Topic 1 Capital Market Master Plan 1 (1)

Changing financial landscape demanded re-assessment of broad

strategic framework for the malaysian capital market - there was
an urgent need to alleviate financing burden on banking sector
Need to increase role of capital markets in meeting nations
financing needs
Need to further diversify holdings of financial assets within
financial system
The vision for the capital market is for it to be:
i.
ii.
iii.

Internationally competitive
Highly efficient
Supported by a strong and facilitative regulatory
framework

What is the Capital Master Plan(CMP)?

The CMP is a comprehensive plan mapping the direction of the
Malaysian capital market over the next 10 years. Hence the CMP
is intended to ensure that the capital market is well positioned to
support national economic growth and to meet future
challenges from regional competition and globalisation.
How did the CMP come about?

In formulating the CMP, extensive consultations were held with a

wide

range

of

market

participants,

ministries,

agencies,

academics and independent consultants to ensure that the views

of all participants were incorporated in the CMP blueprint. This
task was entrusted to the Capital Market Strategic Committee
(CMSC), which comprised representatives from the Securities
Commission (SC) and highly experienced local and foreign
professionals from the capital market. The SC Chairman was
appointed by the Minister of Finance to chair the CMSC.
In addition, independent consultants were also engaged to assist
in the exercise. The CMP was presented to the Government in
October 2000 and was officially released by the SC in February
2001.
Capital Market Master Plan Malaysia
1.

Begins in year 2001, 10 years plan strategic positioning and

future direction of Malaysian capital

2.

As an integral part and indicator of nation

development

3.
4.

Represent vital part of financial market infrastructure

The success of Msian Capital Market contributes to the
overall strength of the economy

Objectives/Strategic Initiatives
These objectives are:
i.

To be the preferred fund-raising centre for Malaysian companies

ii.

To promote an effective investment management industry and a more

conducive environment for investors

iii. To enhance the competitive position and efficiency of market

institutions
iv. To develop a strong and competitive environment for intermediation
services
v.

To ensure a stronger and more facilitative regulatory regime

vi.

To establish Malaysia as an international Islamic capital market

centre

1.To be preferred Fund Raising Centre for Malaysian

Companies
.1

Enhance the efficiency of the fund raising process

.2

Implement a comprehensive programme to develop the

corporate bond market as a competitive source of financing

.3

Facilitate the development of the venture capital industry to

finance emerging high growth companies

.4

Foster a liquid and efficient market for the secondary

trading of securities

Shift from MBR to DBR

- Under Merit Based Regulation (MBR), the Securities
Commission regulates the offering of securities by assessing the
investment merits and pricing of the offering. The regulator
assumes a paternalistic role in assessing the merit of securities to
be issued and interposes itself between those seeking to raise
funds and those seeking to invest.

- Under Disclosure Based Resources (DBR), the onus of

assessing the merit of any securities rests with the investors
whose money is being put at risk. The investors assess and
determine the investment merits of the offering while the Securities
Commission regulates the disclosure of material information.

Refer to MBR vs DBR

 Lowering regulatory cost of fund raising by

streamlining and expediting the issuance and approval
processes and expediting the issuance and approval
processes.
Facilitating competition in the corporate advisory
industry and other services related to securities issues
Encouraging the use of technology in the fundraising process where applicable to take advantage of

the greater reach, speed and efficiency that electronic

platforms can offer.
Comments:
i.
ii.
iii.

Settlement system from T+7 to T+3

Computerised balloting in share issue.
Streamlining share/ bond issue i.e with Bursa
Malaysia/Securities Commission

iv.

Scriptless trading of bonds with the introduction of

FAST system (Fully Automated System for Issuing
and Tendering)

Venture Capital
Money provided by investors to startup firms and small
businesses with perceived long-term growth potential. This is
a very important source of funding for startups that do not
have access to capital markets. It typically entails high risk
for the investor, but it has the potential for above-average
returns.

2. To promote an effective investment management industry

and a more conducive environment for investors.

