Public Listing of Infrastructure Public Companies
11 January 1996 |   By : Dato' Dr. Mohd. Munir Abdul Majid, Chairman, Securities Commission, Malaysia
Seminar on Public Listing of Infrastructure Project Companies

Let me first of all wish everyone a happy 1996. More celebration is on the way, with both the Chinese New Year and Hari Raya Puasa next month. Let's take all this in our stride, as we enter the most exciting phase in the history of the development of the Malaysian capital market.

The Government's objective to develop Kuala Lumpur into a key regional capital market centre will begin to be fulfilled this year. The initiatives announced by the Minister of Finance last year particularly with respect to fund management will start to bear fruit. The legal and regulatory framework has largely been honed to give the kind of flexibility and professionalism that would support a modern capital market system. New instruments have been introduced to the market, foremost of course being the start of trading in derivatives on KLOFFE (Kuala Lumpur Options and Futures Exchange), which can be expected to gather pace this year, together also with the start of trading on MME (Malaysia Monetary Exchange). The KLSE (Kuala Lumpur Stock Exchange) is expected to make progress this year towards becoming a truly world-class exchange, not least the heralding of a fully scripless trading environment by the time the year is out. The development of the Ringgit bond market remains a major outstanding task, which must be addressed in an organised fashion this year.

The Securities Commission had a satisfying year in 1995, making progress in the achievement of objectives of its Business Plan 1995-1997. With the amendments to the Securities Commission Act 1993 and the Futures Industry Act 1993 already effective, and those to the Securities Industry Act 1983 and the Securities Industry (Central Depositories) Act 1991 already passed by both Houses of Parliament, we are, with the exception of provisions in the Companies Act 1965 having a bearing on the securities industry, well on the way to having a modern legal framework for the capital market in our country, which will make it more efficient and professional, leading to a true deepening and broadening of the market.

There have been many initiatives by the Securities Commission such as the introduction of call warrants to the KLSE to revised property trust guidelines to guidelines on the listing of closed-end funds, to guidelines for the listing of infrastructure project companies to its more recent guidelines introducing securities lending to the market in our country. But the developments that have perhaps attracted the greatest attention have been the guidelines for the listing of infrastructure project companies (IPC) on KLSE and the not unrelated new guidelines on Issue/Offer of Securities.

This important seminar will go into the minutiae of the IPC guidelines, but it might be useful for me to make a few general points about both the new Issue/Offer of Securities and the IPC guidelines, so that there is an appreciation of their objectives and regulatory philosophy.

We want our capital market to grow, and to grow fast, in line with the financing needs of our fast-expanding economy. The process of capital raising therefore has to be facilitated by greater efficiency and professionalism, regulators not excepted. There must also be depth and diversity in the market to encourage investor participation, with the objective also to see greater institutional involvement. The cost of raising capital is also an important consideration, and in this regard the market should price the issues without unnecessary regulatory intervention.

On the other side, we seek to ensure investor protection by requiring greater disclosure and by discouraging unfair market practices. This, we propose to achieve by emphasising greater professionalism, due diligence and honesty among company directors, management and their advisers, with the back-stop of clear legal provision and penalty. With respect to the after and secondary market, continuing obligations are also emphasised, again with clear legal provision against unacceptable conduct.

We have carefully sought to craft a balance between the interests of issuers and investors by not taking the dogmatic view they are necessarily opposed but by emphasising their common interest in growth with stability and justice. We cannot sit still and continue to molly-coddle the investor; at the same time we cannot allow the Government's objectives of economic growth and capital market development to be derailed or undermined by events and conduct leading to a serious loss of confidence in our system.

The quality ¾ of companies and management, of behaviour, of regulation, of advisers, and of information ¾ is important in all this. Numbers are important of course but ultimately, in this context as in others, it is the quality that determines abidingness and promotes confidence. At this point, it would perhaps be appropriate for me to respond to some understandable concern that the number of approved new listings on KLSE might slope off because of the more rigorous criteria in the recently-introduced Issue/Offer of Securities guidelines. Well it might, but then again it might not. It depends on many factors, not just the fit of applying companies to the criteria, although that undoubtedly is the most important. On that score, it would be useful to know that on a rough measure, if outstanding applications submitted before the beginning of this year were to be set against the new quantitative criteria, 57% of Main Board and 75% of Second Board applicants would make it, against a strike rate if you like of 77% and 50% respectively without measure against the new guidelines in 1995. It would be useful to note that all Main Board applications which would not have qualified against the new guidelines are able to meet the new Second Board profit thresholds. It would also be useful to recollect that in 1993, the Commission approved 36 listings, in 1994, 77, and last year 62, a total of 175 approved new listings. When set against the total number of 529 listings on KLSE at the end of 1995, this is a huge proportion in a little under three years. This year I expect the number of new listings to remain relatively high given the continued good performance of our economy, although don't ask me to put a figure to it because, as I said, there are a number of variables that determine it, including the number of applications submitted by the merchant banks as they come to terms with new requirements and old expectations now expressly stated.

