TOPIC 3 STOCK BROKING INDUSTRY

Early Development of Broking Business

Bursa Malaysia previously known as Kuala Lumpur Stock Exchange dates back to
1930. When the Singapore Stockbrokers' Association was set up as a formal
organisation dealing in securities in Malaya. The first formal securities business
organisation in Malaysia was the Singapore Stockbrokers' Association, established in
1930. It was re-registered as the Malayan Stockbrokers' Association in 1937.

The Malayan Stock Exchange was established in 1960 and the public trading of shares
commenced. The board system had trading rooms in Singapore and Kuala Lumpur,
linked by direct telephone lines.

In 1964, the Stock Exchange of Malaysia was established. With the independence of
Singapore from Malaysia in 1965, the Stock Exchange of Malaysia became known as
the Stock Exchange of Malaysia and Singapore. In 1973, currency interchangeability
between Malaysia and Singapore ceased, and the Stock Exchange of Malaysia and
Singapore was divided into the Kuala Lumpur Stock Exchange Berhad and the Stock
Exchange of Singapore.

In 1988, the KLSE launched the Second Board for the listing of smaller companies with
good growth prospects to gain access into the stock market.

On January 1, 1990, all Malaysian-incorporated companies on the Singapore stock

exchange and all Singapore –incorporated companies on the KLSE were delisted and
re-listed on their respective national exchanges. Soon after the exercise, an over the
counter (OTC) market for Malaysian listed stocks, CLOB was established in Singapore.

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1n 1993, the Central Depository System was implemented with the aim of scriptless
based system into a book entry system.

In 1996, the number of exchanges in Malaysia has grown to four:

i. The Kuala Lumpur Commodity Exchange (KLCE)
ii. The Malaysian Futures Clearing Corporation (MFCC)
iii. The Kuala Lumpur Options and Financial Futures Exchange Bhd (KLOFFE)
iv. The Malaysia Monetary Exchange (MME) which later merged with KLCE to
form the Commodity and Monetary Exchange of Malaysia (COMMEX) in
December 1998.

In 1998, as one of the attempts to weather the 1997 Asian financial crisis, it fully
suspended the trading of CLOB (Central Limit Order Book) counters.

CLOB

 SES established Clob in Jan 1990, after Malaysia unilaterally delisted all
Malaysian shares from the SES, the KLSE objected strongly. It declared publicly
that Clob was an unrecognised market, and warned investors of the dangers in
trading Malaysian shares on Clob.
 As at 31 Aug 98, 197,000 investors held Malaysian shares on Clob. 90% were
Singaporean investors.
 Even after the SES had given repeated assurances to investors that their shares
were not worthless, shares on Clob continued to trade at a deep discount 1 to
prices on the KLSE. Once the Malaysian measures were announced, nothing the
SES did could prevent a decline of share prices on Clob. Many investors
evidently preferred to sell their shares on Clob and receive the proceeds in S$,
rather than wait to dispose of their shares on KLSE and retain their proceeds in
Ringgit accounts in Malaysia for one year, as required under the new Malaysian
rules.

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  a secondary market in Singapore that traded mainly Malaysian stocks. In its
heyday, transactions on the CLOB far exceeded the transaction volumes for
Singapore shares listed on the main board of the Singapore Stock Exchange. At
one time market value of CLOB shares was between US$15 and $20 billion.

Malaysian Exchange of Securities and Automated Quotation Berhad (MESDAQ)

 Malaysia’s second stock exchange was approved under the Securities Industry
Act 1983 (SIA) in October 1997 to provide a liquid market for the shares of high
growth and technology companies. It was designed to cater for technology
based companies and companies with strong growth potential but do not have a
profit track record.

On 14 April 2004, Kuala Lumpur Stock Exchange was renamed Bursa Malaysia
Berhad, following the demutualisation exercise, the purpose of which was to enhance
competitive position and to respond to global trends in the exchange sector by making
themselves more customer-driven and market-oriented. It consisted of a Main Board, a
Second Board and MESDAQ with total market capitalisation of MYR700 billion (US$189
billion).