.1

Develop a strong framework for corporate governance and

shareholder value recognition

.2

Heighten efforts to establish a vibrant and competitive

investment management industry

.3

Enhance the role of institutional investors in the provision

and management of funds

.4

Facilitate effective risk management by actively developing

the derivatives market

.5

Facilitate the introduction of a broad range of capital

market products catering to various risk-return profiles

Enhancing the awareness of, and accountability for, the fiduciary

duties and obligations of company directors, management and
officers of public-listed companies

i. Further deregulation to allow greater international portfolio

diversification.
ii. EPF to diversify the management of its funds by placing out a greater
portion with external fund managers.
iii. Development of private pension industry.
iv. Allow foreign majority ownership of unit trust management companies
from 2003.
v. Outsourcing of management of funds by insurance companies be
promoted.

3. To enhance the competitive position and efficiency of

Market Institution

Restructure Msian exchanges and clearing institutions to

strengthen their efficiency and competitiveness

Ensure Msian exchanges are well positioned to respond

to changing market dynamics through adoption of flexible
business structures and commercially orientated
strategies

Enhance the efficiency of trading, clearing and settlement

infrastructure

Comments:
i.

Introduction of FAST and RENTAS to provide efficient

clearing and settlement
FAST - Fully Automated System for Tendering
- scripless securities for bond trading similar to CDS
- a system designed to facilitate the primary issue of all
debt securities and money market instruments approved
by Bank Negara Malaysia and/or relevant authorities
which are either issued via tender or on a private
placement basis.

RENTAS - Real Time Electronic Transfer of Funds and

Securities
-

to the reduction of settlement risk in scripless securities

transactions by providing a mechanism for delivery-versus
payment (DVP).

- a real time settlement system for the transfer and

settlement of high value ringgit denominated interbank
funds and scripless securities transactions.
ii.

On April 14, 2004, Kuala Lumpur Stock Exchange was

renamed Bursa Malaysia Berhad, following the demutualization
exercise.
Demutualisation entails the conversion of the KLSE from a nonprofit company limited by guarantee of its members into a public
company limited by shares.

The Demutualisation of KLSE Takes Effect Business Times

5 Jan 2004
After demutualization, KLSE Bhds authorised share capital is
RM500 million comprising one billion shares of 50 sen each. Its
paid-up capital is RM250 million made up of 500 million shares of
50 sen each.

The Capital Market Development Fund, the Minister of Finance

Inc and licensed stockbroking companies will each hold a 30 per
cent stake or 150 million shares. The remaining 10 per cent or 50
million shares will be held by eligible remisiers.
The KLSEs demutualisation follows other demutualised foreign
bourses such as the Australian Stock Exchange, the Hong Kong
Stock Exchange, the Stock Exchange of Singapore, the Sydney
Futures Exchange and the Tokyo Stock Exchange.
Demutualisation refers to the conversion of KLSE from a nonprofit mutual entity limited by the guarantee of its members, into
a public company limited by shares.
Advantages of Demutualisation:
to further enhance its corporate, organisational, and
governance structures to respond to the challenges of a
globalising and increasingly competitive capital market
Demutualisation places the KLSE Group in a better position
to respond to the collective interests of its broader
stakeholders, and consequently be more customer-driven
and market-oriented.

 It will also help in improving liquidity resulting in a more

attractive market place for the trading of securities, thereby
benefiting all market participants.
The principal beneficiaries from the demutualisation would be the
Government, the economy and capital market; the issuers and
investors; the intermediaries (stockbrokers and remisiers); and,
the exchange.
Next step is to form strategic alliances with other exchanges to
attract new participants. Specific targeted markets include
potential investors in West Asia and North Asia.

4. To develop a strong and competitive environment for

intermediation services

Foster constructive competition through regulation of

services, products and fixed fee structure

Develop strong full-service brokers to provide a

competitive market for integrated financial services

Ensure Msian intermediation services are anchored on

appropriate prudent standards, with high levels of
business conduct and professional skills

Adopt a pragmatic programme for liberalization

supported by appropriate safeguards

Comments:
i.

