Corporate Secretarial Practice II – Securities Industry Essentials

Regulatory Framework

The Malaysian capital market is underpinned by a robust regulatory framework comprising five primary statutes: the Securities Commission Act 1993, Capital Markets & Services Act 2007, Securities Industry (Central Depositories) Act 1991, Companies Act 2016, and Anti-Money Laundering Act 2001. These legislative instruments collectively establish comprehensive rules governing licensing requirements for market participants, disclosure obligations for listed entities and issuers, prohibitions against market misconduct (such as insider trading and market manipulation), and the operational framework for central depositories. The objective is to foster a fair, efficient, and transparent capital market, protecting investor interests and maintaining market integrity.

Regulatory Authorities

• Securities Commission Malaysia (SC) – As the primary statutory regulator, the SC is vested with extensive powers. Its responsibilities include licensing capital market intermediaries (e.g., brokers, fund managers), approving initial public offerings (IPOs) and bond issuances, overseeing take-overs and mergers, investigating and prosecuting insider trading and other market offences, supervising stock and derivatives exchanges, and promoting self-regulation within the industry.

• Bursa Malaysia – Operating as a self-regulatory organization (SRO), Bursa Malaysia manages and enforces its own set of listing and trading rules for its three markets: the Main Market, ACE Market, and LEAP Market. It is responsible for ensuring an orderly and transparent marketplace for the trading of securities and derivatives.

• Bank Negara Malaysia (BNM) – The central bank plays a crucial role in overseeing financial institutions that are active participants in the capital markets, such as commercial banks and investment banks. BNM also coordinates with other regulatory bodies to address systemic risks within the broader financial system, ensuring financial stability.

Bursa Malaysia in Brief

Established in 1976 and subsequently listed on its own exchange in 2005, Bursa Malaysia is an integrated exchange offering a diverse range of products including equities, derivatives (such as futures and options), Islamic capital market products (e.g., Shariah-compliant equities and sukuk), and Environmental, Social, and Governance (ESG) related products. Its corporate structure includes various specialized subsidiaries that handle crucial services like securities clearing, derivatives clearing, central depository services (CDS), bond trading, Shariah advisory, carbon trading, and market data provision. The overarching purpose of Bursa Malaysia is to maintain investor confidence, ensure efficient price discovery through fair price formation, and facilitate timely and accurate disclosure of information by listed companies.

Advantages of Listing

Listing on a stock exchange offers a multitude of benefits for companies, including: enhanced access to capital through public offerings, enabling significant growth funding for expansion or new projects; higher corporate credibility and visibility, which can attract a wider base of sophisticated and retail investors; improved liquidity for existing shareholders; the ability to use shares as a currency for mergers and acquisitions; and the facilitation of employee incentive programs through share options or employee share schemes. Listing also provides a transparent and market-driven valuation for the company's shares.

Disadvantages of Listing

Despite the advantages, listing also imposes significant burdens: high initial and ongoing compliance costs (e.g., legal, auditing, regulatory fees); reduced privacy and potential loss of control for original shareholders due to public scrutiny and diluted ownership; stringent continuous disclosure requirements that necessitate constant monitoring and reporting of material events; increased share price volatility influenced by market sentiment and economic factors; and exposure to heavy penalties and legal liabilities for non-compliance with regulatory rules.

Market Options & Key Entry Tests

Malaysia offers three distinct market options for companies seeking to list, each with specific entry requirements:

• Main Market – Designed for well-established and profitable companies. Eligibility criteria include meeting a profit test of an aggregate profit after tax (PAT) of at least RM20,000,000 for the past three to five financial years, with a PAT of at least RM6,000,000 for the most recent financial year; or a market capitalization test of at least RM500,000,000 upon listing; or involvement in a long-term infrastructure project requiring substantial capital. Companies must also demonstrate adequate operating history.

• ACE Market – This market caters to growth-oriented companies across various sectors, even those without a profit track record. The primary entry requirement is the appointment of an approved Sponsor (typically an investment bank), who guides the company through the listing process and remains responsible for its compliance for a period post-listing. This market offers a more flexible route for promising ventures.

• LEAP Market – An adviser-driven market specifically designed for small and medium enterprises (SMEs). It operates with lighter regulatory requirements compared to the Main and ACE Markets. Access is restricted to sophisticated investors only, meaning it is not open to the general public. Companies seeking to list on LEAP must appoint an approved adviser.

It is mandatory for any entity to convert to a public company under the Companies Act 2016 before it can submit a listing application to Bursa Malaysia.

Listing Routes

Companies can pursue listing through several routes:

  • Direct IPO (Initial Public Offering) – The most common route, where the company directly offers new shares to the public for the first time.

  • Reverse Take-over (RTO) – A private company acquires a public listed shell company, thereby gaining public status without a traditional IPO. This often involves a share swap or issuance of new shares in the listed entity to the shareholders of the private company.

  • Back-door Listing – Similar to RTO, where a private company indirectly gains a public listing by acquiring a listed company, often one that is dormant or has minimal operations, and then injecting its own business and assets into the listed entity.

An IPO share offer can take two forms: a Public Issue (where new shares are issued by the company to raise fresh capital) or an Offer for Sale (where existing shareholders sell their shares to the public, and the proceeds go to the sellers, not the company).

IPO Timeline (Main/ACE)

The IPO process on the Main and ACE markets typically follows these phases:

  • Pre-submission (12$–$16 weeks): This phase involves comprehensive preparation, including financial due diligence, legal restructuring, business plan finalization, and engagement with key advisors. Prospectus drafting commences.

  • Regulatory review (12$–$24 weeks): The drafted prospectus and other required documents are submitted to the Securities Commission (and Bursa Malaysia) for review. Regulators assess disclosure adequacy, compliance, and viability of the listing. Queries and revisions are common during this stage.

  • Post-approval (8$–$12 weeks): After receiving regulatory approval, the company proceeds with marketing activities, roadshows to potential investors, book-building, and the public subscription period for the shares. The final prospectus is registered.

  • Listing (\%approx 4 weeks): Shares are allotted, and trading commences on the exchange. This phase includes the issuance of share certificates or crediting to central depository accounts.

Core parties crucial to the IPO process include: the investment bank (acting as the principal adviser, managing the entire process and underwriting), lawyers (for legal due diligence and documentation), auditors (for financial statements), valuers (for asset appraisals), public relations consultants (for corporate communications), and an issuing house (for managing the share application and allotment process).

Post-Listing Obligations

Once listed, companies are subject to continuous obligations to ensure market transparency and investor protection:

  • Maintain public shareholding spread of at least 25\% to ensure sufficient liquidity of shares in the market.

  • Fulfill financial condition tests periodically to demonstrate ongoing financial health as per listing requirements.

  • File semi-annual returns and other prescribed reports to Bursa Malaysia.

  • Seek prior approval from Bursa Malaysia for major corporate exercises such as significant subsidiary listings, material acquisitions/disposals, or changes to dividend policies.

Continuing Disclosure (BMLR Ch.9)

Chapter 9 of the Bursa Malaysia Listing Requirements (BMLR) mandates stringent disclosure obligations. Listed companies must ensure:

  • Immediate release of any material information that could affect the company’s share price or investment decisions.

  • Prompt response to rumors or unusual market activity to clarify facts and prevent speculation.

  • Quarterly results to be announced within 2 months from the end of each financial quarter.

  • Audited annual accounts to be released within 4 months from the financial year-end.

  • Annual report to be issued within 6 months from the financial year-end, including comprehensive financial and operational information.

  • Prompt disclosure of related-party dealings, major corporate proposals (e.g., rights issues, bonus issues, acquisitions), and any significant changes in the board of directors or statutory auditors.

Insider Trading (CMSA ss.183-188)

The Capital Markets and Services Act 2007 (CMSA) sections 183 to 188 prohibit insider trading. An “insider” is defined as a person who possesses information that is not generally available, which on becoming generally available, would have a material effect on the price or value of securities, and knows or ought reasonably to know that the information is not generally available. Prohibited actions include: trading in the affected securities, procuring another person to trade, or tipping off (communicating) the information to another person who then trades. Penalties for insider trading are severe, including imprisonment for up to 10 years and/or a fine of not less than RM1,000,000, in addition to potential civil liabilities for disgorgement of profits. Statutory defences are available, such as adhering to a “Chinese Wall” (information barrier within financial institutions), trading under an underwriting agreement, or establishing “parity of information” (where the information was made available to all parties involved in the transaction).

Capital-Raising Methods

Companies typically employ various methods to raise capital through the issuance of securities:

  1. Public Issue – This is a primary issuance where a company offers new shares directly to the public through a prospectus. Public issues are often underwritten by an investment bank, guaranteeing the sale of a certain number of shares. In cases of oversubscription, shares are typically allotted through a balloting process to ensure fair distribution among applicants.

  2. Offer for Sale – Unlike a public issue, an offer for sale involves existing shareholders selling their blocks of shares to the public. The proceeds from the sale go to these existing shareholders, not to the company itself. This method can increase the public float of a company's shares.

  3. Placing – Securities are offered directly to a selected group of institutional investors or high-net-worth individuals, usually via a broker or merchant bank. This method allows for quicker capital raising and targeting specific investors, but access is limited to a non-public group.

  4. Tender – In this method, securities are offered to potential investors who submit bids reflecting the price they are willing to pay and the quantity they wish to purchase. Shares are typically allocated to the highest bidders above a stated floor price. This competitive process can help in achieving optimal pricing.

Under section 186 of the Companies Act, 2016, a minimum subscription amount may be disclosed in the prospectus. No allotment of shares can be made until this disclosed minimum sum is received. Furthermore, the underwriting fee, paid to the underwriter for guaranteeing the sale of unsold shares, is typically capped at 10\% of the issue price to control costs for the issuer.