Distinguished guests, participants, ladies and gentlemen
A very good afternoon to all and thank you to the Malaysian Economic Association for giving me the opportunity to address you on the role of the Securities Commission in corporate restructuring.
The economic crisis which started in the second half of 1997 has brought to fore the shortfall in internal controls and the weak balance sheets of many of our companies. The tightening of borrowing rates, depressed demands for goods and services, mismatch of financing costs and cashflows generated from core businesses as well as mounting debts faced then had caused further strains on the corporate sector. Many companies, big and small, listed and unlisted, became distressed and had to find ways and means to restructure in order to survive. The need for the restructuring of our companies became the clarion call during the height of the economic crisis. Restructuring became the order of the day and proposals involving recapitalisation, capital raisings, debt conversions as well as acquisitions and disposals of assets were packaged as generic solutions. Under that difficult environment prevailing then, the Commission took a facilitative approach within its regulatory framework on such restructuring exercises and had, for the whole of 1999, approved a total of 137 capital-raising and restructuring proposals by listed companies. In 1998, the SC approved 41 such proposals while 82 proposals were approved in 1997.
With the country having successfully steered itself out of the economic crisis and with marked improvements in our economic conditions, companies should not become complacent and rest on their laurels. They should instead continue to examine themselves and pursue their restructuring efforts to make themselves more resilient to face the challenges ahead. Indeed, the Government also recognised very early on that corporate restructuring and corporate recovery were necessary precursors to economic recovery and efforts were directed at restoring corporate health so that the corporate sector would not only continue to operate their existing businesses but also undertake business expansion and diversification to generate multiplier effects that will expand the economy. As you have heard earlier on today, 2 of such efforts were the establishment of Danaharta and CDRC. Danaharta was set up principally to remove NPL distractions from the banking system, thereby allowing them to refocus on their core business of lending. Hopefully, this would provide the corporate sector with the much needed credit for recovery. CDRC, on the other hand, was established to assist in the debt restructuring process with the primary objective of minimising losses to creditors, shareholders, and other stakeholders through voluntary coordinated recapitalisation and workout proposals.
Corporate Restructuring and the Securities Commission
Ladies and gentlemen,
The Securities Commission was established in 1993 as a statutory authority to regulate and oversee the securities and futures market and to act as a single regulatory body to promote the development of the capital market.
Under section 32(2) and section 32(4) of the Securities Commission Act 1993, any issue or offer of securities by public companies require the prior approval of the Commission. Thus, a restructuring proposal of a public company would require the sanction of the SC if the proposal involves the issuance and offering of securities. Restructuring proposals could include capital raising, schemes of compromise, arrangement, amalgamation or reconstruction, acquisitions and disposals of assets, as well as take-overs and mergers. I also wish to remind you that any restructuring exercise through the acquisition or disposal of assets would also require the approval of the Commission, notwithstanding that it does not involve any issue or offer of securities, if the restructuring exercise results in a significant change in the business direction or business policy of a public listed company.
In considering whether or not to approve a restructuring exercise, the Commission would assess compliance of the proposal with the relevant guidelines as stipulated under the Commission's "Policies and Guidelines on Issue/Offer of Securities", or Issues Guidelines in short. Generally, a restructuring proposal would be considered favourably by the Commission if the proposal were able to adhere to certain principles. I would illustrate what the principles are in turn:-
- The restructuring scheme must demonstrate to the Commission's satisfaction the ability to resolve the financial problems faced by the company;
- The Commission must be satisfied that the restructuring scheme is comprehensive enough to address the overall restructuring of liabilities rather than one which offers only a piecemeal solution;
- The proposed solution must not merely represent a short-term measure or is one where the company is likely to need a subsequent "rescue" or "blood transfusion" in the near future;
- Where assets are to be injected, the assets must be of a reasonable quality and be able to provide immediate and sustainable contributions to the company's profit and cashflow;
- The promoters, including the "white knights" where applicable, must have a proven track record of good corporate governance;
- The Commission must be satisfied that the restructuring scheme is capable of generating positive cashflows over a sustainable period;
- The Commission must be satisfied that the restructuring scheme is fair to all parties concerned (minority shareholders, creditors, promoters and other stakeholders in the company) and does not unduly compromise or adversely affect the interests of shareholders, particularly minority shareholders with lesser bargaining power;
- The substantial shareholders or those deemed to have been responsible for the downfall of the company must not benefit in an unfair manner as a result of the restructuring scheme;
- There must be demonstrable broader benefits resulting from the exercise, especially for the shareholders, employees and other stakeholders of the company;
- The restructuring scheme is undertaken in the national interest; and
- The Commission must be satisfied that the restructuring scheme does not have an adverse impact on the capital market in general either immediately or over a longer term.