Progressively liberalising fixed commissions and charges

ii.

Introduction of on-line broking

iii.

The SCORE fee will be reduced in two stages to 0.005% and

0.0025% with effect from 1 September 2000 and 1 July 2001
respectively. Subsequently, SCORE fees will be reviewed further
(The SCORE (System on Computerised Order Routing and Execution)

iv.

14 The SC levy will be reduced to 0.015% from the present 0.02%

with effect from 1 July 2001

v.

15 Stamp duty should be capped at RM200 per contract for all

trades on the KLSE and be further considered for eventual
removal.

5. To ensure stronger and more facilitative regulatory

regime

Move towards a market based system of regulation for

capital market activities

Ensure regulatory parity and consistency between all

institution and participants conducting similar capital
market activities

Ensure strong enforcement of the regulations governing

the capital market

Enhance capacity for maintaining systematic and

stability

Comments:
i.

SC and KLSE to initiate measure to promote timely,

comprehensive and regular dissemination of material and
relevant co info to shareholders Listing Requirement.

ii.

Fund Management Companies- to have a Corporate

Governance Dept and appoint compliance Officer.

iii.

Recommendations contained in the Report on

Corporate Governance will be effected in a timely and
comprehensive manner.

iv.

Enhance disclosure in annual report by listed

companies.

v.

Setting of MSWG(Minority Shareholders Watch Group)

to protect the interest of minority shareholders.

6. To establish Malaysia as an International Islamic Capital

Market Centre

Facilitate the development of a wide range products

and services related to the Islamic capital market

Create a viable market for the effective mobilization of

Islamic Funds

Ensure that there is an appropriate and comprehensive

accounting, tax and regulatory framework for the
Islamic capital market

Enhance the value of recognition of the Malaysian

Islamic capital market internationally

Comments:
i.

Bond Incentives given:

a Bank Negara Malaysia has waived stamp - duty for all
instruments relating to the issue and transfer of company
bonds,
b Interest earned on bonds is tax exempted.
c In 2001, asset-backed securities were granted stamp-duty
waiver,
d In 2003, tax deductions were allowed on expenses
incurred in issuing Islamic private debt securities that
adopted either the mudharabah, musyarakah or ijarah
principles.

ii.

A single Syariah Advisory Council be established for the

Islamic financial sector.

iii.

A lax tax and legal framework be established for Islamic

capital market.

iv.

Enhanced awareness of Malaysias Islamic capital market

at the domestic and international level be pursued.

Implementation of Capital Market Master Plan

Phase 1 (2001-2003)

Strengthen domestic capacity and develop strategic and

nascent sectors
Addressed weaknesses that had emerged during the 1997
financial crisis
Strengthened domestic capacity for future expansion
Enhanced microstructure efficiency including enhancement
of the Securities Commissions overall efficiency and
effectiveness
Phase 2 (2004-2005)- Implementation

 Further strengthen key sectors and gradually liberalise

market access
Focus will be on:
Enhance Liquidity
Address structural impediments to enhance liquidity
Global networks
Focus upon enhancing the position of Malaysias capital
market within a global network
Value Creation
Assist market intermediaries and institutions to create value
for their customers

Phase 3 (2005-2010)
Further expansion and strengthening of market processes
and infrastructure towards becoming fully-developed capital
market
Enhance international positioning in areas of comparative
and competitive advantage

Strategic developmental initiatives for the Malaysian

bond market
Strategy
Initiatives
1. Introducing an efficient and
facilitative issuance process

1
Release of Guidelines on the
2
Offering of PDSs 2000
3
4
Introduction of a shelf-registration
scheme 2000
Release of Guidelines on the Offering of
Asset-backed Securities (ABSs) 2001
5
Release of Asset Securitisation Report
2002
6
Introduction of Guidelines on the
Offering of Islamic Securities - 2004

