Re-engineering/Gearing Malaysian Capital Markets For the 21st Century at the markets East's 1995 "1st Asian Technical Analysis Conference - Stocks, Futures & Options"e
1 July 1995 |   By : Dato' Dr. Mohd. Munir Abdul Majid, Chairman, Securities Commission, Malaysia

First of all, I would like to thank the organisers of this conference, Futures International Conferences, Malaysian Business and P.I. Capital Research Sdn. Bhd., for inviting me to deliver this address.

These are heady days for the further development of Malaysian capital markets. Last week, on Thursday 22nd June, the Deputy Prime Minister, who is the Finance Minister, announced a number of significant initiatives, signalling his vision for the emergence of Malaysia as a regional capital market centre. Indeed today he will announce further measures for the development of Labuan as an off-shore financial centre. And, as you all would know, an important milestone would be reached in the history of the development of Malaysian capital markets, when the options and financial futures exchanges are established.

The Deputy Prime Minister's vision of "Malaysia as a regional capital market centre" is fully supported by the Securities Commission's Business Plan 1995 - 97, announced earlier this year. One of the major points stressed by the Deputy Prime Minister on 22nd June was a sound regulatory framework, a subject dear to the heart of the Securities Commission.

I would like to take this opportunity to address one aspect of the matter, the time taken to process corporate proposals, which has received some comment in the days following the Deputy Prime Minister's statement. Much of this comment has been unfair to the staff of the Securities Commission but, more importantly, misleading and inaccurate with respect to the actual situation in regard to the number of authorities involved in the processing of corporate proposals. If we do not even have the facts right, we cannot even begin to address the weaknesses of the situation. This, in turn, can hold back our joint desire to see the further development of Malaysian capital markets.

There can be as many as nine authorities involved in the processing of corporate proposals. The Securities Commission has taken it upon itself to act as a one-stop agency so that submissions do not have to be made to so many destinations. We act as a post office. I wish to emphasise that the Securities Commission is not a single authority which decides on every aspect of a corporate submission. Before we can begin to consider many proposals, the decisions of the other agencies have to be obtained. Certainly before the letters of approval are sent out by the Commission, all other decisions by the other agencies as well have to be available. Thus, it is not quite surprising that a PDS proposal, for instance, can take as long as 6-9 months before a decision is made. This is intolerable. It is too long a wait. The Securities Commission suffers from this long wait as well.

The Securities Commission fully understands that time is money. Shortly after its establishment, it set up internal benchmarks for the consideration of corporate proposals, which were classified into eleven types. Based on the average figures, we have been able to meet our maximum internal targets where the decisions are wholly within our control, for example a simple bonus issue for which we already have a maximum target of one month. We have also made decisions well within a one-month period with respect to the 10 per cent private placement of shares, to take another example of corporate proposals over which we have total control. Therefore the Securities Commission does not foresee any problem in meeting the Deputy Prime Minister's deadlines announced in his 22nd June speech, for as long as the decisions to be made are within its control and no account is taken of the time expended by other agencies making their part of the decisions. This is obviously an unsatisfactory caveat, but the solution surely must be not to blame the Securities Commission. The solution must be to get quick decisions from other authorities; better still to rationalise the regulatory framework, a sine qua non for the further development of our capital markets. Indeed the Securities Commission has made proposals for the rationalisation of the regulatory framework in the interest of the further development of Malaysian capital markets.

A second consideration in the interest of time efficiency with regard to the consideration of corporate proposals is the quality of the submissions. The merchant banks play a central role in this. In the past, incomplete and shoddy submissions had been returned by the Capital Issues Committee (CIC), no questions asked. I had instructed our staff to adopt a less "unfriendly" attitude upon the establishment of the Securities Commission. But with a fixed time-frame for the consideration of submissions, we have to review this. Also, the merchant banks have generally been losing staff in a tight labour market. The poor quality of some of the submissions is disturbing, but the merchant banks often do not communicate the problems encountered in their submissions to their clients, for obvious reasons. Again, the Commission cannot continue to tolerate this if there is no discernible improvement in the quality of the submissions received from the merchant banks. Already the barbarians are at the gates and competition is getting fierce. The merchant banks will have to buck up, not for the sake of the Securities Commission but, very importantly, for their own sakes.

Thirdly, and most fundamentally, in the interest of further development of Malaysian capital markets, the Securities Commission has been pushing for a migration from the current merit-based system of regulation to a full disclosure one. This has often been misrepresented as based on a desire to save time in the consideration of corporate proposals, although that will certainly be a welcome outcome. The most important point about the shift we propose is the modernisation of the regulatory structure to bring it in line with modern capital market centres. Many things that a modern capital market centre can do, we cannot do because of our merit-based regulation. Certainly they can do many things faster than we can achieve. Our corporations are screaming out loud: when can we do things that can be done, and be done faster, in the advanced capital markets? Do we have to raise capital and trade there? Do we want the Malaysian capital market to come up to speed?

There are two aspects about our present merit-based regulation which we should note. On the one hand, as very explicitly stated in Section 32(3) of the Securities Commission Act, it imposes on the public authority duties and obligations which result in an intervention in the securities issue process which, to my mind, is best left to the market to determine. For example, price determination by the public authority. Is the market not a more efficient place to determine price than the offices of the regulator? This brings us to second aspect of merit-based regulation: a somewhat flabby and self-satisfied market where investors and underwriters are spoon- fed and protected, never to develop capabilities assumed in developed markets. How then can markets become efficient, active and vibrant, and the cost of raising capital brought down further?

The flip-side, disclosure-based regulation, while giving efficiency and growth to the market, must also ensure investor protection is not neglected. This is why in every disclosure-based environment, duties of due diligence are imposed on advisers and company directors who are raising funds from the public based on certain representations. The representations will have to be good; otherwise they will have to answer for it, which to me seems a fair and balanced system.

I have so far made three points about the regulatory framework, all of which point clearly in the direction of market-driven imperatives for the further development of Malaysian capital markets. With the right regulation, we can all truly contribute to the Deputy Prime Minister's vision of achieving deep and liquid capital markets with more institutional investor participation, greater diversification and a higher level of professionalism.

The time taken to consider corporate proposals is certainly a very important factor. While alerting you to some of the difficulties, I have tried to underline the other components of a sound regulatory framework. Certainly the staff of the Securities Commission have their work cut out for them. They must work hard, which they are doing, and even harder to achieve the vision of our political leaders.
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