KLSE Executive Chairman Dato' Mohd Azlan Hashim said a major concern that some have expressed on the demutualisation of the exchange is, how would the exchange address potential conflicts that would arise as a result of a for profit entity performing regulatory tasks.
"This has been a major focus during the formulation of the demutualisation plan.
"We have addressed this by the formulation and implementation of a comprehensive Public Interest Framework upon the demutualisation of the exchange.
"In examining the key components of the Public Interest Framework, it cannot be emphasised enough that in the pursuit of commercial objectives, the demutualised exchange will not compromise its commitment to the long term development and growth of the capital market and securities industry.
"It would not serve any party's interest to have a market that is not well and objectively regulated, impacting on investor confidence. Thus the careful attention paid to addressing this aspect," Mohd Azlan said.
Mohd Azlan was speaking at the media briefing on the demutualisation of KLSE. At the same briefing, Securities Commission Chairman Datuk Ali Abdul Kadir announced that the Minister of Finance has given his approval for the KLSE to proceed with the demutualisation of the exchange.
On the Public Interest Framework, Mohd Azlan detailed six key components:-
- The governance of the demutualised exchange will have a balanced board structure, where there will be public interest and shareholder elected directors represented on the board. This ensures that when making decisions, the Board of Directors does not ignore the public interest commitments of the demutualised entity.
- Limits will be imposed on the shareholding and decision making capacity of the demutualised exchange. The approval of the Minister of Finance will be required to enable acquisition of shareholding higher than the prescribed limit and on decisions that impact on national policies.
- The supervision of the listed entity, will be conducted by the Securities Commission rather than the exchange itself.
- A Capital Market Development Fund is a major feature of the Public Interest Framework, as it ensures that efforts related to market development will not be abandoned as a result of the exchange becoming profit-oriented. This ensures that market development initiatives that require substantial funding and involve long gestation periods, which may conflict with the demutualised exchange's for profit objective, can be undertaken, by the exchange or any other entity.
- The Public Interest Framework addresses the objectivity and independence of the exchange in the performance of its regulatory functions. Separation of the regulatory unit from the business units is intended to ensure the independence and objectivity of the regulatory arm. In addition, the creation of specific board committees creates appellate channels and oversight of public interest issues.
- Risk management is addressed by the introduction of adequate and proper risk management mechanisms not just in relation to the corporation but also in respect of investor protection. This is provided for by having three levels of separation for risk management activities, at the operational, corporate and board levels. A risk management committee will be established to specifically focus on these issues.
- Governance of the Demutualised Exchange
- Corporate Structure of the Demutualised Exchange
- Enhancing the Competitiveness of the Demutualised Exchange, and
- Regulation by the Demutualised Exchange
On the governance structure of the demutualised exchange, Mohd Azlan said it reflects the best of commercial and governance practices. "The proposed governance structure will incorporate essential elements of corporate governance best practices, transparency, public interest policy matters and international best practices.
"Thus, a balanced representation will be put in place to facilitate effective functioning of the public interest framework and adequate representation of shareholders.
Mohd Azlan said this will entail the creation of a board of directors where representation is derived not just from shareholders, but also public interest representatives. This ensures the objectivity of the demutualised exchange in performing its regulatory functions, whilst pursuing its business objectives.
While the Board of directors will be responsible for formulating policies for the company, Board Committees will be delegated powers to perform specific executive functions of the Board of Directors.
The proposed Board Committees are:
- Appeals Committee
- Audit Committee
- Investment Advisory Committee
- Nomination and Compensation Committee
- Risk Management Committee
II. Corporate Structure of the Demutualised Exchange
On the corporate structure of the demutualised exchange group, Mohd Azlan said the main objective will be to enable effective and efficient management of the organisation.
"There will be a need to balance between commercial and regulatory functions and obligations of the demutualised exchange," he said.
- There will be four core business units that will drive the performance of the group, namely - Exchanges, Clearing Settlement & Depository, Information Services and Technology.
- The regulatory functions of the group will be centralised and independent of the business units. The regulatory unit will be headed by a Chief Regulatory Officer.
- Common support services, such as Finance & Strategy, Corporate Services and Information technology, will be established and centralised to provide backing to the business units and operations of the group.