2. Establishing a reliable and

efficient benchmark yield

Introduction of an auction calendar for

Malaysian Government Securities
(MGS) -2000
Review of the principal dealers system

3. Widening the issuer and investor

base

Broadening of the investor base under

the Securities Commission Act for the
OTC market
1
Universal Brokers are allowed to trade
in the OTC market - 2002
2
ABSs are introduced together with taxneutral framework and tax deductions
on issuance expenses - 2003

Islamic PDSs are accorded various tax

incentives (eg stamp duty waiver, tax
deductions on issuance expenses) and
a tax-neutral framework - 2003, 2005
1
Multilateral development banks,
multilateral financial institutions and
multinational corporations are allowed to
raise ringgit- denominated bonds 2004
2
Removal of withholding taxes on
interest income earned on investments
by nonresident companies in ringgitdenominated Islamic securities and
securities issued by the Malaysian
Government - 2004

4. Improving liquidity in the

Non-financial institutions are allowed to

enter into repurchase transactions
2000

secondary market
The Securities Borrowing and Lending
Programme is introduced via the
RENTAS system 2001
Institutional Securities Custodian
Programme (ISCAP) is put in place to
encourage institutional investors to lend
securities to BNM - 2004
5.Facilitating the introduction of risk
management instruments

Introduction of three-, five- and 10-year

MGS futures - 2002, 2003
Introduction of Guidelines on
Regulated Short- selling of Securities 2005

Sources: Bank Negara Malaysia; Securities Commission.

Tutorial:
1. Discuss the difference between Merit based disclosure vs
Disclosure based regulation. Which in your opinion is better
and why?
2. Comment on the article: KLSE Demutualisation Takes
Effect. Discuss the advantages and disadvantages of the
demutualisation.

3. Discuss the objective of the Capital Master Plan and what

led to the CMP 1.

4. The Malaysian sukuk market is worth RM225 bil as at end

May 2010. Discuss factors that led to the development of the
sukuk market.

Note: Please do additional research for answers.

Additional Reading: 1
MBR vs DBR
Comparing Disclosure Based Regulation And Merit Based Regulation Finance Essay

MBR
The recognition of the need for a securities regulator to ensure investor
protection and market integrity is located in the Securities Commission Act
1993 (SCA), under which the Securities Commission (SC) is established.
Section 15(1) of the SCA requires the SC to, which control all matters
relating to securities and to take all reasonable measures to preserve the
confidence of investors in the securities market by ensuring sufficient
security for such investors. The principal thrust of the regulatory framework
currently applied by the SC is merit-based. Section 32(4) of the Securities
Commission Act 1993 (SCA), give power that all proposals that involve
issues or offers of securities to the public be subjected to the SC's prior
approval. The SC has the discretion to approve the proposals with such
revisions and subject to such terms and conditions as it deems fit. The SC
also has the power to reject corporate proposals if it is reasonably satisfied

that these proposals are not in the best interest of the public company
and/or the investing public.
Authorities regulate securities offering
Under the MBR, The authorities regulate the securities offering by
protecting and shielding the investor by ensuring that the offering of the
securities of the companys is judged by the authorities to be fair, just and
equitable. Under this approach, the regulators or the authorities would
make an assessment regarding the companys viability, quality and
capabilities of the companys management, its suitability for listing and
taking regard of the public interest before approving any issuance proposal
regarding the companys securities. For example, section 34(4) of the SCA,
issues or offers of securities is subjected to the approval from the SC.
Issuers and advisers disclose to authorities
Under the MBR model, the issuers and advisers disclosed all information
regarding the companys business to the authorities or the market
regulators. These are because under this type of model, the market
regulator needs to approve first the securities before the investor can be
allowed to invest in the companys. This is for the purpose to protect the
investor.
Authorities reviews investment merits of offering
Regulators review each transaction according to its perceived merits. The
evaluation is completed in two stages which is firstly, adequacy of
disclosure is assessed then, and the merits of the transaction are subjected