The Demutualisation of Bursa Malaysia

Refers to process of converting an exchange from a non-profit, mutually owned broker

dealer membership organization to a shareholder-owned for profit corporation.
Why?
 Capital Master Plan  to deregulate and develop the industry
 To remain competitive in the face of greater competition
 Before demutualization  lack of incentive to develop the market
 Allow greater investment upgrade in trading platform

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In January 2004, the Kuala Lumpur Stock Exchange’s (KLSE), now Bursa Malaysia
Bhd, demutualisation took effect. It became a public company as opposed to a company
limited by guarantee previously, and became known as KLSE Bhd. Remisiers owned a
10% stake and the government 30%.

At the time, its chairman Datuk Mohd Azlan Hashim had said, “KLSE will continue to
focus on its roles as front-line regulator and market operator. It will continue to balance
commercial objective with public interest.”

That was 13 years ago. Today, Bursa Malaysia Bhd is a listed entity. To what extent
has it played its twin role of being a regulator as well as a listed company driven by
profits?

With the conversion, the existing KLSE will vest and transfer its stock exchange
business to a new wholly-owned subsidiary whilst the demutualised KLSE will become
the Exchange Holding Company.

With the conversion, the shareholding structure of KLSE Bhd as approved by the
Minister of Finance was as follows:

Shareholding Structure of KLSE Bhd

Shareholders Allocation of Shares (%)

Capital Market Development Fund 30%

Minister of Finance Inc 30%

Licensed Member Companies 30%

Remisiers 10%

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 CAPITAL MARKET SERVICE ACT 2007

Section 2 of the Capital Market and Services Act 2007 (CMSA) defines securities as:

(a) Debentures, stocks or bonds issued or proposed to be issued by any government;

(b) Shares in or debentures of , a body corporate or an unincorporated body or
(c) Unit trust or prescribed investments and any rights, options or interest in respect
thereof.

Duties of the exchange

Section 11 of CMSA 2007: duty of the exchange is to maintain an orderly and fair
market.
 Ease of order execution
 Fit and proper intermediaries who trade on the exchange
 Listed issuer to meet minimum std for purpose of listing and quotation of their
securities
 Adequate disclosure relating to the affairs of listed companies
 Integrity of market place

Section 11(3): in case of conflict of interest; public interest prevail over its interest as a
corporation.

Section 28: Allows SC to take action such as prohibiting trade, to suspend

trading, limit trading or to modify trading days and hours.

In futures trading action may include confining trading to liquidation of futures

contract position or to require margins .

Control in shareholding
 Requires that any person who enters into an agreement to acquire more
than 5% of the nominal value of all the voting shares should first obtain the
approval of the Minister of Finance.

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  It is against the best interest to allow an individual or a small group to
control the exchange.

The Bursa Malaysia as a Self Regulatory Organization (SRO)

Nature of SRO are usually responsible for regulation and member regulation functions.
 Exchange SROs also regulate listed companies to varying degrees in their
listing rules.
 Responsibility is shared with the government authority (SC), which also
supervises the SRO.
 Government regulators are usually responsible for higher-level activities,
while SROs are usually responsible for front-line activities.
 Market regulation covers rules to protect market integrity, market conduct
rules, and exchange trading rules.
 Compliance with those rules is monitored through market surveillance
programs, trading analysis, and examinations of firms’ trading operations.
 Member regulation refers to regulation of the operations of
participants, securities dealers, or intermediaries.
 At the SRO level, it usually covers membership or access standards, rules
on business conduct and sales practices, and financial compliance
(including capital requirements).
 Compliance with those rules is monitored through compliance and
financial examinations, financial and operations reporting to the SRO, and
administration of membership rules.
 SROs usually have responsibilities to investors, issuers, and the
public imposed on them by law or regulation, and they are
accountable to their supervising regulator (SC).
 SROs are broadly accountable to stakeholders in the capital markets, not
just to their members or shareholders. Those responsibilities require the
SRO:
i. to ensure compliance with its rules and regulations;

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 ii. to protect market integrity and investors by imposing rules on
business conduct; and
iii. to maintain a fair, efficient, and reputable public market.