An even more important number is market capitalisation. In this connection, one can expect, with some degree of certainty, a significant increase in nominal market capitalisation on KLSE this year, arising from the higher capital requirements of the Issue/Offer of Securities guidelines but, perhaps more importantly, from the listing of infrastructure project companies. We want to see our market becoming even bigger and more liquid with shares in good quality companies in an environment of full confidence, efficiency and fair play by the time this year is out. I would, therefore, watch the growth of market capitalisation, apart from the number of new listings.

We want the infrastructure project companies that get to be listed to be, if I may be allowed to use a metaphor in the run-up to the fasting month, the seri-muka and not the pulut kacau of the capital market. The guidelines released on 19th September last year are quite clear on what we are about: infrastructure with project cost of not less than RM500 million and a remaining concession or licence period of 15 to 18 years. At this seminar, we hope to underline what we mean by infrastructure projects, what is excluded. The intention of IPC listing, without profit track record, is not to provide a listed vehicle for other assets to piggy-back on. Neither is it a bazaar for the mixing and matching of motley assets of various definitions. We are talking about the build-up of the infrastructure of the country and the region, where such build-up is led by Malaysians, which needs the raising of large amounts of capital as efficiently as possible. We hope there will be a clear common understanding at the end of this seminar about the requirements of IPC listing on KLSE.

With respect to the mechanics of the offer, the Commission is prepared to be flexible. We hope to communicate at this seminar how flexible, taking into account also legal requirements and national policies. As you know, the pricing of the issue, for instance, will be left almost entirely to the market, certainly the institutional tranche, and we want Malaysian advisers to get on that curve, to get into the tugs and pulls and insistences of price determination. The Commission obviously cannot give undertakings in areas over which it has no authority, such as share ownership. I am confident nonetheless you will find from this seminar the Commission would be willing to work through with you the whole offer mechanism, the Commission being as interested as you to ensure IPC listings are a success, particularly the first few.

The Commission will be insistent with regard to investor protection. A premium will be placed on disclosure, including periodic disclosure required in the form of quarterly reports to KLSE and SC and continuous disclosure requirements for significant changes in assumptions and variance in profit projections. It follows that directors, advisers and experts are to exercise due diligence on information provided in the prospectus. The code of best practice for due diligence has been formulated as a guide for advisers. You will also find that the Commission would want shareholding spreads to ensure sufficient allocation for small investors and, as you know, there are restrictions on promoters disposing their shares until the project is profitable and running. Clear penalties are provided under Section 32 (as amended) of the Securities Commission Act 1993 for misrepresentations, material omissions and false statements.

It is critical that we appreciate the importance of making it work, of understanding requirements and responsibilities, while seizing the opportunity afforded by IPC listing. After the introduction of call warrants early last year, IPC listing represents a highly significant next and far larger step in the direction of a full disclosure and market driven regulatory environment. I am confident we can make a success of this venture in the modernisation and expansion of our capital market if we worked together and understood one another. Indeed in all the preparation over the past almost one year now, the Securities Commission has been fortunate to get the support of the industry, of the advisers and experts at home and especially abroad who have had the experience, and the cooperation of a number of regulators in various jurisdictions. For this, we are very grateful. And we hope that we can continue to work together with all the parties involved as we have done through meetings, discussions and, what our Research and Development division likes to call it, colloquiums.

I must also add a strong note of appreciation and thanks to the Association of Merchant Banks for the splendid work they have done in organising this seminar, with our SIDC. To the Commission staff involved, thank you as well, and well done.

Most of all, let me thank today's speakers and discussants for making time to share their expert views and experiences with a wider audience, to all our benefit. I very much hope you will all have a most fruitful seminar, and we can look forward to an IPC listing on KLSE in the not too distant future.
about the SC
The Securities Commission Malaysia (SC) was established on 1 March 1993 under the Securities Commission Act 1993 (SCA). We are a self-funded statutory body entrusted with the responsibility to regulate and develop the Malaysian capital market.

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