to value judgment. Merit-based regulation assumes that the market

regulators are better informed than investors and can better decide the
merits of transactions on their behalf. These merit judgment is the
indication whether the companys can provide safe securities in making
business in order to protect the investment made by the investor.
Advantages of MBR Model
In merit based regulation, it is a paternalistic attempt to improve or to
develop the fairness between the relationship between the sellers and
buyers of the securities in the capital market. These models also act as a
shield to protect the public investors from the risks involved in acting on
impulse. This is because the authorities had made deep valuation and
merits regarding the companys business in order to approve the securities
issued by the companys.
This model or regulatory system is particularly suitable to be adopted for
Malaysias emerging capital market which has a large proportion of
financially unsophisticated retail investors. This is also reduce or minimizing
the possibility of promoters of public companies exploiting these less
sophicated investors to use as to their own advantages.
In the securities market, the Securities Commission is also able to ensure
that mechanism in place is working well in order to prevent unscrupulous
and unethical practices in the issue or offer of the securities by the
companies. By ensuing that the mechanism place is working, the investor
would have minimized the risk of losing their investment by the

unscrupulous and unethical practices of some companys who would

provide false or inadequate information regarding their business.
But, the ultimate decision still lies within the investor. This is because the
decision and the evaluation of the security offered lies with the investing
public. The securities commission will not give a guarantee that the
investment made by the investor would get a return or profit.
The SC has the power to check and ensure that the securities that are
offered by the issuers are fairly and reasonably priced.
Disadvantages of MBR Model
This is regards to the public interest where the public investor would make
their decision in investing their money in the companys based on the SC.
The approach of MBR posed a problem of moral hazard. This is because
when the market regulators or the SC gives their approval of the merits of a
particular company, it exist danger that investors will perceive that the
corporation will be a good investment as the SC had given their approval
after making some merits regarding the business of the companys. This
would lead to an impression whereby the investor did not need to
individually evaluate the merits or risk of investing in that company. The
investor would totally leave it to the market regulator to make the research.
By using these models, the regulatory approach of MBR restricts
entrepreneurs and investors choice in making decision in choosing the
right company to invest by limiting the scope of investment that is offered to
them. This is because only SC will give and provide the necessary approval
in order to make the issued security to be approved. If the companys does

not comply the guideline given and the SC does not approve the issue
offered, thus limiting the option available to the investor in investing their
money.
This approach also denies certain ventures of access to public funds
unless the issuer of securities agrees to modify their offering according to
the pre-requisite set by the SC. The issue that always arises is that the SC
and the issuers of securities tend to have conflicting views as to how and
the extent to which a proposed venture or transaction will be beneficial to
investor in general.

The SC is also known to be more conservative in its judgment and normally

will not approve highly risky securities to be offered to the public. The merit
based regulation also provided that by giving much protection to the
investor, this will take the bargaining power from the securities offeror or
issuers and the power will be switch to the investor instead. The protection
is significant because the issuers of the securities need to raise funds at a
substantial discount from the actual price of their securities. From this
Market philosophy, this over-protection of the investing public had
compelled issuers to raise funds at a substantial discount from the actual
value of their securities or add to the perception of initial investors that they
would be guaranteed a premium when the corporate body is launched
onto the marketplace.
Basic principle of DBR

The basic principle of DBR is the need for the issuers and intermediaries
offering securities to provide investors with sufficient, accurate and timely
disclosure of all relevant information regarding the companys business,
prospects, finances and the terms of the securities in order to allow
investors to better evaluate the risks and merits of their
investment. [6] This is to allow the investor to make they own informed
investment decisions. Usually is done through the use of prospectus which
focuses whether the companies comply with the standard of disclosure
required. For example, in Malaysia, the companies that is listed in Bursa
Malaysia, one of the listing requirements of the standard disclosure is to
have at least two annual reports that can be inspect by the investors in
order to make their decision to invest. The investor are expected to carry
out their own due diligence or with the assistance of expert or professional
such as lawyers and accountant because the investor hold a higher level of
responsibilities in evaluating the risk or particular offering based on the
disclosed information before investing.
Authorities regulate disclosure of information in securities offering
Under DBR, the regulation of the disclosure or the standard of the
disclosure in securities offering is on the authorities where the authorities
will provide the guidelines for the company in disclosing the relevant
information pertaining the companys business, finances, prospects and
terms of securities. The burden is put on the issuers of the securities and
advisers and not on the authorities.
Issuers and adviser disclosed to investor

