There are tw0 basic models of regulatory system which is the supervision framework for securities market which really is a merit based rules and disclosure structured regulation. These regulation systems are important to provide enough investor safety and regulate business procedures or rules of do that reduces systemic risks. There are several countries that have adopted the disclosure established regulation that are Malaysia, Hong Kong and Singapore. The countries which are still following a merit based systems are China and Philippines but to certain extend.
MBR
The acceptance of the need for a securities regulator to ensure investor protection and market integrity is found in the Securities Fee Take action 1993 (SCA), under which the Securities Percentage (SC) is set up. Section 15(1) of the SCA requires the SC to, which control all matters associated with securities also to take all fair measures to preserve the self confidence of buyers in the securities market by guaranteeing sufficient security for such buyers. The principal thrust of the regulatory construction currently applied by the SC is merit-based. Section 32(4) of the Securities Commission Take action 1993 (SCA), give ability that proposals that require issues or offers of securities to the public go through the SC's previous approval. The SC gets the discretion to approve the proposals with such revisions and at the mercy of such terms and conditions as it deems fit. The SC also has the power to reject corporate and business proposals if it's reasonably satisfied that these proposals are not in the best interest of the public company and/or the committing public.
Authorities regulate securities offering
Under the MBR, The authorities control the securities offering by protecting and shielding the investor by making certain the offering of the securities of the company's is judged by the government bodies to be reasonable, just and equitable. Under this approach, the regulators or the regulators would make an diagnosis regarding the company's viability, quality and functions of the business's management, its suitability for listing and taking regard of the general public interest before approving any issuance proposal about the company's securities. For instance, section 34(4) of the SCA, issues or offers of securities is subjected to the approval from the SC.
Issuers and advisers disclose to authorities
Under the MBR model, the issuers and advisers disclosed all information about the company's business to the specialists or the market regulators. These are because under this type of model, the marketplace regulator must approve first the securities before the investor can be allowed to invest in the company's. This is for the purpose to safeguard the entrepreneur.
Authorities' reviews investment merits of offering
Regulators review each transaction matching to its recognized merits. The analysis is completed in two stages which is first of all, adequacy of disclosure is evaluated then, and the merits of the deal are put through value judgment. Merit-based legislation assumes that the market regulators are better educated than investors and can better decide the merits of orders with the person. These merit view is the sign if the company's provides safe securities in making business to be able to safeguard the investment made by the trader.
Advantages of MBR Model
In merit founded regulation, this can be a paternalistic try to improve or even to develop the fairness between the relationship between the sellers and purchasers of the securities in the capital market. These models also act as a shield to safeguard the public shareholders from the potential risks involved in functioning on impulse. This is because the authorities acquired made deep valuation and merits about the company's business in order to approve the securities issued by the company's.
This model or regulatory system is particularly appropriate to be followed for Malaysia's rising capital market which has a large proportion of financially unsophisticated retail buyers. That is also reduce or minimizing the opportunity of promoters of open public companies exploiting these less sophicated investors to use concerning their own advantages.
In the securities market, the Securities Commission payment is also able to ensure that system in place is working well to be able to prevent unscrupulous and unethical practices in the problem or offer of the securities by the firms. By ensuing that the system place is working, the entrepreneur would have reduced the risk of dropping their investment by the unscrupulous and unethical routines of some company's who would provide bogus or inadequate information regarding their business.
But, the best decision still is placed within the trader. This is because your choice and the evaluation of the security offered lays with the investing community. The securities commission rate will not give a warranty that the investment created by the trader would get a return or earnings.
The SC gets the capacity to check and ensure that the securities that are made available from the issuers are pretty and reasonably priced.
Disadvantages of MBR Model
This is regards to the public interest where in fact the public entrepreneur would make their decision in trading their profit the company's predicated on the SC. The way of MBR posed a issue of moral hazard. It is because when the market regulators or the SC offers their authorization of the merits of a particular company, it can be found danger that shareholders will perceive that the corporation will be a good investment as the SC possessed given their acceptance after making some merits regarding the business of the company's. This might lead to an impression whereby the investor did not need to separately measure the merits or risk of buying that company. The investor would totally leave it to the marketplace regulator to help make the research.
By using these models, the regulatory strategy of MBR restricts entrepreneurs and investor's choice to make decision in deciding on the best company to invest by limiting the opportunity of investment that emerges to them. It is because only SC gives and provide the required approval in order to make the released security to be approved. If the company's will not comply the guideline given and the SC does not approve the issue offered, thus restricting the option open to the entrepreneur in making an investment their money.
