By Errol Oh, executive editor of The Star
It is not every day that a single legislative stroke paves the way for the introduction of a number of capital market products. 28 December last year was such a day. That was when the Capital Markets and Services Act 2012 came into force in Malaysia.
The chief outcome is the splitting of the approval framework into two so as to separately handle listed and unlisted capital products. On its website, the Securities Commission (SC) explains: ‘The new framework recognises that listed and unlisted capital market products have distinct characteristics and different degree of risk, and as such applies the appropriate level of regulation commensurate with the risks attached’.
When there is a listing of securities, the framework is more transparent. For example, the types of products that require approval are specified. So too are the circumstances that justify the SC’s rejection of an application.
For unlisted capital market products, the SC’s authorisation is for the product itself. As such, authorisation is granted for a unit trust scheme and no longer for the issuance of every unit in the scheme, as previously. Also, foreign capital market products can be offered in Malaysia only if they are recognised by the SC.
The idea behind the new framework for unlisted capital market products is to improve the efficiency of the approval process for product offering. Examples of such products include unlisted collective investment schemes, asset-backed securities, over-the-counter (OTC) derivatives and OTC-structured products such as negotiable instruments of deposit with tenure of more than five years.
In tandem with the amendments, the SC issued four new sets of guidelines and revised four existing ones. Among these are rules for the setting up of business trusts, a new asset class for investors to consider, and rules to allow listed companies and banks to offer bonds to retail investors. In a press release, SC chairman Datuk Ranjit Ajit Singh said: ‘These initiatives are intended to provide issuers with avenues to better optimise their capital structure and raise finance at competitive costs in meeting their business needs. At the same time, investors will benefit from a wider array of investment options to match their investment profiles and risk appetite’.
But let’s not forget that investor protection is just as important, and it is comforting that this aspect is covered in this round of amendments as well. Under the CMSA 2012, a consolidated Capital Market Compensation Fund has been set up so that individual investors can make claims when a holder of a Capital Markets Services Licence (a firm dealing in securities or derivatives or a fund manager) fails to pay amounts owing to its investors.
The SC has also come up with the Guidelines on Sales Practices for Unlisted Capital Market Products. These cover fair treatment of investors, the requirement for product highlights sheets, and suitability assessment of investors before unlisted capital market products are recommended.
This means more work and heavier responsibilities for issuers and distributors of these products, but if it contributes to a healthy and orderly growth of the capital market, it will be well worth the extra effort.
This article first appeared in Accounting and Business, February 2013, China edition