Under the model Of DBR, the issuers of the securities will provide sufficient
information according to the Securities Commission Guidelines regarding
the disclosure of information regarding their business. The advisers which
are normally experts or professionals such as accountants, lawyers and
other technical experts need to have play their role in the preparation of
prospectus for the investing public. These are because each of these
adviser or experts can be held liable for a defective prospectus under the
DBR. The due diligence process is for the purposes of preparing good and
complete prospectus and involves performing reasonable investigate work
in order to determine that the prospectus does not contain any material
omission or false information. Financial advisers and experts in particular
are expected to have a very high standard of reasonable care. An adviser
has an obligation to make a reasonable investigation not just for the
purpose of its own due diligence defence but also as a duty to the investing
public who will be relying on the opinion and recommendations of the
advisers. In order to minimize their potential risk, the expert of
professionals must make due diligence enquiries.

Investors determine investment merits of offering

In the DBR System, the investor cannot expect that the securities regulator
to protect them forever. In order to invest, the investor cannot invest blindly.
The investor must make their own research and collect data and
information regarding the companys business. Investors have to evaluate
and assess the merits of any security being issued or offered before
making any investment decision

It would become more apparent that investors would have to change their
laid-back attitude. They can no longer take for granted that securities being
issued or offered have already passed the regulators' investment merit
review. Instead, the information necessary for the investors themselves to
evaluate the investment merit of a security will be available. Investors must
also take a more active interest in the companies they invest in emphasis
should always be placed on fundamentals and long-term performance
rather than short-term profit. Investors should be concerned about ensuring
that their rights and interests as shareholders are protected, and that
greater transparency and accountability are shown by the directors or
principal officers of the companies concerned. Ultimately the effectiveness
of the disclosure regime to be adopted in Malaysia will depend on investors
themselves. They must also rise to the occasion by paying closer attention
to the affairs of the corporations in which they invest.
Under a disclosure-based regulation, investment analysts and financial
journalists would have access to more relevant information to enable them
to make more detailed analysis, research and assessment of each security
issue or offering and can conclude at a better finding and recommendation.
This is of particular importance in Malaysia in view of the large proportion of
retail investors, some of whom lack the technical expertise and or the time
needed to evaluate the web of information disclosed by issuers of
securities. These investors may need to rely on the analysis disseminated
by the investment analysts and financial journalists to make better informed
investment decisions.

Advantages of DBR
There are several advantages of the DBR regulatory model system.
Basically, this would result in a more transparent and informed market
whereby companies have to improve their quality of disclosure to facilitate
potential decision making by potential investors. By upgrading the quality,
the investors have more choice and more information pertaining the
business and the finances of the companies before making any investment
in the companies.
Investor must know and get the information given by the issuer of securities
to because the investor will hold the burden of all the responsibility towards
their investment decision.
One of the major advantages of DBR, the companies can raise more funds
at a lower or cheaper cost. This is because it is based on the assumption
that the higher level of transparency will lead to a greater evaluation risk by
underwriters which would then contribute to a lesser cost in raising the fund
which give the issuers companies the power to price it assets at a higher
premium rates.
Another advantage under the DBR is where the role of the regulator is to
ensure that the structure of the market is consistent and efficient for the
market In order for the investor to make a decision. The regulators will
ensure that the information given by the companies are disclosed so that
the investor will become the judge in making judgment of the merits of
alternative investment, so that the regulator would only emphasis on
disclosure and eradication of fraud.