III. Enhancing the Competitiveness of the Demutualised Exchange
On enhancing the competitiveness of the demutualised exchange, Mohd Azlan said the demutualised exchange will adopt strategies to ensure liquidity in the market place is not only preserved but also enhanced and that our markets not only survive, but continue to thrive.
Key strategies identified include:
- Enhancing access to local markets to facilitate broader base investment sources towards improving liquidity.
- Introducing a wider range of products and services to serve changing needs of market, including Islamic capital market instruments.
- Developing strategic alliances in smart partnership fashion for greater synergies, and more effective use of technology with the objective of increasing the attractiveness and accessibility of Malaysian securities internationally.
- Attracting new issuers and investors, whilst adding value and encouraging greater participation by present issuers and investors.
- Expand the listing facilities to foreign companies, albeit in a phased manner.
As an operator of a fair and orderly market, Mohd Azlan said the ability to regulate remains an important aspect of the functions of the demutualised exchange.
"KLSE will not compromise the effective regulation of the market, in pursuit of profit. The KLSE will continue to work closely with the Securities Commission and other regulators to further strengthen regulations in the marketplace," he added.
In respect of the implementation, Mohd Azlan said there is still a lot that needs to be done to complete the demutualisation exercise and the process itself. "Given that there are no precedents nor provisions in current law, that is the Companies Act 1965, for a direct conversion of the Kuala Lumpur Stock Exchange from a company limited by guarantee into a company limited by shares, the conversion process will be effected through the passing of a special Act - i.e. Demutualisation Act.
"In addition, amendments to current securities and futures laws [i.e. Securities Industry Act 1983, Securities Industry (Central Depositories) Act 1991, and Futures Industry Act 1993] will also be carried out in tandem with the promulgation of the Demutualisation Act.
"The amendments are meant to ensure that the law facilitates the creation and operation of a demutualised exchange, as detailed in the Demutualisation Plan," he said.
Mohd Azlan said KLSE is targeting to have the proposed legislation presented at the Parliamentary session in March/April 2003. Concurrently, stockbroking members' approval will be sought for the demutualisation exercise, specifically in relation to the changes to the memorandum and articles of association of the Kuala Lumpur Stock Exchange. Taking into account the necessary administrative processes, the target completion date or effective demutualisation date will be July 2003.
"As for the listing of the demutualised exchange, we are targeting by end 2003, subject of course to market conditions and other relevant factors, including approval of the Securities Commission," Mohd Azlan said. In closing his briefing, Mohd Azlan said the benefits of the demutualisation of KLSE encompass not just a select few - it covers all stakeholders.
"It is for the benefit of not just members of the exchange, or the exchange itself. It benefits the broader capital market as well as the overall economy. "Demutualisation will benefit the economy with reduced cost of capital, leading to increased efficiency in the allocation of scarce financial resources to Malaysian corporates and the economy. It will also increase the ability to retain participation of both domestic companies and investors in the local capital market.
"In the meantime, the capital markets will gain from demutualisation with the broadened representation of stakeholder groups in the demutualised KLSE's governance. Increased participation from a broader group of intermediaries and investors, including foreign participants, would provide increased international coverage of the Malaysian capital markets. With the establishment of the Capital Market Development Fund, there will also be increased support for the development of the broader securities and futures market.
"On the part of the exchange, demutualisation would mean increased efficiency, accountability and transparency, driven by value creation objectives. This will result in the enhanced ability to raise capital to fund critical investments and business expansion.
"Additionally, with demutualisation, members will derive the benefits of value allocation in a for profit exchange, continued trading rights and continued participation in a progressive and growing market, as contrasted from a market that may be perceived otherwise and which may even be marginalised," he said Mohd Azlan said moving forward the continued commitment, professionalism and co-operation of all parties are key drivers in ensuring the success of this effort and the realisation of the benefits of demutualisation.
"Remember, demutualisation is not the end, it is an enabler. An enabler that will allow KLSE to achieve new heights of success, an enabler to make the KLSE better able to contribute to the efficient and effective functioning of our capital markets and an enabler for KLSE to better contribute to national development," Mohd Azlan said.
