Financial regulator seeks to ensure that capital markets continue to operate in an orderly manner

By Lee Min Keong

The Securities Commission Malaysia (SC) today announced further reliefs for public-listed companies impacted by the Covid-19 fallout. It is also considering further measures to facilitate greater access to funding for small and midcap companies, as well as micro, small and medium enterprises (MSMEs).

“With this Covid-19 pandemic, we are confronting a situation that none of us has experienced in our lifetimes. It requires measured responses that consider the longer term impact on our market and its participants, beyond this immediate crisis,” said SC chairman Datuk Syed Zaid Albar at a virtual media conference to release the its annual report for 2019.

“While the world comes together to combat this public health emergency, we have taken proactive measures to ensure that markets continue to operate in an orderly manner, as access to funding is vital to maintain confidence and ensure the long-term recovery of the market,” he added.

         SC chairman Datuk Syed Zaid Albar

Acknowledging that companies may face challenges as a result of the pandemic, the SC also announced that Bursa Malaysia will provide affected companies listed on the Main Market temporary relief from the Practice Note 17 nn (PN17) classification in relation to the following criteria:

  1. The shareholders’ equity of the listed issuer on a consolidated basis is 25% or less of the share capital (excluding treasury shares) of the listed issuer and such shareholders’ equity is less than RM40 mil.
  2. The auditors have highlighted a material uncertainty related to going concern or expressed a qualification on the listed issuer’s ability to continue as a going concern in the listed issuer’s latest audited financial statements and the shareholders’ equity of the listed issuer on a consolidated basis is 50% or less of share capital (excluding treasury shares) of the listed issuer.
  3. A default in payment by a listed issuer, its major subsidiary or major associated company, as the case may be, as announced by a listed issuer pursuant to paragraph 9.19A of the Listing Requirements and the listed issuer is unable to provide a solvency declaration to the Exchange.

These measures will allow companies more time to regularise their financial positions. Similar temporary relief from Guidance Note 3 classification will also be provided by Bursa for companies listed on the ACE Market. The period for this PN17 relaxation will be effective from 17 April until 30 June 2021.

Measures for alternative financing platforms

Observing heightened interests by MSMEs to tap into alternative fund raising channels, the SC also lifted fundraising limits on Equity Crowdfunding (ECF) platforms, and allowed ECF and peer-to-peer financing (P2P) platforms to operationalise secondary trading, both with immediate effect.

From now till 30 September 2020, the government co-investment fund MyCIF, administered by the SC, has also increased its funding matching ratio from 1:4 to 1:2 for eligible ECF and P2P campaigns, to provide additional liquidity into the alternative fundraising space.

The SC also called upon the industry to seize the opportunity to accelerate their digitisation transformations and offer more online products and services to investors as the regulator observed a significant increase of new online trading accounts opening in recent months.

The SC itself, in view of this new norm, will expedite guidelines for holding virtual general meetings and facilitate alternatives to meet take-over requirements.

The regulator is also working on efforts to broaden the suite of product offerings of fund management industry through facilitating the introduction of waqf-based collective investment schemes and alternative investments for wholesale funds, where underlying assets can be property, gold or private equity.

Noting that extraordinary times call for extraordinary responses, Syed Zaid said this is not business as usual and the SC is deploying a wide range of regulatory tools to provide support to the market and relief to market participants.

Protecting investor interest

While the regulator is doing what it can to support the businesses, Syed Zaid said the SC remains steadfast in ensuring investor interest is protected during this challenging time. “We continue to raise investor awareness on scams, as scammers tend to target people during times of uncertainty.

The SC will take a targeted approach to protect vulnerable investors and minority shareholders. I would also like to remind our intermediaries to remain vigilant and for PLCs to remember their obligations to shareholders and to make timely disclosures,” he stressed.

The SC also assured investors that the Malaysian capital market remains fundamentally strong and is functioning in an orderly manner, supported by deep domestic liquidity, complemented by the government’s stimulus packages, amidst non-resident outflows.

“Over the years, Malaysia has withstood many crises and the SC has worked closely with the industry to strengthen the capital markets and addressed systemic weaknesses. As a result, the Malaysian players and institutions are better equipped to face the onslaught of challenges arising from this pandemic,” added Syed Zaid.

As the financial system adjusts to the impact of Covid-19, the SC will continue to monitor the evolving situation in global and domestic markets, and calibrate its responses and update the public accordingly.

Segments of bond issuers under stress

Corporate bond issuers in the aviation, oil & gas (O&G) as well as trading and services segments are experiencing short-term financial stress that may result in higher risks to their credit positions.

While that could weaken their credit positions it would not necessarily result in defaults as the majority of issuers are in the triple A and double A rating categories, said Kamarudin Hashim, SC executive director, Market and Corporate Supervision, during the same media conference.

“And in the event of credit deterioration there should be should be sufficient buffers before cash flow becomes severely constrained.”

In addition, he said several of these issuers within these segments have some form of support in the form of financial guarantees, corporate guarantees or danajamin guarantees.

He pointed out that defaults rates in the corporate bond markets have declined significantly since the Asian financial crisis. “At that time it was around 9.4% and has come down to below 1% up to last year,” said Kamarudin when answering a question from the media on the possibility of defaults by issuers of corporate bonds, sukuks and P2P (peer-to-peer financing) notes.

“Moving forward and due to uncertainties arising from the Covid-19 pandemic as well as the slower global growth, there are several issuer segments that may see higher risks to their credit positions.

“The areas include aviation, oil & gas as well as trading and services. These are segments under stress currently, and they represent around 8% of the total corporate bonds issuances,” he added.

He said a prolonged weakening of issuers’ cash flow will be a cause of concern and the SC will continue to monitor this space.

“As investors in the corporate bond market are also predominantly institutional investors, in the event of default they will be able to pursue various options to preserve their investments through negotiations such as rescheduling or restructuring, or rigorously pursuing their contractual rights and priority of claims against the issuer.”

In relation to P2P financing, he said the average default rate remains similar to last year at around the 4% mark.

“At the moment, the SC is not considering imposing a blanket moratorium on P2P financing notes. Our approach is for issuers to work together with [P2P financing platform] operators if they are under stress for possible restructuring and rescheduling,” he added.

 

For more information on the SC’s measures to maintain market integrity, please visit www.sc.com.my/covid-19 and www.sc.com.my/resources/publications-and-research/sc-ar2019.