According to analysis, by shifting towards the disclosure based regulation,

the benefit that the securities market will enjoy is that the increased of
efficiency of the Malaysian capital market by removing the barriers to
competitiveness which is present in the old merit regulatory system.
A higher standard of disclosure by the companies is ensuring by the
regulatory bodies. This is because the companies are expected to follow
the guidelines of disclosure of the information according to the SC. This
would give more chance to the investor in making their own research of the
accountability of the companies before making any investment.
The Ground for the shift of regulatory model from MBR to DBR
The Securities Commission continues to play an important role in providing
direction on broad policy matters and in enforcing the securities laws and
regulations. Its role is to ensure that the incentives and structure of the
market are consistent with efficiency, fairness and stability. The table below
shows the ground for the shift to DBR regulatory system.
Three Tenets of DBR
i.Disclosure
The responsibility of directors of public companies is to ensure that all
material information required by the public to make investment decisions is
provided accurately, in full and on a timely basis.
In disclosing such information, the question that is need to be asked is
whether

Has any important piece of information been omitted?

Is any part of the information misleading?
Is the information complete and accurate?
Investors rely on available information when deciding where and when they
should invest their money. There is a need for information when new
securities are offered in the primary market.
There is also a need for information when dealing in securities already
traded in the secondary market.
Disclosure of information therefore benefits investors by facilitating them to
make investment decisions.
Companies intending to offer securities to the public are required to fully
disclose information about the affairs of the companies and the securities
which are being offered, in the offering documents or prospectuses. For a
public listed company, disclosure obligations are stipulated in the Listing
Rules of the stock exchanges.
ii.Due Diligence
In preparing the information to be disclosed to the public, directors of public
companies must undertake a due diligence exercise to verify and ensure
that the information to be released is accurate and timely.
Due diligence is a process by which inquiries are conducted to ensure that
information to be disclosed is true, sufficient and timely. Due care must also

be given to ensure that there is no omission of material information.

Material information is information which would reasonably be expected by
rational investors to facilitate their investment decisions.
Information that can affect the trading activities and prices of the company's
securities must be released immediately. The onus then lies with the
investor to consider and weigh the information provided before making
decisions.
Following amendments to the Securities Commission Act 1993 (SCA) in
1995, which placed a higher standard of responsibility on promoters,
directors, and advisers in respect of disclosures, the Securities
Commission released a publication on Due Diligence Practices in August
1996.

The publication is intended to explain the importance of due diligence,

especially given the criminal liabilities imposed on persons responsible for
submission of proposals to the Securities Commission under section 32 of
the SCA.
In March 1999, another publication on "Due Diligence Guidelines on
Submission of Proposals to the Securities Commission" was published. It
was jointly issued by the Association of Merchant Banks in Malaysia,
Federation of Public Listed Companies, MIA, MACPA and MAICSA. The
publication, in detailing the due diligence process, the question whether
1) Who will be held responsible for conducting the due diligence?

2) Who should be included in a Due Diligence Working Group(DDWG)?

3) What should the terms of reference and role of the DDWG be?
4) What is the methodology used in conducting the due diligence exercise?
The publication also includes a due diligence checklist for an initial public
offering and sets out clearly the roles and responsibilities of the various
parties involved in the exercise.
Iii Corporate Governance
The timely, accurate and transparent disclosure of material information is
an integral component of ensuring good corporate governance. Boards of
directors of companies need to be open about the businesses they direct
and this includes transparency in corporate activities and transactions. This
is essential so that shareholders can exercise their rights constructively.
However, they can only do so if they are provided the relevant information.
Apart from compliance with laws and regulations that constitutes one
aspect of ensuring that directors perform their fiduciary duties properly,
there are also codes of best practices which the directors are expected to
observe. Among the codes to be observed are The Malaysian Code on
Corporate Governance, issued by the Finance Committee on Corporate
Governance and The Company Director's Code of Ethics issued by the
Registry of Companies.

