ON Dec 28, 2012, amendments were made to the Capital Markets and Services Act 2007 (CMSA), the primary securities legislation in Malaysia, and Securities Commission Malaysia (SC) had issued the business trust (BT) guidelines to establish the framework for its structure.
With the introduction of the guidelines, Malaysia joins Singapore and Hong Kong in enabling issuers to use BTs as a listing vehicle to raise funds. A BT is a unit trust scheme in which the underlying assets constitute an ongoing business. It is a hybrid structure incorporating elements of an investment trust and a company.
A typical structure of a BT is set out as follows.
A BT functions through a trustee-manager (generally expected to be a company), which owns and operates the business assets for the benefit of unit holders. The unit holders have an economic interest in the business assets of the BT and have rights to participate in the distributions declared by the trustee-manager.
A BT is akin to a real estate investment trust (REIT), as both are, in essence, unit trust schemes. However, a BT provides greater flexibility to sponsors as compared with a REIT, as a BT does not have to comply with strict investment guidelines and borrowing restrictions. There are generally no restrictions on the types of assets that can be injected into a BT.
The trustee-manager is accountable to unit holders and is required to comply with various corporate governance requirements, such as to maintain proper accounting records and registers and to prepare annual audited financial statements. These requirements are similar to those imposed on directors of a Malaysian company. A BT is also subject to corporate income tax at the same rate as a Malaysian company (currently 25%).
BTs are frequently marketed as investments that provide a steady recurrent yield. Such instruments are particularly attractive in a low interest rate environment if they provide a decent yield. A significant advantage of a BT over a Malaysian company is that distributions of a BT can be made to investors from its operating cash flow, subject to solvency requirements (a Malaysian company can only make distributions out of profits). Therefore, it is anticipated that a BT will be more attractive for business assets that are capital intensive but with stable cash flows such as those in the infrastructure, shipping, public utility and healthcare sectors.
The guidelines envisage the establishment of both conventional BTs as well as syariah-compliant Islamic BTs, structured in accordance with approved syariah principles and concepts. A BT established in Malaysia must be registered with the SC whereas a foreign BT established outside of Malaysia must be recognised by the SC before its units can be offered or made available in Malaysia.
The trustee-manager of a BT established in Malaysia must hold a capital markets services licence (CMSL) for the regulated activity of fund management in relation to asset management issued by the SC. This means that that the trustee-manager must, in addition to the requirements under the CMSA and the guidelines, comply with the Licensing Handbook issued by the SC. Under the Licensing Handbook, the trustee-manager must, among others, have at least one director holding a capital markets services representative's licence (CMSRL) for the regulated activity of fund management in relation to asset management and employ at least two CMSRL holders.
Based on guidance notes issued by the SC, it appears that only BTs that are seeking listing on the Main Market of Bursa Malaysia Securities Bhd will be registered or recognised by the SC. This means that, for the time being, foreign issuers who intend to market interests in their BTs will have to seek a listing on Bursa Malaysia and may reflect an intention to leverage Malaysia's relatively deep pools of investment funds to promote the listing of BTs in Malaysia.
It is to be noted however that the Main Market listing requirements have not been specifically amended to cater for the listing of BTs. It is anticipated that these will follow shortly. It is unclear at this juncture as to whether the scope of the Malaysian Code on Take-overs and Mergers will be extended to apply to BTs and we expect further guidance to be issued by the SC in this regard.
In order to obtain a primary listing on Bursa Malaysia, a BT's total market capitalisation must be at least RM1 billion, based on the issue or offer price.
The core business underlying the BT must have been in operation and generating operating revenue for at least one full financial year. Additional requirements apply where the core business of the BT comprises infrastructure assets. The core business of the BT must not be the holding of investment in other listed BTs or listed corporations to ensure that each listed BT has its own source of revenue.
A regional comparison
There is no separate legislative or regulatory regime in Hong Kong to govern BTs. Accordingly, Hong Kong adopts the shares stapled units model for BTs. Under this structure, units in a trust (the BT) are stapled together with the shares of a listed company and hence traded together. This structure is fundamentally different from the BT structure under the Malaysian regime where units in a BT can be independently traded.
The Singapore BT structure is largely similar to the Malaysian BT. In particular, Singapore BTs also provide greater flexibility to sponsors as compared with Singapore REITs in terms of investment options and borrowing limits. See table for a brief comparison between the salient features of a listed Malaysian BT, Malaysian REIT, Singapore BT and Singapore REIT.
One of the key distinctions between the Singapore BT and the Malaysian BT lies in the regulatory regime in relation to the trustee-manager. The trustee-manager of a Malaysian BT is required to hold a capital markets licence, but there is no similar requirement imposed on the trustee-manager of a Singapore BT.
However, the listing criteria that has to be met by a Singapore BT will be lower compared to Malaysia.
A Singapore BT is merely required to have a total market capitalisation of at least S$300 million (RM749 million) and to demonstrate that the assets are capable of generating operating revenue immediately upon listing.
It is anticipated that the more stringent regulatory requirements in Malaysia through the appointment of a licensed trustee-manager will provide additional levels of protection and comfort for investors. The more stringent listing criteria in Malaysia is also expected to attract better quality assets with a sound track record.
Conclusion
The introduction of BTs as a new asset class is highly anticipated, as the Malaysian capital markets continue to mature. BTs are expected to draw significant interest from sponsors as it affords greater fundraising flexibility than other listing vehicles.
Malaysia is now on equal footing with Singapore in providing a framework to facilitate the establishment and listing of BTs.
Malaysia has certain advantages with respect to BTs as it has a multiplicity of infrastructure and other assets (developed solely by the private sector or in partnership with the Malaysian government or that which have been privatised), which are suitable to be spun off and injected into BTs.
A key factor for kick-starting a robust and vibrant BT industry in Malaysia is for market players to establish pioneer BTs with significant market capitalisation that are capable of delivering competitive investment returns to investors over a sustained period of time.
Neither Singapore nor Hong Kong BTs have been especially successful for various reasons. Malaysia has a real opportunity to steal a march over these capital markets with its new BT regime.
[Munir Abdul Aziz is partner at Wong & Partners — a member firm of Baker & McKenzie International. This article is for information purposes only and does not constitute legal advice.]
This story first appeared in The Edge weekly edition of Feb 18-24, 2013.