This approach also denies certain ventures of usage of public funds unless the issuer of securities agrees to modify their offering according to the pre-requisite collection by the SC. The issue that always arises would be that the SC and the issuers of securities tend to have conflicting views as to how and the level to which a proposed venture or exchange will be beneficial to investor generally.
The SC is also regarded as more conventional in its view and normally will not approve highly risky securities to be wanted to the public. The merit structured regulation also so long as giving much safety to the entrepreneur, this will take the bargaining electric power from the securities offeror or issuers and the energy will be change to the investor instead. The cover is significant because the issuers of the securities need to raise funds at a substantial discount from the actual price of their securities. From this
Market school of thought, this "over-protection" of the investing public had compelled issuers to improve funds at a substantial discount from the genuine value of their securities or add to the perception of first investors that they would be "guaranteed" reduced when the corporate body is launched onto industry.
Basic concept of DBR
The basic theory of DBR is the need for the issuers and intermediaries offering securities to provide buyers with sufficient, appropriate and timely disclosure of all relevant information about the company's business, prospects, budget and the conditions of the securities in order to allow traders to better measure the risks and merits of their investment. This is to allow the buyer to make they own informed investment decisions. Usually is done through the use of prospectus which centers if the companies comply with the standard of disclosure required. For instance, in Malaysia, the companies that is outlined in Bursa Malaysia, one of the list requirements of the standard disclosure is to acquire at least two annual reports that can be check by the buyers to make their decision to get. The investor are expected to carry out their own homework or with the assistance of expert or professional such as attorneys and accountant because the trader hold an increased level of tasks in evaluating the chance or particular offering predicated on the disclosed information before investing.
Authorities regulate disclosure of information in securities offering
Under DBR, the rules of the disclosure or the typical of the disclosure in securities offering is on the government bodies where the authorities will provide the rules for the business in disclosing the relevant information pertaining the company's business, finances, potential customers and terms of securities. The burden is placed on the issuers of the securities and advisers and not on the specialists.
Issuers and adviser disclosed to investor
Under the model Of DBR, the issuers of the securities provides sufficient information based on the Securities Commission Recommendations about the disclosure of information regarding their business. The advisers which are normally experts or specialists such as accountants, legal representatives and other technological experts need to have play their role in the planning of prospectus for the trading public. They are because each of these adviser or experts can be performed responsible for a defective prospectus under the DBR. The homework process is for the purposes of planning good and complete prospectus and consists of performing sensible investigate work to be able to ascertain that the prospectus will not contain any materials omission or bogus information. Financial advisers and experts in particular are expected to have a high standard of affordable care. An adviser has an obligation to produce a reasonable investigation not just for the purpose of its own homework defence but also as a duty to the making an investment public who will be relying on the opinion and tips of the advisers. To be able to decrease their potential risk, the expert of professionals must make due diligence enquiries.
Investors determine investment merits of offering
In the DBR System, the trader cannot expect that the securities regulator to safeguard them forever. In order to invest, the investor cannot commit blindly. The buyer must make their own research and acquire data and information about the company's business. Investors have to judge and evaluate the merits of any security being given or offered prior to making any investment decision
It would are more apparent that buyers would have to change their laid-back frame of mind. They can not anymore neglect that securities being given or offered have previously passed the regulators' investment merit review. Instead, the information necessary for the shareholders themselves to judge the investment merit of a security will be accessible. Investors must take a more active interest in the companies they spend money on emphasis should always be positioned on basics and long-term performance alternatively than short-term earnings. Investors should take into account making certain their protection under the law and pursuits as shareholders are shielded, and that higher transparency and accountability are shown by the directors or primary officers of the firms concerned. Ultimately the effectiveness of the disclosure regime to be implemented in Malaysia will be based upon investors themselves. They need to also grow to the occasion by paying closer attention to the affairs of the companies where they commit.
Under a disclosure-based regulation, investment analysts and financial journalists would have access to more relevant information to permit those to make more detailed examination, research and diagnosis of each security issue or offering and can conclude at a better finding and advice. This is of particular importance in Malaysia because of the top proportion of retail traders, some of whom lack the technological experience and or enough time needed to measure the web of information disclosed by issuers of securities. These investors may need to count on the research disseminated by the investment experts and financial journalists to make better knowledgeable investment decisions.
Advantages of DBR
There are several advantages of the DBR regulatory model system. Quite simply, this would result in a more transparent and educated market whereby companies have to boost their quality of disclosure to help in potential decision making by potential shareholders. By upgrading the product quality, the investors have more choice and more information pertaining the business enterprise and the funds of the companies prior to making any investment in the firms.
Investor must know and get the info given by the issuer of securities to because the entrepreneur will hold the burden of all the responsibility towards their financial commitment.