Additional Reading: 2

KLSE Demutualisation Takes Effect

5 Jan 2004, Business Times
By CHEAH CHOR SOOI

THE Kuala Lumpur Stock Exchange (KLSE) is from today a public

company limited by shares as opposed to a company limited by guarantee
previously.
The date for its listing, which forms part of the exchanges demutualisation
programme, has not been fixed and will depend on prevailing market
conditions.
The local bourse has vested and transferred its stock exchange business to
wholly-owned subsidiary Malaysia Securities Exchange Bhd, while the
demutualised KLSE has been approved as an exchange holding company
known as KLSE Bhd.
KLSE Bhds authorised share capital is RM500 million comprising one
billion shares of 50 sen each. Its paid-up capital is RM250 million made up
of 500 million shares of 50 sen each.
The Capital Market Development Fund, the Minister of Finance Inc and
licensed stockbroking companies will each hold a 30 per cent stake or 150
million shares. The remaining 10 per cent or 50 million shares will be held
by eligible remisiers.
The KLSEs demutualisation follows other demutualised foreign bourses
such as the Australian Stock Exchange, the Hong Kong Stock Exchange,
the Stock Exchange of Singapore, the Sydney Futures Exchange and the
Tokyo Stock Exchange.
In 1998, the Australian Stock Exchange Ltd demutualised to become one of
the first exchanges in the world to list on its own market.

This was followed by the Singapore Exchange Ltd in 1999, the Sydney
Futures Exchange and the Hong Kong Exchange in 2000 and the Tokyo
Stock Exchange in 2002.
The KLSEs demutualisation was originally expected to be completed by
July last year with the exchange listed by end of 2003.
However, the short parliamentary session of only eight days in June last
year prevented the KLSE Demutualisation Bill from getting a second
reading in the Dewan Rakyat until September that year.
In November last year, the Dewan Negara passed the Demutualisation Bill
and amendments to the securities laws. Last Friday, the Finance Ministry
published the gazette order stipulating that the Demutualisation Act come
into effect.
The demutualisation exercise first took off in May 2002 with the approval of
the proposed demutualisation plan by the KLSE Committee.
Demutualisation refers to the conversion of KLSE from a non-profit mutual
entity limited by the guarantee of its members, into a public company
limited by shares.
The exchange said from a business strategy perspective, demutualisation
supported by business transformation initiatives, is an enabler for the KLSE
Group to further enhance its corporate, organisational, and governance
structures to respond to the challenges of a globalising and increasingly
competitive capital market.
Demutualisation places the KLSE Group in a better position to respond to
the collective interests of its broader stakeholders, and consequently be
more customer-driven and market-oriented.
It will also help in improving liquidity resulting in a more attractive market
place for the trading of securities, thereby benefiting all market participants,

it added.
KLSE Bhd also said principal beneficiaries from the demutualisation would
be the Government, the economy and capital market; the issuers and
investors; the intermediaries (stockbrokers and remisiers); and, the
exchange.
It acknowledged that market liquidity and velocity remain the paramount
performance indicators for its business and that it must be proactive in
efforts to boost both areas.
The exchange added it will aggressively market and promote itself to a
wider pool of market participants with diverse and complementary trading
strategies.
This includes forming strategic alliances with other exchanges to attract
new participants. Specific targeted markets include potential investors in
West Asia and North Asia.
It will also introduce innovative market models and improve order types
accessibility.
In addition, the demutualised exchange will broaden market access to
encourage direct participation from domestic and international investors,
and intermediaries who can direct new or more trading volume to the
market.
This will be done in a phased manner to retain the stability of the local
stockbroking industry, in line with the national industry consolidation policy,
KLSE Bhd said.
On its listing, the exchange said the timing will depend on prevailing market
conditions. The exercise will facilitate greater diversity of exchange
ownership, thus allowing for enhanced public representation in the

governance of the demutualised Exchange.

Upon listing, KLSE Bhd will have a wider capital base with which to
expand and further develop its scope and scale of operations.
KLSE Bhd would also be subject to high levels of transparency and
accountability, to the benefit of its stakeholders, it added.