Loophole plugged


The ammended law means that parties preparing information memoranda (info memo), that typically accompany the issuance of private debt securities such as corporate bonds, can no longer seek to exclude their liability.

The ammended law means that parties preparing information memoranda (info memo), that typically accompany the issuance of private debt securities such as corporate bonds, can no longer seek to exclude their liability.

PETALING JAYA: An amendment to a securities law is to plug a loophole in the law that allowed parties to exclude liability for the veracity of statements made in marketing material related to corporate bonds.

The Capital Markets and Services (Amendment) Act 2015 (CMSA 2015) now makes it clear that any “document, agreement or contract” that seeks to exclude the liability of the issuer of that document from the accuracy and reliability of information in that document will be deemed as void.

In other words, this means that parties preparing information memoranda (info memo), that typically accompany the issuance of private debt securities such as corporate bonds, can no longer seek to exclude their liability.

The amendment effectively addresses the issues that arose following the 2014 decision of the Federal Court in the Pesaka Astana bond case.

Recall that in that case, there had been a default by Pesaka Astana of RM140mil of Islamic debt securities issued by that private company.

The bond-holders sued Pesaka Astana, KAF Discounts (which was the lead arranger of the bonds) and Mayban Trustees Bhd (which had acted as the trustee).

Eventually, the court decided that the trustees be held liable for the default and not the company or investment bank that had provided the info memo.

The case went all the way up to the Federal Court, which decided that the lead arranger had rightfully excluded the liability relating to the veracity of the information contained in the info memo.

It held the view that KAF was entitled to exclude the liability of what was stated in the info memo. One of the reasons given by the Federal Court for its decision was that the relevant section of the CMSA 2007 only dealt with agreements entered into by the two parties and that the info memo was not a contractual document.

The judgement had stated: “It had been issued on behalf of Pesaka to provide information to potential investors. The info memo was not part of the issue documents that requires the approval of the SC. For those reasons, we hold that the info memo is not an agreement falling within section 65 of the Securities Commission Act or SCA 1993, therefore, KAF is free to include the important notice (exclusion clause) in the info memo to exclude any liability arising from any claim that may arise from the info memo.”

The relevant section then was Sect 256 of the CMSA 2007, previously Sect 65 of SCA 1993. This has now been replaced by the new Sect 256 of the CMSA 2015, that clearly states that any document, agreement or contract that seeks to exclude the liability related to the person preparing the documents, is void.

It was reported earlier that the Federal Court’s decision had “rattled” the bond market. Fund managers had said that the decision would have an impact on the efficiency of the corporate bond market, considering that investors could no longer rely on the veracity of info memos and had to do their own full-blown due diligence on bond issuances, which, in turn, means higher costs for investors.

As such, the new amendment should enhance the attractiveness of private debt securities.

CMSA 2015, along with the Securities Commission (Amendment) Act 2015 (SCMA) came into force on Sept 15, 2015. The amendments were made to enhance investor protection and clarify responsibilities of issuers and advisers, among others.

The amendments to the CMSA also enhanced minority shareholder protection in the event of corporate takeovers and mergers.

The amendment allows the SC to appoint an independent adviser for an offeree if the latter fails to appoint one.

The amendments also expand the administrative action that can be taken by the SC for breaches in takeovers and mergers.

“The SC can refuse to accept or consider any submission from an adviser who has breached any provision under the securities law.

“The SC can also prevent a licensed person or capital market service provider to not act or continue from acting for a person who has breached the securities law,” said an executive familiar with the changes.