“IT is the best the government can do in the current situation,” says Alliance Merchant Bank's head of research Nor Zahidi Alias. He joins a chorus of other market observers and analysts on the recent 10-point measures to give the capital market a boost.
While most contend that the measures reflect the government's continued efforts to address the weaknesses in the market, they say the move is not likely to have an immediate impact.
Typically, in a languishing market such efforts do little to perk up interest. But more importantly, they offer added incentives for investors when the market is ready to roll.
If anything, says CIMB Securities, the measures set the stage for a potential catalyst to spark some interest in the equity market, especially on the mergers and acquisitions (M&A) front.
It points out that in third quarter 2001 and first quarter 2002 where there were a flurry of such activities, both quarters saw rises in the Kuala Lumpur Composite Index (CI) of 26 per cent to 36 per cent driven by portfolio inflows.
However, for now, the research house adds, it will do little to ease the fears stemming from the external environment.
In a nutshell, the measures announced by Deputy Prime Minister Datuk Seri Abdullah Badawi are five-pronged and aimed at enhancing investor participation, liquidity, efficiency of the capital raising process and the value of government-linked companies while strengthening intermediation.
Below are the measures and their respective strengths and weaknesses.
Measure 1: Stamp Duty capped at RM200 per contract
Effective March 17, stamp duty for all securities trading on the Kuala Lumpur Stock Exchange (KLSE) will be capped at RM200 per contract. This replaces the 0.1 per cent stamp duty on the value of stock transactions.
Pros: It will reduce transaction costs for investors, particularly portfolio fund managers. The savings for contracts above 200,000 units would be substantial. For example, a contract value of RM500,000 would translate to savings of RM300.
Cons: The government stands to lose about RM60 million a year in revenue as a result. Lowering transaction costs is one thing but it is the quality of stocks out there that really matter.
Measure 2: All board lots to be standardised at 100 units
For securities on the Second Board, this will take effect in April followed by Main Board securities by June. Currently, only the Malaysian Exchange of Securities Dealing and automated Quotation (Mesdaq) counters are traded in lots of 100 units. All initial public offerings (IPOs) to be listed from April would be based on board lots of 100 units.
Pros: It makes the purchase of stocks, particularly blue-chip companies, more affordable and reduces the size of odd lot holdings. Liquidity may also be enhanced.
Cons: “Stocks are already affordable,” says a merchant banker, “most of them are trading at below RM10 which allows even smaller players to invest” but they are not attracting much interest.
The move may reduce interest over smaller companies as the stocks of bigger companies become within the reach of retail players.
Measure 3: To facilitate listing of large companies
Effective April 1, 2003, companies with a minimum market capitalisation of RM250 million and an after tax profit of RM8 million for the latest financial year will be exempted from the three to five-year profit record requirement. The five-year operating history requirement remains.
Pros: The move provides additional avenue for large companies including turnaround companies to be listed on the KLSE. It could create greater liquidity.
CIMB Securities says these measures could be for the reverse take over (RTO) of “promising” companies into PN4 companies.
Cons: It may affect the quality of stocks. “The rules have been put in place to protect the investor,” says a merchant banker, “and one could argue that by reducing the entry requirements, the way is being paved for companies of poor standing to list.” There is also an element of compromise as one aspect of due-diligence is removed.
Measure 4: Merger of government-linked companies within common sectors
Pros: “This seemed to hit the nail right on the head,” says an analyst. “It addresses the problem that we are presently faced with which is the illiquidity of the market. A bigger market capitalisation will make equity more attractive to foreign investors.”
It will create greater efficiency and reduce replication of resources. Mergers result in staff downsizing. By reducing head count, companies will be able to offer more attractive salaries to attract strong people.
Cons: A great deal of discipline is required to undertake these mergers and make them work.
The creation of larger companies may also result in a waning interest in smaller companies.
(For more, read separate story on page 5)
Measure 5: Moratorium on
promoters’ shareholdings for new IPOs/RTOs slashed to one year from four
Applicable for applications received from March 12 onwards.
Pros: Ensure greater availability of shares and address the problem of liquidity. CIMB Securities says with the shorter moratorium period and the new guidelines to facilitate listing of large companies, the existing 94 PN4 companies may benefit from the relaxed requirements for potential white knights.
Cons: The moratorium is meant to ensure that promoters are committed to ensure the long-term viability of a company, hence protecting investor interest. With a shorter moratorium, that compulsion has been diluted. Instead of staying in for the long haul, some promoters may be only too eager to make quick capital gains in the short term.
Measure 6: IPO processing shortened to less than 3 months
This is applicable for IPOs submitted from May 1, 2003 onwards. It usually takes 6-8 months.
Pros: Shortens the lag period. A company can also get listed within 15 days of their prospectus being issued, compared to more than 25 days currently.
“The problem with the market,” says one head of research, “is that the lead time from the point of due-diligence to the point at which the stock is actually listed is too long and the market environment could have changed drastically. There is only a certain window of opportunity and the long processing time could make one miss that.”
Cons: Speedier processing could lead to compromise on due diligence.
Measure 7: FIC Approvals to be processed by the Securities Commission (SC)
The SC can now approve corporate proposals that previously required approval from both the SC and the Foreign Investment Committee (FIC). Approval will be done in accordance with FIC guidelines and in consultation with the body, if required. This, however, only applies to cases where both SC and FIC approvals are required.
Pros: It cuts down red tape and expedites processing of approvals particularly for restructuring and M&A activities.
Cons: Effective implementation of this procedure remains to be seen
Measure 8: Performance Incentive Scheme for government-linked companies
Performance of management staff will be measured yearly against pre-agreed and transparent key performance indicators (KPI). Those who meet or exceed their respective KPIs will be rewarded with an attractive share option while those whose performance consistently falls below will be subject to appropriate action.
Pros: Measure is long overdue and should improve efficiency. Only by providing attractive incentives will effective managers be willing to join these companies. Government’s commitment to meritocracy will be put to test.
CIMB Securities comments on the move in the context of giving stock options (most likely a 5 per cent stake) to successful managers of government-owned companies. “The government is now fine-tuning its “professional manager” model. The 5 per cent stake (option) for the managers will not lead to undue influence of individuals in listed companies ensuring that the shortcomings of the owner-manager model is not repeated.”
Measure 9: Enhancing capital market skills.
SC has initiated a new Capital Market Graduate Training Scheme where participants will receive training for one month and an 11-month attachment with participating organizations.
The KLSE will contribute RM5 million to enhance the skills and knowledge of Bumiputra remisiers and paid dealers’ representatives to strengthen their role in the capital market.
Pros: Enhancing skills are always important in ensuring an efficient capital market.
Measure 10: Review of commission rates for brokers to establish a floor
The SC will work out with the KLSE and the Association of Stockbroking Companies Malaysia, within a month, a suitable framework for minimum rates that will have an effective policing mechanism to discourage unhealthy pricing practices.
Pros: News should be positive for stockbrokers but it really depends on the minimum rate.
Cons: The measure doesn't address the question of enforcement, which is necessary to prevent unhealthy practices in the industry.