Measures Taken to Facilitate Corporate Restructuring
Ladies and gentlemen,
I mentioned earlier that the Commission takes a facilitative approach in considering restructuring proposals given the importance of restructuring in the economic recovery process.
I would now like to outline the various measures that were taken by the Commission over the past 2 and the half years to support the restructuring of companies whilst at the same time maintain investor protection and confidence in the capital market.
Variations on the Issuance of Convertible Securities
One such measure was in regard to the issuance of convertible securities where the limitation on the size of securities was removed in July 1998. Prior to that, a public company could only issue convertible securities of not more than 50% of its issued capital if the issuance is by way of rights and, not more than 10% if not by way of rights. With the removal of the limits, a public company can now issue convertible securities commensurate with its capital size and funding needs, and without any restriction on size.
In regard to the issuance of warrants, however, there is still a restriction, whereby the limit for the issuance of warrants, either by way of rights or otherwise, cannot exceed 50% of the company's issued capital before exercise. At the present moment, issuance of warrants which is too large is not encouraged as the Commission is concerned about the effects brought about by large warrant issues on earnings, negative implications on share prices, excessive speculation and the subsequent enlargement of capital which is not supported by earnings potential.
Issuance of Warrants
Notwithstanding the restriction on the size of warrant issues, warrants are now allowed to be attached with rights shares. However, the Commission requires that the pricing of the rights shares be fixed such that the issuer derives maximum benefit from the proposal.
The Commission has also allowed the issuance of naked warrants if specific circumstances exist. These are cases where the issuance of naked warrants are found necessary -
- for purposes of compensating minority shareholders in having to waive the profit guarantee obligation given by major shareholders;
- for purposes of strengthening a company's financial position pursuant to a restructuring exercise; and
- for purposes of restructuring of debts or repayment of bank borrowings in order to save a default situation.
Our parameters on the issue of convertible securities and warrants are, thus, amongst the most liberal in the region currently.
Whilst the flexibility accorded is intended to help capital-raising exercises, it is important for promoters and directors of listed companies and their advisers to weigh the pros and cons of issuing too many of these securities. Allowance must be provided for any future issuance of warrants given the 50% limit. There must also be a balance so that the securities issued would not turn out to be non-performing securities in the future.
Earnings Dilution
In view of the poor performance of companies arising from the economic crisis, the Commission allows dilution in earnings per share (EPS) resulting from acquisition exercises by public companies. However, the Commission requires that companies disclose and provide justifications for the dilution in EPS and the expected gestation period for the restoration of the EPS.
Profit Forecasts and Projections
Since it was difficult during the economic crisis for companies to make profit forecasts and projections, the Commission allowed companies to choose not to submit to the Commission profit forecasts and projections duly reviewed by their external auditors, except for IPO and reverse take-over proposals. However, the Commission would still require the company to submit for its review the budgeted financial projections prepared by senior management and duly endorsed by its directors. The Commission will continue to monitor the post-proposal performance of the company based on the figures submitted.