One of the major advantages of DBR, the firms can raise more money at less or cheaper cost. It is because it is based on the assumption that the bigger level of transparency will lead to a greater analysis risk by underwriters which would then contribute to a smaller cost in increasing the fund which give the issuers companies the power to price it assets at an increased high quality rates.
Another edge under the DBR is where in fact the role of the regulator is to ensure that the composition of the market is steady and effective for the marketplace In order for the investor to produce a decision. The regulators will ensure that the info given by the firms are disclosed so that the investor will become the judge in making common sense of the merits of choice investment, so that the regulator would only emphasis on disclosure and eradication of scams.
According to research, by shifting for the disclosure based regulation, the power that the securities market will enjoy would be that the increased of efficiency of the Malaysian capital market by detatching the barriers to competitiveness which exists in the old merit regulatory system.
A higher standard of disclosure by the firms is guaranteeing by the regulatory systems. This is because the companies are anticipated to follow the guidelines of disclosure of the information in line with the SC. This might give more chance to the trader in making their own research of the accountability of the firms prior to making any investment.
The Surface for the transfer of regulatory model from MBR to DBR
The Securities Commission rate continues to play an important role in providing direction on broad coverage things and in enforcing the securities laws and regulations. Its role is to ensure that the bonuses and structure of the market are steady with efficiency, fairness and steadiness. The stand below shows the ground for the switch to DBR regulatory system.
Three Tenets of DBR
Disclosure
The responsibility of directors of general public companies is to ensure that all materials information required by the public to make investment decisions is provided accurately, completely and on a well-timed basis.
In disclosing such information, the question that is have to be asked is whether
Has any important piece of information been omitted?
Is any part of the information misleading?
Is the information complete and appropriate?
Investors count on available information when deciding where so when they should spend their money. There is a dependence on information when new securities are offered in the principal market.
There is also a need for information when coping in securities already traded in the secondary market.
Disclosure of information therefore benefits shareholders by facilitating those to make investment decisions.
Companies intending to offer securities to the public must totally disclose information about the affairs of the companies and the securities which can be being offered, in the offering documents or prospectuses. For the public listed company, disclosure responsibilities are stipulated in the List Rules of the stock exchanges.
Due Diligence
In preparing the information to be disclosed to the public, directors of public companies must undertake a homework exercise to confirm and ensure that the information to be released is appropriate and well-timed.
Due diligence is an activity by which queries are conducted to ensure that information to be disclosed is true, sufficient and timely. Due care must also be given to ensure that there is no omission of materials information. Material information is information which would realistically be likely by rational shareholders to help in their investment decisions.
Information that can affect the trading activities and prices of the business's securities must be released immediately. The onus then sits with the trader to consider and consider the info provided prior to making decisions.
Following amendments to the Securities Percentage Action 1993 (SCA) in 1995, which put an increased standard of responsibility on promoters, directors, and advisers in respect of disclosures, the Securities Commission released a publication on Due Diligence Methods in August 1996.
The publication is supposed to explain the value of homework, especially given the unlawful liabilities enforced on persons accountable for submission of proposals to the Securities Commission payment under section 32 of the SCA.
In March 1999, another publication on "Due Diligence Guidelines on Distribution of Proposals to the Securities Fee" was publicized. It was jointly released by the Association of Merchant Finance institutions in Malaysia, Federation of Open public Listed Companies, MIA, MACPA and MAICSA. The publication, in detailing the due diligence process, the question whether
1) Who will be held responsible for conducting the due diligence?
2) Who should be contained in a Due Diligence Working Group(DDWG)?
3) What if the terms of reference and role of the DDWG be?
4) What's the methodology used in conducting the homework exercise?
The publication also includes a homework checklist for an initial open public offering and places out evidently the roles and obligations of the many parties mixed up in exercise.
Corporate Governance
The timely, accurate and translucent disclosure of material information can be an integral element of ensuring good corporate governance. Boards of directors of companies need to be open about the businesses they direct and this includes transparency in corporate and business activities and deals. This is essential so that shareholders can exercise their protection under the law constructively. However, they can only do so if they're provided the relevant information. Apart from compliance with laws and regulations that constitutes one aspect of ensuring that directors perform their fiduciary responsibilities properly, there's also codes of best practices which the directors are expected to observe. Among the list of codes to be viewed are The Malaysian Code on Corporate Governance, given by the Financing Committee on Corporate Governance and THE BUSINESS Director's Code of Ethics issued by the Registry of Companies.
Time Framework for Change to DBR
The shift to DBR needs effect over a period of five years under three stages, from 1996,
with full DBR expected to be performed by the entire year 2001. An overview of that time period framework and focus
of the shift is set out below:
