Keynote Address at Launch of the Due Diligence Guidelines on Submission of Proposals to the Securities Commission
15 March 1999 |   By : Encik Ali Abdul Kadir, Chairman, Securities Commission
Keynote Address 

Encik Ali Abdul Kadir
Chairman, Securities Commission

at the
Launch of the Due Diligence Guidelines on Submission of
Proposals to the Securities Commission

Equatorial Hotel Kuala Lumpur
15 March 1999

Yang Berbahagia Tan Sri Dato' Azman Hashim
Chairman, Association of Merchant Banks in Malaysia,
Distinguished Guests,
Ladies and Gentlemen,

A very good morning. I am honoured to be given the opportunity to deliver this keynote address and subsequently launch the "Due Diligence Guidelines on Submission of Proposals to the Securities Commission". Indeed, the subject of due diligence has been much talked about and there is no doubt that it would continue to be discussed for a long time to come. In fact, I have been thinking about the matter, from a practitioner's point of view, on how to improve the processes and procedures in which due diligence exercises ought to be undertaken and, here I am today, standing in front of you, giving my first public address as a regulator, on the same issue.

I am heartened to note that the industry shares the same common cause with the Securities Commission in improving the standards of due diligence practices in the country. What started as the imposition of due diligence responsibility under Section 32B of the Securities Commission Act 1993 and the publication of the booklet on due diligence practices in August 1996 by the Commission as guidance notes on how the industry may proceed to carry out these obligations in practice has now been followed through by the industry itself with the launch of the Due Diligence Guidelines. I wish to laud the efforts of the Association of Merchant Banks in Malaysia, Federation of Public Listed Companies, Malaysian Institute of Accountants, Malaysian Association of Certified Public Accountants and the Malaysian Association of the Institute of Chartered Secretaries and Administrators who have worked together in coming up with the Guidelines. I wish to also put it on record that the 5 bodies have managed to sit down with each other and work to make the Guidelines a practical one and, as I understand it, with minimal involvement from the Commission. The Guidelines, therefore, is largely an industry effort and I wish to give due credit for this.

Ladies and Gentlemen,

The regional economic crisis has affected us badly. This downturn should not, however, be used as a convenient excuse to pay less attention on due diligence review and corporate conduct. Instead, we should use this as an opportunity to re-look at ourselves and to improve our shortcomings. Are our corporate governance practices up to mark? Are our due diligence standards adequate? Investors, especially in the current situation, are demanding that directors and advisers of listed companies conduct themselves with high standards of corporate governance and due diligence.

No doubt, the Malaysian economy is beginning to recover and we can expect the number of corporate restructuring exercises to increase. It is everybody's responsibility to restore and promote investors' confidence in our capital market. In this respect, due diligence practices should be undertaken with greater responsibility. The promoters and directors of listed companies must be transparent in their business dealings not only to a privileged segment of their constituents but to all investors and parties who have a stake in their companies. The product of due diligence should be the free flow of good information, such that disclosures are accurate, complete and timely. There should not be omissions of material information which rational investors and shareholders would reasonably expect, or would reasonably require, for the purpose of making informed investment decisions. When due diligence standards are high, it would follow that the quality of disclosures would be high as well. This should translate into enhancement in corporate governance where management actions are made known to all and those responsible are accountable for their actions.

The Commission, as most of you are aware, is taking the lead in moving our capital market from a merit-based system of regulation to a disclosure-based framework of regulation (or DBR). High standards of due diligence, disclosure and corporate governance practices are the pre-requisites for the new regulatory system to work. The Commission will continue to work towards improving these standards.

One example of the progress made towards the new framework is the "freeing" of pricing of securities in initial public offerings and rights issues. Previously, the pricing of such securities was determined by the Commission. That system gave rise to an unresponsive and lumbering mechanism for securities offerings and capital raising. 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 and rights issue has been "freed up" and issuers, together with their advisers/underwriters, now price these issues without regulatory intervention.

  • As a responsive organisation, the Commission has, in 1998, introduced various initiatives to facilitate capital raising by listed companies in these difficult times. These initiatives, which also represented an acceleration of the Commission's DBR programme, included -
  • revision to the shareholding spread requirements for new listings;
  • liberalising the limits and rules governing the issue of warrants and convertible securities;
  • allowing dilution in earnings per share resulting from acquisition proposals;
  • granting dispensations of profit forecasts and projections in public documents; and
  • allowing the undertaking of 2-call rights issue by listed companies whose share prices are trading around or below par values.

Additional programmes would be put in place as the Commission moves forward with its DBR plans and these would include further liberalisations in the areas of securities pricing, valuation of assets and utilisation of proceeds from capital-raising exercises.

I would like to point out, however, that all these benefits come with the price of increased responsibility on the part of market participants. As I have mentioned earlier, the Securities Commission Act has placed greater duties of due diligence on promoters, directors and advisers in respect of their representations and disclosures made to the Commission for proposals involving issues of securities. Recently, the Malaysian Code on Take-Overs and Mergers was also amended to impose, among others, similar due diligence obligations 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, or take-over offers made, to them. The penalties imposed for breaches of such duties remain one of the highest in the region, thus, signifying the importance we place on this obligation.

Building a workable regulatory framework for due diligence responsibility 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 responsibility is sketched into the picture so far by the Commission. Your part is to fill out the sketch and, in this regard, the publication of your Due Diligence Guidelines is a step in the right direction.

In carrying out your due diligence responsibilities, you have to bear in mind the fact that millions, if not billions, of ringgit will be transacted in corporate finance transactions. Much of that ringgit will be the hard earned savings of small investors who may be either shareholders or intending shareholders of transacting public companies. We owe it to them to discharge our duties responsibly and to give them the true information they deserve. And the quality of information disclosed would be the product of the standards which you would set in the due diligence process. If the information and numbers are wrong, the decisions made by investors would be wrong and, if that happens, we would have failed in our professional duties.

You are all, therefore, guardians of financial truth and setters of due diligence standards - merchant bankers, lawyers, accountants and company secretaries, to name but a few of you who are amongst us this morning. To look at due diligence merely as a compliance responsibility to fulfil your legal obligations would be missing the point - these due diligence practices should bring about higher professional standards, greater disclosure of information and more accurate representations - without which the integrity of our capital market will be seriously undermined.

The objectives of the due diligence process cannot be over-emphasised - never lose sight that the due diligence process is a means to bring about the disclosure of information and representations that are accurate, timely and adequate to investors and other users of financial information. Disclosure is not disclosure if it does not communicate the true position. And more disclosure does not mean better disclosure.

The actions you take and the standards you set have an impact far beyond the individual companies you respectively represent. 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 market. It is my ardent hope that the Due Diligence Guidelines developed by the industry would be able to assist you in achieving this objective. It is also my wish that the Guidelines not only be used for purposes of making submissions to the Commission but should also be expanded for a wider purpose.

Ladies and Gentlemen,

On this note, it gives me great pleasure to officially launch the "Due Diligence Guidelines on Submissions of Proposals to the Securities Commission" and I wish you success in your deliberations in today's seminar.

Thank you.

Issued by Securities Commission. For assistance, please contact Corporate Affairs Department at tel. no. (603) 6548513 (Ann Teoh) or (603) 6548107 (Ida Mariana Azmi) or fax no. (603) 6515078.
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