Extension of Exercise Period of Warrants
Following the amendment to section 68 of the Companies Act 1965, the Commission moved to allow warrants to have a maximum life of 10 years to enhance the value of the option on a longer-term basis to benefit both the listed company and the warrant holders while serving also to facilitate capital raising for listed companies. In addition, the Commission had, on 30 April 1999, announced that it would allow listed companies to issue and list new equity warrants to replace the existing warrants issued by such companies. However, companies have up to the end of June this year to submit their proposals for replacement warrants, after which the flexibility would no longer be allowed.
Two-Call Rights Issue
In November 1998, the Commission announced that it allows two-call rights issues to alleviate some of the problems faced by listed companies in raising funds, especially as the share prices of so many companies were trading at below or near their par value. Thus, companies that have substantial reserves in their share premium account would be able to issue rights shares, which could be partly paid in cash and partly credited from the share premium account, to make the actual cash price for the rights issue more attractive vis-à-vis the market price.
All these measures have been taken to support various corporate restructuring proposals in a very difficult equity market, which was prevailing then. Indeed, the SC accords priority to expedite the processing of restructuring proposals from listed companies in distress or listed companies in urgent need of funds.
I believe that the increased flexibility accorded to companies demand a higher standard of responsibility and corporate behaviour on the part of promoters, directors, senior management and advisers. On its part, the Commission expects a high level of conduct and corporate governance from all parties and will not hesitate to take the appropriate enforcement actions to maintain these standards.
Measures to Enhance Investor Protection, Corporate Governance and Transparency
Ladies and Gentlemen,
I would be remiss if I do not touch on certain aspects of investor protection, corporate governance and transparency.
The economic crisis also revealed inadequacies in the other areas so critical to the establishment of a full disclosure-based regulatory system for capital-raising activities. The Commission believes that a full disclosure-based regulatory system not only accords greater flexibility and efficiency in the process of capital raising, but also carries with it onerous responsibilities of disclosure of information and accountability through self regulation.
The most important is of course the level of corporate governance that would give confidence that a company is professionally and well managed in an even-handed manner in the best interest of all its shareholders. The Malaysian corporate sector cannot fall short of this requirement. The management of companies has to be sharply improved. There was even the practice of some listed companies which treated capital-raising exercises as a substitute for cashflow from ordinary business operations. This has undermined confidence in the Malaysian corporate sector and can be invidious if left unchecked. Unhealthy practices such as the shifting of assets with blatant conflict-of-interest situations serve to only lower the attractiveness of companies for investment, or on occasions, to a selling down of shares.
Therefore, there must be transparency in corporate activities and transactions, compliance with existing rules on investor protection and no corporate misconduct predicated on the following principles: -
- Due diligence by investment advisers;
- Timely and complete information dissemination by companies;
- Compliance with accounting and financial reporting standards; and
- Fair treatment to minority shareholders.
Malaysian Code on Take-Overs and Mergers 1998
One strong measure taken following the crisis was in the overhaul and revamp of the Code regulating take-overs in Malaysia. The new Malaysian Code on Take-Overs and Mergers was gazetted and came into effect on 1 January 1999. I am satisfied that the New Code clearly establishes the Commission as the single regulatory authority. Even more importantly, transparency has been enhanced in the administration of the provisions of the Code and its Practice Notes, especially in the granting of waivers from the general offer obligations - and in particular waivers based on national policy considerations. I believe that the Malaysian Code on Take-Overs and Mergers 1998 will better protect the interests of minority shareholders by ensuring higher standards of disclosure, corporate behaviour and greater professionalism. It would also ensure that a fair opportunity is given to minority shareholders to consider the merits and demerits of an offer in order to enable them to decide whether they should retain or dispose of their shares in a take-over offer. The Code is a major achievement, not only in the effort to restore confidence in the context of the problems of 1997 but also in having a framework any modern regulatory system can be proud of.