 Bursa Malaysia has issued various sets of rules to stipulate the

requirements that need to be met by the regulated entities either upon
admission and/or on a continuing basis.
 It administers and monitors compliance with these rules and takes strict,
prompt and objective enforcement action for breaches of these rules.
 Bursa Malaysia actively supervises the listed issuers and the participants.
 also undertakes surveillance over the trading activities in the marketplace.
 The SC supervises and monitors Bursa Malaysia to ensure that Bursa
Malaysia performs its regulatory duties and obligations in an effective
manner.

Quantitative listing requirements of Bursa Malaysia

In 2009, the SC issued a new set of quantitative Equity Guidelines for listing on the
stock exchange. The stock exchange or Bursa Malaysia (BM) is categorized into the
Main Market and the ACE Market (Access, Certainty & Efficiency).

In order to qualify to be listed in the Main Market of BM, the company must have
passed one of the three (3) capital test, that is, the -
1. Market Capitalisation Test:

a. A total market capitalisation of at least RM500 million upon listing; and

b. Incorporated and generated operating revenue for at least one full financial
year prior to submission of application.

2. Profit Test:

a. Uninterrupted profit after tax of 3 to 5 full financial years, with

aggregate of at least RM20 million; and

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 b. Profit after tax of at least RM6 million for the most recent full financial
year.

3. Infrastructure Project Corp. Test:

a. Must have the right to build and operate an infrastructure project in or

outside Malaysia, with project costs of not less than RM500 million; and

b. The concession or license for the infrastructure project has been awarded
by the govt. or state agency, in or outside Malaysia, with remaining
concession or licence period of at least 15 yrs.

Public Spread:
 At least 25% of the Company's share capital must be in the hands of the public;
and
 Minimum of 1,000 public shareholders holding not less than 100 shares each

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 Aspects Main Market

Core Business  An identifiable core business which it has majority ownership and
management control.
 Core business should not be holding of investment in other listed
companies

Management  Continuity of substantially the same management for at least three

Continuity and full financial years prior to submission
Capability  For market capitalisation test, since the commencement of
operations (if less than three full financial years)

Financial Position &  Sufficient level of working capital for at least 12 months;
Liquidity  Positive cashflow from the operating activities for listing via profit test
and market capitalisation test; and
 No accumulated losses based on its latest audited balance
sheet as at the date of submission

Morotorium on shares  Promoters' entire shareholdings for six months from the date of
admission
 Subsequent sell down with conditions for companies listed under
Infrastructure Project Corporation test

Transaction with Must be based on terms and conditions which are not
Related Parties unfavourable to the company
All trade debts exceeding the normal credit period and all non-trade
debts, owning by the interested persons to the company or its
subsidiary companies must be fully settled prior to listing

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 PROSPECTUS

Introduction

A public company can raise capital funding by inviting the public to subscribe to its
securities. The securities can only be offered through the issue of a prospectus.

New regulation

Beginning 28 September 2007, the framework for fund raising activities, as part of the
SC’s push for investor protection, is a disclosure-base system of regulation. The aim
is to achieve the following objectives:

i. To create an efficient approval process, which is facilitative and transparent, for

fund-raising activities; and

ii. To create an efficient and active private debt securities market through the
banking system.

This new regulation calls for any public invitation or proposal to offer for subscription or
purchase of securities through the issuance of a prospectus that has been registered
and approved by the SC.

 A prospectus containing detail information about the company and its securities
must be prepared.

 application must be supported by relevant documents.

Offences

It is an offence against the CMSA, if without the SC’s approval:

i. To offer or invite the public to subscribe to its securities

ii. To apply for listing on the stock exchange (BM) – s. 212 (2) CMSA

Punishment

i. Contravening the above – a fine or imprisonment not exceeding RM1 million or

10yrs or both – s. 214A (6) CMSA.

(NB: If company does not maintain the capital requirements after listing, it will be
classified as a PN4 and can subsequently be delisted. Practice Note 4 – means a

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company that is in poor financial condition and is required to restructure to revive or
face delisting.)

S. 2 (1) CMSA defines securities to include:

i. Debentures, stocks, bonds issued by government.

ii. Shares or debentures issued by companies.
iii. Unit trusts.
iv. Any right, option or interest.

S. 226 CMSA defines prospectus to include –

i. Any notice, circular, advertisement or documents inviting applications or offers to

subscribe for or purchase securities; or
ii. Any of the above documents that is offering any securities for subscription or
purchase.
iii. Including supplementary prospectus, replacement prospectus, and abridge
prospectus, etc.

