capital market will bring for Malaysian business. All these initiatives will bring, directly or indirectly, greater access to raising funds in the capital market. This plays an important role in financing the nation's massive funding needs. Indeed, it is estimated that for the 5 year period of the Seventh Malaysia Plan (1996-2000), capital requirements for the nation are expected to be in the region of RM 536 billion of which RM 385 billion is expected to be raised by the private sector. As at the end of June this year, the KLSE had a total of 657 companies of which 431 are listed on the Main Board and 226 are listed on the Second Board with a total market capitalisation of RM 755.6 billion. In 1996 alone, a total of 92 companies were listed and some RM16.8 billion was expected to have been raised from the issue of equity and debt securities in that year.

All these benefits come at the price of increased responsibility on market participants. In the area of securities issues, amendments to the Securities Commission Act in 1995 have placed greater duties of due diligence on promoters, directors and advisers in respect of their representations and disclosures made to the Commission for securities issues proposals. By the end of this year, similar due diligence obligations will be imposed on persons involved in take-over and merger transactions. All these provisions are for the purpose of providing the investing public with the information they would reasonably need to evaluate the risks and returns of the securities offered to them - or take-over offers made to them in time to come. The penalties imposed for such breaches of duty remain one of the highest in all of our securities laws, signifying the importance we place on this obligation.

Building a workable regulatory framework for due diligence by providing for legal sanctions as a back-stop is only one step in laying a firm foundation for a credible and efficient market in a disclosure based regime. That's where due diligence is sketched into the picture so far by the Commission. Your part is to fill out the sketch.

In the next 3 days, you will discuss, examine and review ad nauseam the various aspects of due diligence from a variety of perspectives. Ask yourselves - why are you here? It is not as if awards will be given out to individuals or firms for "Best Due Diligence" in a legal or accounting role.

The "attraction" is not in the unreal spotlight of the media but in the fact that millions, if not, billions of ringgit will be transacted through your hands in corporate finance transactions. Much of that ringgit will be the hard earned savings of investors who may be either shareholders or intending shareholders of transacting public companies. The economic decisions they make with their money are no better than the information on which they are based. And that information would have been derived from standards and practices that have been set by you in the due diligence process - if the numbers or information is wrong, the decisions are wrong, and our economic future is in peril.

You are all therefore, guardians of financial truth and due diligence standards - merchant bankers, lawyers and accountants, to name but a few of you who are amongst us this morning. To look merely at compliance with due diligence as only a means to fulfil your legal obligations is to miss the proverbial woods from the trees - these practices bring about higher professional standards, greater disclosure of information and more accurate representations - without which the integrity of our markets will be seriously undermined.

I therefore urge you to seize this opportunity to take an enthusiastic and involved look at due diligence practices, to define your roles and to address the various issues on due diligence and capital raising that will arise in the course of the next few days. There are no doubt, difficulties and grey areas in the process. The truth, as Oscar Wilde once said, is rarely pure and never simple. People have different ideas about what that means and how it is interpreted.

It is for you to set the highest objective standards possible in your respective roles to assist the interpretation process - the accountants, for example, in their role as independent and impartial auditors of financial statements. The lawyers, perhaps, in ensuring that the prospectus of the future is a useful and informative disclosure document and not just a legal document to shield against liability. And merchant banks should take greater responsibility for their positions as lead advisers for corporate proposals and examine, probe and scrutinise thoroughly all aspects of such proposals. They must always have the courage and integrity to own up to their findings - even if it means losing a client.

It has been one and half years since the imposition by legislation of due diligence obligations. Since then, we have had discussions with industry and issued a publication on the issue of due diligence practices in order to bring about some broad suggestions on how industry may proceed to carry out these obligations in the real world.

From our perspective, how have the advisers fared so far? I must say there has been improvement, but much needs to be done to bring us up to speed with practices in more developed markets.

I need not remind you of the circumstances under which the Commission had to revoke an approval for an initial public offering in November 1996. There was also a case where a public company with a significant following from foreign institutional investors (Aokam Perdana) reported a shortfall in its forecast profits of over 80%. Recently, the Commission received a submission involving a "wanted" man in another jurisdiction as a promoter in an IPO application for which there was insufficient declaration made in respect of his position. I am sure these events could have been avoided if high standards of due diligence work had been performed by all.

Some objectives about the due diligence process cannot be over emphasised: Never forget that the due diligence process is a means to bring about the disclosure of information and representations that are timely, accurate and adequate to investors and other users of financial information. Disclosure is not disclosure if it does not communicate. And more disclosure does not always mean better disclosure - "over-diligence" or due diligence for the sake of due diligence increases costs to issuers and ultimately, investors. This should also be borne in mind.

The actions you take and the standards you set, have an impact far beyond the individual companies you represent respectively. The investors in the market, other professional advisers and users of financial information are all counting on you to maintain high standards and to bring financial truth into the sunlight.

Ladies and gentleman, if I sound passionate and involved in talking about the issue of due diligence, it is simply because it is indeed the case. Due diligence is not merely about doing what the law expects one to do, it is about changing the mind-sets of issuers, advisers and investors. It is as much about professionalism and skills as it is about truth and responsibility.

On that note, I wish you every success in your deliberations.

Thank you.
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