Finance Committee on Corporate Governance and Report on Corporate Governance
A measure to improve the standards of corporate governance was in the setting up of the high-level Finance Committee on Corporate Governance in March 1998, in which the Commission was a member and also acted as its secretariat. This high-level Finance Committee on Corporate Governance led the work to review the framework for corporate governance in Malaysia and to set best practices for the corporate sector. The Committee's principle recommendations in its report made to the Government are as follows: -
- To strengthen the statutory and regulatory framework for corporate governance;
- To enhance the self regulatory mechanisms that promote good governance; and
- To ensure that the framework for the proposed corporate governance is supported by necessary human and institutional capital.
The report also recommended that the Committee should continue to be in existence to oversee the progress in improving the standard of corporate governance and to decide if further enhancements or refinements should be recommended. Todate, the Government had accepted the Committee's recommendations, and the report has been publicly released. Thus, a major milestone was passed in the process of enhancing the regulatory structure and corporate governance. I can say with confidence that the Government is fully committed to implementing the recommendations of the Corporate Governance report and in this regard, an Implementation Project Committee comprising various agencies and interest groups has been set up.
Of course, I fully appreciate that the real test will come with whether or not there is effective enforcement, in corporate governance matters as with other capital market transgressions. Let me say here that my maxim for the Commission's enforcement agenda is to "be strict but fair". The Commission would on its own, and where applicable, work with relevant authorities to ensure that enforcement against contraventions of provisions of the securities laws is carried out without fear or favour.
New Thrusts for the Future
The recent economic turmoil has highlighted the urgent need for new thrusts for the future. My thoughts on some of the thrusts that would push us forward are as follows: -
- Greater Quality of Listed Counters
There would be a need for greater quality of listed companies. In this regard, the qualifying criteria for companies seeking listing on the Main Board and Second Board of KLSE was raised in April 1999. Although this was considered an unpopular move, it was needed to improve the standards of listed companies. The move was also necessary as Second Board counters, in particular, were too lowly capitalised and had poor liquidity.
- Greater Recognition for Shareholder Value
Maximisation of shareholder value must be more explicitly recognised in decision-making in companies. Creating shareholder value involves establishing an environment where shareholders can be confident that their interests are protected in the company that they invest in. To this end, the Commission is continuously examining ways of further facilitating and promoting long-term value creation by companies and greater corporate accountability to the investing public. Some of the areas in which the Commission will further emphasize the incorporation of shareholder value consideration, as part of its overall regulatory functions, include educating company directors on the importance of maximising shareholder value, as well as their duties in this regard.
I strongly believe that if you work for shareholder value, you would have taken care of investor protection in our capital market.
- Implementation of a Disclosure-Based Regulatory (DBR) System
A DBR system would need to be implemented as soon as the market is ready for it to cater to the dynamism and increasingly sophisticated capital market. The Commission is pushing forward with the DBR agenda and is making steady progress on this front, as reflected in the changes which the Commission had effected on the Issues Guidelines on 30 December last year.
- Broker Consolidation Scheme
The present scenario is that we have 63 one-site brokerage houses, operating on fixed commissions. This is obviously a drawback to our initiatives to have an efficient capital market with a core of well-capitalised and well-managed stockbroking companies. Initiatives are now being hatched to ensure that the stockbroking companies merge into stronger and more efficient ones to face the onslaught of liberalisation, globalisation and new technology which we cannot stop.
One of the main reasons for the economic crisis was the over-dependence on the banking sector and the equity market. Therefore, one of the Commission's utmost priority is to develop a viable national bond market to provide another source of financing. The Government has agreed to this proposal and the National Bond Market Committee has been set up to oversee the development of the bond market. We could expect to see results this year.
Conclusion
Ladies and gentlemen,
I hope my talk had enlightened you on the role of the Securities Commission in corporate restructuring. In my address, I have somewhat also touched on broader issues of capital market development as this, I believe, would be of interest to you as well. Whilst it is indeed heartening that much has been done in the regulatory environment as manifested in the measures that have been undertaken over the last 2 and the half years or so and in the improved conditions of our economy, I believe that there is still a lot of work to be done.
The Commission is willing to listen to any suggestions that you might have on ways and means to strengthen the regulatory environment for the capital market in order to move forward.
Thank You.