Need to register prospectus with the Securities Commission

To invite the public to subscribe for its securities the company must first comply with the
rules and requirement concerning prospectus.

As of 1st July 2000, under the SCA, the authority to register and approve prospectuses
is given to the SC and not to CCM.

The SCA imposes 2 mandatory obligations:

i. S.232 (1) CMSA- A person shall not issue, offer for subscription or purchase or
make an invitation to subscribe for or purchase, any securities UNLESS it first
registers a prospectus that complies with the provisions of the SCA; and

ii. S. 232 (2) CMSA- Requires a company to ensure that a copy of the registered
prospectus accompanies ANY FORM OF APPLICATION for securities.

Offence - failure to comply with the above, a RM1 million fine or imprisonment not
exceeding 10 years or both.

Regulation on fund raising

SC approval required for issuance of securities under s.212 CMSA

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 • IPOs, PDS, collective investment schemes
• Securities issuance for schemes and acquisition
• Listing and quotation
• Distribution on winding-up
• Acquisition & disposal causing change
in business direction
S.232 - SC is the registering authority for prospectuses of corporations other than
unlisted recreational clubs.

What must be disclosed?

A prospectus is a “disclosed-based document” where -

s. 236. (1) …prospectus must contains all such information that investors and
their professional advisers would reasonably require, and reasonably expect to
find in the prospectus, for the purpose of making an informed assessment of–

(a) the assets and liabilities, financial position, profits and losses and prospects of the
issuer and, in the case of a unit trust scheme or prescribed investment scheme, of the
scheme;

(b) the rights attaching to the securities; and

(c) the merits of investing in the securities and the extent of the risk involved in doing so.

S.235 CMSA – sets out specific content:

i. Shall be dated and taken as the date of issue of the prospectus.

ii. Statement declaring that the prospectus has been registered with SC.

iii. Disclaimer which states that registration does not imply that SC has
recommended the securities nor that SC assumes responsibility for the
correctness of any statement made in the prospectus.

Prospectus Guidelines

The SC has in May 2003; issued a Prospectus Guidelines on Public Offerings of

Securitiesto supplement the list of specific items of information in s.235 of the CMSA.

Information required by the Prospectus Guidelines includes:

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 a. the purpose of the public offering;
b. the terms and conditions of the public offering;
c. the details on pricing of securities;
d. the brokerage arrangements and commissions;
e. the disclosure of the interests of, and the fees payable to, certain people involved
with the offer;
f. the information in relation to the assets and liabilities;
g. the financial position, profit and losses and prospects of the issuers;
h. the rights attaching to the securities;
i. the merits of investing in the securities and the extent of the risk involved in doing
so.

What if the information changes during the offer period?

A prospectus, once prepared, must be registered with the SC and lodged with the CCM.
Sometimes the information included in a prospectus becomes out of date or is
discovered to be inaccurate during the period between registration and issue date of
securities.
In this case, the issuer of the securities must register a supplementary prospectus with
the SC under s.238 CMSA, which corrects the defect in the original document, as soon
as possible after becoming aware of the changes.

S238. (1) (b) …where a prospectus has been registered but before the issue of
securities, and where the issuer becomes aware that–
i. there has been a significant change affecting a matter disclosed in the
prospectus;

ii. the prospectus contains a material statement or information that is false or

misleading; or

iii. the prospectus contains a statement or information from which there is a material
omission.

S238 (2) state that as soon as practicable after becoming aware of a matter, the
issuer shall submit a supplementary or replacement prospectus to the
Commission for registration.

Supplementary prospectus is issued when a prospectus has been registered but before
the issue of securities, and where the issuer becomes aware of a:

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 i. New matter or information has arisen which should have been disclosed at
the time the main prospectus was prepared.
ii. There is a significant change affecting a matter that has been disclose in
the main prospectus;
iii. Material statement or information in the main prospectus was false or
misleading;
iv. Material omission of statement or information in the main prospectus.

What if the prospectus is wrong or incomplete?

i. Defects in a prospectus can be cured by the issuer of securities registering a
supplementary prospectus under s. 238 CMSA.

Criminal liability will attach to the person who authorizes or causes the issue of a
prospectus which contains false or misleading statements.

Criminal liability – S. 246 (3) CMSA provides that a person who contravenes
s246 (1) commits an offence and shall, on conviction, be liable to a fine not
exceeding RM3 million or to imprisonment for a term not exceeding 10 years or
to both.

ii. Civil liability for misleading or deceptive acts – S. 249 CMSA - If a person
subscribes for securities on the basis of a defective prospectus and suffer loss or
damage as a result, he may recover the amount loss or damage against the
issuer of the securities and others involved in the preparation of the prospectus.

CAPITAL MARKET SERVICES ACT 2007

In order to carry on a business of dealing in securities one must be licensed

under:
i. Capital Markets Services Licence -StockbrokingCompanies / Investment
Banks
Ii Capital Markets Services Representative’s Licence [“CMSRL”]

Requirement for Capital Markets Services Licence (CMSL)

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Section 58. (1) No person shall whether as a principal or agent, carry on a business in
any regulated activity or hold himself out as carrying on such business unless he is the
holder of a Capital Markets Services Licence or is a registered person.

Requirement for Capital Markets Services Representative’s Licence (CMSRL)

Section 59. (1) No person shall act as a representative in respect of any regulated
activity or hold himself out as doing so unless he is the holder of a Capital Markets
Services Representative’s Licence for that regulated activity or is a registered person
with respect to that regulated activity.

Section 59 (2) Any person who contravenes subsection (1) commits an offence and
shall, on conviction, be liable to a fine not exceeding five million ringgit or to
imprisonment for a term not exceeding five years or to both.

DEALING IN SECURITIES

Securities

 The generic term for any instrument traded on the stock exchange
 It is a transferable instrument evidencing ownership or creditorship

What is a Stock Exchange

An organisation providing the market-place or facility for the buying and selling of stocks
and shares

Duties

→Ensures an orderly and fair market

→Acts in the public interest

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→Ensures that Participating Organizations and listed companies comply with the Rules
of the Exchange

Types of Securities

Securities traded on the Exchange :

Ordinary shares
Preference shares
Bonds
Loan stocks
Debentures
Property trust units
Warrants
Call Warrants

Actions or Penalties in relation to Directors

Bursa Malaysia Securities BerhadListing Requirement (BSLR)

Para 16.16 BSLR- breach of LR by a listed issuer or its directors

In the event of breach of LR by a listed issuer or its directors, the BSLR may, after
consultation with SC, take or impose such actions or penalties as it considers
appropriate.

• Issuance of caution letter

• Issuance of private reprimand

• Issuance of public reprimand

• Imposition of fine not exceeding RM 1 million

• Issuance of letter directing listed issuer to rectify

• Suspension of trading

• De-listing of listed issuer

• Any other action which the Exchange deem appropriate

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Common Breaches of BSLR

• Late submission of quarterly report

• Late submission of annual audited accounts together with auditors’ and directors’
report

• Failure to make immediate announcements in respect of winding up petition

Example: Articles: 1

FINES IMPOSED BY BURSA ON COMPANIES & DIRECTORS

On 1 April 2005, Bursa Malaysia Securities Berhad ("Bursa Securities") publicly

reprimanded and imposed a total fine of RM240,000 on Bukit Katil Resources Berhad
("BKATIL" or "the Company") for breach of paragraphs 9.23(a) and 9.23(b) of the Listing
Requirements of Bursa Securities ("Bursa Securities LR").

Paragraph 9.23 of the Bursa Securities LR states that a listed issuer must ensure that
the issuance of the annual audited accounts and annual report by a listed issuer shall
be as follows:-
(a) the annual report shall be issued to the listed issuer’s shareholders and given to
Bursa Securities within a period not exceeding 6 months from the close of the financial
year of the listed issuer; and
(b) the annual audited accounts together with the auditors’ and directors’ report shall, in
any case be given to Bursa Securities for public release, within a period not exceeding 4
months from the close of the financial year of the listed issuer unless the annual report
is issued within a period of 4 months from the close of the financial year of the listed
issuer.

BKATIL was found to be in breach of the following provisions of the Bursa Securities
LR:-
(a) Paragraph 9.23(a)

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 BKATIL has failed to submit the annual report for the financial year
ended ("FYE") 30 June 2004 ("AR 2004") by the due date of 31 December
2004.
(b) Paragraph 9.23(b)
BKATIL has failed to submit the annual audited accounts for the FYE 30
June 2004 ("AAA 2004") by the due date i.e. 31 October 2004.

The public reprimand and fine were imposed pursuant to paragraph 16.17 of the Bursa
Securities LR after taking into consideration all relevant factors, including the fact that
BKATIL has previously breached the Bursa Securities LR. Bursa Securities further
directed BKATIL to furnish the AAA 2004 and AR 2004 for public release within one (1)
month from the date of penalty imposed.

REGULATORS AND REGULATIONS

In Malaysia the stock exchange or Bursa Malaysia, is regulated by the Ministry of

Finance and the Securities Commission (SC). The power to regulate is from the Capital
Market and Services Act 2007 (CMSA) and the Securities Commission Act 1993 (SCA).

The CMSA is a consolidation of the Securities Industry Act 1983, Futures Industry Act
1983 and Part 4 & 4A, SCA 1993.The CMSA now regulates fund raising activities of
companies.

1. Securities Commission (SC)

 regulates the capital market activities in Malaysia, especially in relation to
equities, bonds, unit trusts and fund management.
 Securities Commission (SC) is a statutory body established under the
Securities Commission Act 1993.
 Primary function is to promote a competitive Malaysian capital market.
 Regulate the issue of company securities.

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  Approving and registering of company prospectuses.
Acts include:
 Capital Markets Services Act (“CMSA”)
 Securities Commission Act (“SCA”)
 Securities Industry Central Depository Act (“SICDA”)
 SC Guidelines and Directives

2. Bursa Malaysia Securities Berhad (BMSB):

 regulates the conduct of listed companies and market intermediaries, such as
Participating Organisation [“PO”], Authorised Depository Member [“ADM”],
Authorised Depository Agent [“ADA”]
 BMSB is responsible in overseeing the conduct of listed companies -
i. to ensure that listed companies comply with the listing requirements;
ii. to enable the transferability of securities listed on the relevant market which it
controls.

 The transferability of securities is achieved by attaching a price to the relevant

security. The price of each security is fixed by market forces.

 Beside this the stock exchange is also a place that offers marketability of
securities i.e. those securities that are listed are more marketable that those not
listed.

Acts include:
 Rules of Bursa Securities
 Rules of Bursa Derivatives
 Rules of Bursa Depository Listing Requirements
 Bursa Guidelines and Directives

3. Bank Negara Malaysia (BNM)

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  regulates the management of the financial system and monetary policy
 Payment system involved in trading of shares is important to ensure that the
monies are received when due.
 A good payment system provides confidence to the financial market and
encourage trading of the bonds and share

Acts include:
 Bank & Financial Institutional Act (BAFIA)- now FSA
 Anti Money Laundering (AML) and Anti Terrorism Financing Act
- Monies are easily laundered through the stock market
- BNM will need to monitor the KLSE very closely to ensure no AML
activity.
 BNM Guidelines and Directives

4. Companies Commission of Malaysia (CCM):

CCM is a statutory body established under the Companies Commission of Malaysia Act
2000. It is the result of a merger between the Registry of Companies & the Registry of
Businesses.
 Only companies limited by liability is allowed to be listed on the Bursa Malaysia
 Sole proprietorship and partnership companies cannot be listed.

CCM is mainly responsible for administering and enforcing –

a. The Companies Act 1965.
 In case of non payment of coupon and/or face value can lead to
bankruptcy/winding up petition  this is provided for under the
Companies Act 1965
b. The Registration of Businesses Act 1956.

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Tutorial 3: Stock Broking Industry

Tutorial Questions:

1. What is a prospectus and discuss the importance of the prospectus?

2. What is supplementary prospectus and why is it important?

3. Discuss the various regulatory agencies involved in regulating the stock broking

activities.

4. The Bursa Malaysia as a Self Regulating Organisation (SRO) is broadly

accountable to stakeholders in the capital markets, not just to their members or

shareholders. As a SRO, what are their responsibilities?

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