Bursa Malaysia’s Proposed (New) Market
30 April 2017
Chee Kheong and Hui Jin highlight some salient features of Malaysia’s proposed new share market.
On 2 September 2016, Bursa Malaysia (“Exchange”) issued Consultation Paper No. 1/2016 to seek public feedback on a proposed concept for a new securities market, tentatively called the “(New) Market” (“New Market”).
This was followed by the issuance of Consultation Paper 3/2016 on 8 November 2016 to seek further feedback on the proposed regulatory framework for the New Market, including the proposed listing requirements (“NMLR”) and the proposed amendments to the Rules of Bursa Malaysia Securities Berhad (“BMS Rules”) and the Rules of Bursa Malaysia Depository Sdn Bhd to accommodate the New Market.
The consultation period for Consultation Papers No. 1/2016 and 3/2016 closed on 2 October 2016 and 30 November 2016 respectively.
This article discusses the salient features of the New Market as set out in the proposed NMLR and the proposed amendments to the BMS Rules. Some of these features could be modified after the Exchange considers the feedback received on the consultation papers.
The New Market seeks to provide a platform for Malaysian Small and Medium Enterprises (“SMEs”) to raise capital. It will operate under an adviser-driven framework and is unique in that it will be a qualified market where only sophisticated investors will be allowed to trade.
A “sophisticated investor” is an investor who falls within the categories set out in Parts I of Schedules 6 and 7 of the Capital Markets and Services Act 2007 (“CMSA”). These include a high-net worth entity whose total net assets exceed RM10 million and a high-net worth individual whose total net personal assets or net joint assets with his spouse exceed RM3 million or whose gross income, or joint gross income with his spouse, in the preceding 12 months exceed RM300,000 and RM400,000 respectively.
As the New Market will be an “alternative market”, an applicant who seeks a listing on the New Market does not require the prior approval of the Securities Commission Malaysia (“SC”). Instead, the applicant will deposit an information memorandum with the SC and concurrently submit its listing application to the Exchange. The discretion as to whether to approve or reject the application rests solely with the Exchange.
In considering an application, the Exchange will focus on areas of corporate governance, conflicts of interest and public interest but will not assess the suitability of an applicant for listing on the New Market.
To be eligible for admission to the New Market, an applicant must be a public company incorporated in Malaysia. No minimum quantitative requirements in relation to profit or operating history are necessary.
Suitability for Listing
The applicant must be considered suitable for listing in the assessment of its Approved Adviser.
Identifiable Core Business
The applicant must have a clearly identifiable core business, that is a business which provides the principal source of operating revenue or after-tax profit and which comprises the principal activities of the applicant and its subsidiaries. Among others, an applicant which is an investment holding corporation with no immediate or prospective business operations within its group and an incubator are not considered as suitable for listing.
At least 10% of the total number of shares for which listing is sought must be held by public shareholders at the time of admission.
Types of securities
Only ordinary shares may be listed on the New Market. A listed corporation is not prohibited from issuing preference shares, convertible securities, debt securities or other securities but these may not be listed. Nevertheless, any ordinary shares which are to be issued upon conversion of convertible securities must be listed. The application for listing and quotation of the shares which are to be issued upon conversion must be submitted to the Exchange before the convertible securities are issued.
The promoters are not permitted to dispose of any of their shares for 12 months after the date of admission. Thereafter, the promoters must hold, in aggregate, at least 45% of the share capital held by them as at the date of admission. The NMLR does not specify an expiry date for the latter moratorium or any minimum percentage of shares which must be held by the promoters on the date of admission.
METHODS OF OFFERING
An applicant may issue new shares by way of an excluded issue, that is, an issue to accredited or high-net worth investors listed in Schedule 7 of the CMSA or an issue which is prescribed to be an excluded issue by the Minister of Finance under section 230(1)(b) of the CMSA. This may be effected through a public offer, placement or book building or a combination of these methods.
If an applicant has already fulfilled the shareholding spread requirement before submitting an application for admission, it may seek listing by way of introduction.
An offer for sale of existing shares by promoters is not allowed unless (i) the applicant has generated one full financial year of operating profit based on its latest audited financial statements; or (ii) the promoters are corporations undertaking venture capital or private equity activities and are registered with the SC. Furthermore, in either event, the listed corporation must be able to comply with the moratorium requirements discussed above.
To protect investors, all subscription moneys received under a primary offering must be placed in a trust account which is to be opened with a licensed financial institution and jointly operated by the applicant and a custodian who may be the Approved Adviser, a placement agent or an issuing house appointed by the applicant. The subscription moneys will be released to the applicant only upon the listing of its shares on the New Market.
The New Market will operate under an adviser-driven framework. Two categories of advisers will be introduced – an Approved Adviser and a Continuing Adviser. Both categories of advisers must be a corporate finance adviser which is licensed by the SC.
An applicant must retain the services of a Continuing Adviser for at least three full financial years after its admission to the New Market or at least one full financial year after it has generated operating revenue, whichever is the later. The Approved Adviser who submitted the application for admission of the applicant to the New Market must act as its Continuing Adviser for at least one full financial year following the applicant’s admission. Non-compliance with the above requirements may result in the suspension of trading and the delisting of the listed corporation.
An Approved Adviser is authorised to undertake initial listing activities and post-listing activities whereas a Continuing Adviser may only undertake post-listing activities.
Initial listing activities include (i) assessing the suitability of an applicant for admission to the New Market; (ii) participating actively in the preparation of the admission document; and (iii) ensuring that the due diligence process for the admission document complies with the relevant guidelines issued by the SC.
Post-listing activities include (i) maintaining regular contact with the listed corporation; (ii) advising and providing guidance to the listed corporation and its directors as to their obligations under the NMLR and ensuring their compliance with all relevant laws and guidelines; (iii) reviewing any document to be released by the listed corporation to the public as well as any circulars to be issued to its shareholders prior to their release; and (iv) assisting a listed corporation in any post-listing corporate proposals for which an adviser is required under the NMLR, including reviewing the adequacy of the disclosure document, ensuring that the execution of the proposal complies with the NMLR and all relevant laws and guidelines and that any difference in effect of the proposal on minority shareholders (as compared to other shareholders) is clearly disclosed.
A listed corporation will be subject to various continuing obligations after it has been listed. Some of these requirements are discussed below.
Corporate Disclosure Policy
The listed corporation must ensure timely, complete and accurate disclosure of material information to investors in order to maintain a fair and orderly market for its shares. The dissemination of material information must be thorough and non-selective.
The NMLR requires a listed corporation to make an immediate announcement in respect of prescribed matters, including (i) any change in its chief executive or composition of the board of directors or auditors; (ii) any proposed material diversification in its operations; (iii) any change in control of the listed corporation; (iv) any deviation of 25% or more between its announced unaudited financial results and the audited financial results; (v) commencement of winding-up proceedings; and (vi) any modified opinion or material uncertainty relating to going concern in its auditors’ report.
Non-related Party Transaction
For non-related party transactions (“Non-RPT”), an immediate announcement must be made if the percentage ratio is 10% or more. Shareholders’ approval is required for a Non-RPT where the percentage ratio is 25% or more.
Related Party Transaction
A listed corporation must make an immediate announcement of a related party transaction (“RPT”) if the percentage ratio is 5% or more and obtain its shareholders’ approval if the percentage ratio is 10% or more.
The directors of the listed corporation, excluding interested directors, are required to ensure that a RPT is in the best interests of the listed corporation, fair, reasonable, on normal commercial terms and not detrimental to the interest of the minority shareholders.
Interested parties are not permitted to vote on the resolution in respect of an RPT.
Transactions which involve a value of RM250,000 or less are exempted from the requirement to make an announcement in relation to an RPT or Non-RPT.
Further, the NMLR also lists four categories of transactions which are not normally regarded as RPTs. This list is significantly shorter than the corresponding lists in the Main Market Listing Requirements (“MMLR”) and the ACE Market Listing Requirements (“ALR”).
Interestingly, there are no provisions in the NMLR that deal with recurrent RPTs, i.e. recurrent transactions of a revenue or trading nature which are necessary for the day-to-day operations of a listed corporation or its subsidiaries.
Significant Change in Business Direction or Policy
A transaction that will result in a significant change in the business direction or policy of a listed corporation may only be carried out with the approval of its shareholders. The listed corporation must, prior to the terms of the transaction being agreed upon, appoint an Approved Adviser for the purposes set out in item (iv) of the post-listing activities described above.
The NMLR also requires a listed corporation to obtain the approval of its shareholders before undertaking a “major disposal”, that is, a disposal of all or substantially all of the corporation’s assets which may result in the listed corporation being no longer suitable for continued listing on the New Market. The threshold for approving a major disposal is 75% of the total number of issued shares held by the shareholders present and voting on the resolution.
Unlike the MMLR and the ALR, there is no requirement under the NMLR for a listed corporation to appoint an independent adviser to, inter alia, opine on the fairness and reasonableness and whether to vote in favour of a proposed RPT that requires shareholders’ approval or of a “major disposal”. Further, the Continuing Adviser will not be required under Rule 4.13 of the NMLR to provide specified advice in respect of these transactions as the obligation under that rule only arises where the NMLR expressly requires an Adviser for a transaction. While this may be viewed as a shortcoming in the interest of investor protection, especially in relation to RPTs, the Exchange may have felt that such protection is not critical, given that the investors on the New Market are primarily sophisticated investors.
TRADING AND RELATED MATTERS
Method of trading and settlement
The shares of a listed corporation will be “prescribed securities” under the Securities Industry (Central Depositories) Act 1991. Accordingly, all listed shares of the listed corporation will be deposited with Bursa Malaysia Depository Sdn Bhd and be transferred by way of crediting and debiting the securities accounts of the buyer and seller of the shares.
Clearing and settlement of the trade will be carried out in accordance with the BMS Rules and the Rules of Bursa Malaysia Securities Clearing Sdn Bhd on a T+3 basis.
Restriction on trading
Subject to the exception mentioned below, only sophisticated investors will be allowed to trade on the New Market. A duty is imposed on Participating Organisations to ensure that their clients who wish to trade on the New Market satisfy the foregoing requirement.
An existing member of a listed corporation will be permitted to sell his shares on the New Market but will not be allowed to purchase more shares on the New Market if he is not a sophisticated investor.
Margin Financing and Day Trading
Participating Organisations are not allowed to provide margin financing for shares listed on the New Market. However, discretionary financing under Rule 7.31 and other forms of financing (not being similar to margin financing or discretionary financing) under Rule 7.32 of the BMS Rules are permitted.
Day trading of shares listed on the New Market is not permitted.
Direct Business Transactions
Direct Business Transactions (DBT) may be carried out in respect of shares listed on the New Market without approval of the Exchange.
Securities Borrowing and Lending and Short-Selling
Securities Borrowing and Lending, Permitted Short-Selling and Regulated Short-Selling are not permitted for shares listed on the New Market.
A company listed on the New Market may seek a transfer to the ACE Market if it satisfies all the requirements for admission to the ACE Market.
The New Market is expected to be launched in the second quarter of 2017. It will provide another avenue for fundraising by SMEs, in addition to the P2P Financing and Equity Crowd Funding platforms operated by recognised market operators registered under section 34 of the CMSA. Interesting times lie ahead for SMEs who seek alternative means of financing their business.