LONDON — Ranjit Ajit Singh, the new Chairman of the Securities Commission of Malaysia who assumed office in April this year, wants to see the emergence of an internationalized single Association of South East Asian Nations (ASEAN) asset class that can compete with other major regional or global asset classes. “Not only must the Malaysian capital market be internationalized, but there needs to be internationalization of ASEAN as a single asset class. The success of ASEAN as a single asset class on the global stage will also translate to better and wider access for the capital markets of each member country,” said Singh in his keynote address to the 17th Malaysian Capital Market Summit held in Kuala Lumpur recently. The 10 ASEAN countries is currently engaged in the development and integration of the Group's capital markets through the ASEAN Capital Markets Forum (ACMF) primarily focusing on facilitating greater cross-border offerings of capital market products and services in the region. ACFM is particularly keen in developing a set of harmonized disclosure standards to facilitate multi-jurisdictional offerings of equity and debt securities, including Sukuk Ijarah, to the general public through retail offerings. In addition, an ASEAN Collective Investment Scheme (CIS) framework is being developed for the cross-border offering of CIS within the region. But given the political and economic diversity of the ASEAN nations ranging from functional democracies to quasi democracies to Marxist states, the challenge of integrating the ASEAN capital markets is not easy. “There are many challenges to be overcome, ranging from differing legal structures and regulatory philosophies to market practices and language. Clear protocols and understanding must be established to ensure that suitability requirements, disclosures, selling practices, enforcement and dispute resolution across all the member countries will not be arbitraged. Nevertheless, integration is inevitable and all participants must share the task of making it work,” advised Ranjit Singh. The supporters of regional groupings whether monetary, fiscal, capital market and banking unions usually point out to the economies of scale that can be achieved through such integration. This would also drive domestic and regional economic growth and make the capital market more efficient and effective. In a difficult global financial climate, countries and regional groupings are jockeying for competitive position to attract foreign direct investment (FDI) inflows and bond and Sukuk issuers. However, the reputation, quality and credibility of the market are paramount, especially in an era of increased compliance, corporate governance, risk management, and anti money laundering (AML) requirements. But – as Singh maintains – “for internationalization to succeed, capital market professionals must step up to the challenge and meet global standards. They must also remember to put the long term interests of the market and professionalism ahead of profits. Companies must recognize that going to the public markets is only the beginning of a journey and not the final destination. Post listing performance, obligations and conduct are critical and the company's directors and senior executives must be fully prepared for this transformational journey.” Kuala Lumpur is quietly upbeat about the progress of the Malaysian Capital Market (MCM). Its size, according the latest data of the SC, grew by 14 per cent from RM2.1 trillion as at the end of 2011 to RM2.4 trillion at the end of September this year. The rising start of the MCM is undoubtedly the bond and Sukuk market with funds raised totaling RM100 billion up to end of September 2012, surpassing 2011's record total issuances of RM70 billion. The RM30.2 billion Sukuk issued by PLUS Berhad, the national road operator, at the beginning of this year remains the single largest Sukuk to date in the world. As at end of September 2012, the total amount of bonds outstanding stood at close to RM980 billion, compared to RM841 billion as at the end of last year, reflecting the continued growth of the bond market and propelling Malaysia as the 3rd largest local currency bond market in Asia. In contrast, while Malaysia's unit trust industry has continued to grow steadily, with net asset value (NAV) increasing from RM249 billion as at 31 December 2011 to RM291 billion as at 30 September 2012, it is still relatively modest compared to the developed markets and the rising emerging markets such as China. However, there is no dispute as to Malaysia's pre-eminence in the global Sukuk market. The country accounts for 68.5 per cent of global Sukuk outstanding. Similarly, Shariah-compliant securities listed on Bursa Malaysia had a market capitalisation of RM883.8 billion as at the end of September 2012, representing 64 per cent of the total market capitalization on the bourse. The strong performance and resilience of the Malaysian capital market, emphasized the SC's Singh, “is the culmination of structured and directed efforts to build the ecosystem and connect all its key components. Two of these key components are a solid and effective regulatory framework and market liquidity. The SC believes that the quality of the market and the high standards of conduct of its participants cannot be compromised. The Capital Market Masterplan 2 sets the tone for the future of our capital market and its implementation is designed to capture the dynamic nature of the changing environment.” Singh strongly believes that the capital markets must be fit for purpose – not just a vehicle for capital formation for big corporations and investors, but increasingly supporting the New Economy and the real sector. These include two important sectors – agriculture to help mitigate concerns over food security; and the small-and-medium-sized enterprises (SME). In order to help facilitate the flow of capital to the agricultural sector, the SC is working with the industry towards introducing an integrated framework for unlisted agricultural managed investment schemes and tax incentivised agricultural Sukuk, providing latitude for issuers to optimise their cost of capital. The SC also continues to develop areas where capital formation can be made more inclusive – a form of ‘People's Capital Market'. The aim is to broaden the investor base for bonds and Sukuk issuance away from traditional investors such as institutions and pension funds, to allow ordinary retail investors to invest in bonds and Sukuk. In September, the SC indeed launched a framework to allow retail investors to participate in the ringgit bond and Sukuk market. Under the retail bond framework, retail investors will initially be able to invest in bonds and sukuk issued or guaranteed by the Malaysian government. In the next phase, retail investors' access to bonds and Sukuk will be expanded to include issuances by public listed companies and banks, for which guidelines and regulations will be announced in the first quarter of 2013. “This phased approach,” explained Ranjit Singh, “will provide retail investors time to gain the necessary understanding and familiarity with investing and trading in bonds and Sukuk. We recognize that retail bonds will not be part of the investment portfolio of every investor; nor would every issuer find it cost effective, given their circumstances, to tap the retail segment. However, the point is for all investors and issuers to have a choice because the avenue is available.” At the same time, the SC acknowledges that SMEs, which form the backbone of many economies, continue to face the challenges of financing - particularly raising equity financing, thus giving them an opportunity to grow. In this respect, the SC plans to establish a trading venue for securities of unlisted companies thus creating a “conducive environment and safe harbour for SMEs to raise funds.” Singh is confident that such a platform will bring together entrepreneurs seeking growth capital and investors who have the appetite for such investments with lower costs and better connectivity of users and providers of capital. “The venue,” he added, “will also provide a platform to encourage mergers and acquisitions through better information flow. The relevance of such alternative trading venues should not be underestimated. In some parts of the world over a third of trading is transacted off stock exchanges, illustrating the growing importance of alternative venues and platforms.”
