Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on April 20, 2020 - April 26, 2020

MALAYSIA’s market regulators last week relaxed a raft of rules, giving a temporary reprieve to public listed companies (PLCs) battered by the fallout from the Covid-19 pandemic, with economic activity plunging during the Movement Control Order period.

From April 17 this year to June 30 next year, Main Market-listed companies that trigger any one of three criteria — there are six in total — in Practice Note 17 (PN17) of Bursa Malaysia’s listing requirements would not be classified as such for one year.

The three criteria are: (i) the shareholders’ equity of the PLC falling below 25% of its share capital or RM40 million; (ii) having the auditors highlight a material uncertainty or express a qualification on the company’s ability to continue as a going concern in its latest audited financial statements; and (iii) a default in payment by the PLC, its major subsidiary or major associated company and it is unable to provide a solvency declaration to the exchange.

Similar temporary relief from Guidance Note 3 (GN3) classification will be provided to companies listed on the ACE Market.

The Securities Commission Malaysia (SC) says this relaxation will afford listed companies sufficient time to regularise their financial condition in the aftermath of the outbreak.

“The current crisis has already impacted every major economy in the world, causing extreme financial stress and distress in several sectors. Unfortunately, the situation is unlikely to correct quickly as the fallout from the pandemic is expected to be both broad and deep,” the commission’s spokesman says in an email response to questions from The Edge.

“The SC believes that both issuer and investor interests will be best served by supporting fundamentally sound companies during this unusually challenging period.”

Nevertheless, the spokesman points out that the relief afforded is additional time, and not a permanent waiver of financial obligations listed companies are expected to fulfil.

Koh Huat Soon, head of research at Kenanga Investment Bank Bhd, says the temporary relief measures by both the SC and Bursa Malaysia Bhd are welcome and helpful for PLCs during this difficult time.

“In the first place, classifying poorly performing stocks into PN17 and GN3 is necessary to alert investors of such cases and enforce discipline on poorly managed or errant listed issuers to run their businesses responsibly. However, at a time like this, even well-run companies may fall victim to financial stress and so, a temporary relief from PN17 classification is welcome,” he tells The Edge.

He cites it as a case of “don’t throw the baby out with the bathwater”, where deserving companies would not need to waste their resources working out regularisation plans — instead, they can focus on getting their businesses back in shape.

Koh concedes that PLCs must still make an immediate announcement to Bursa should they fall into situations prescribed as PN17 or GN3, so investors are aware, allowing them to make informed investment decisions.

“However, the 28 companies that are currently PN17 or GN3 classified should continue to report and continue with regularisation initiatives as these were not victims of Covid-19-related stress.”

There were 28 companies under PN17 and GN3, representing 3.1% of the total number of 902 companies listed on the Main Market and ACE Market of Bursa, as at April 15.

Bursa also granted a further one-month extension of time until June 30 for PLCs to submit their financial statements as well as temporarily loosening the rules around private placements, allowing listed companies to place out not more than 20% of the total issued shares, from the existing 10%, until Dec 31, 2021 — subject to shareholders’ approval.

Koh deems the authorities’ move to extend the deadline for submitting financial statements until June 30 as fair, as audit firms are not able to conduct audit and reporting activities at the normal pace during the MCO period.

An analyst at a foreign research firm concurs, noting that a further one-month extension for submission of financial statements takes into consideration the challenges arising from the MCO.

Koh also notes that raising the general mandate threshold for new securities issues from 10% to 20% provides an avenue to raise cash by deserving companies that may need to fund commercially viable projects or sensible acquisitions.

A chief financial officer at a PLC says while it is good to help companies in financial distress, he cautions against relaxing capital market regulations for too long.

“We are entering into a crisis that will be more severe than the Asian financial crisis of 1997/98. For those companies that are heavily indebted, it will be a challenging time,” he says.

But extending the deadline for submitting financial statements for longer than three months may not be ideal as public investors need to know the performance levels of listed companies to make informed decisions, he adds.

Speaking at the announcement of the SC Annual Report 2019 last Thursday, SC chairman Datuk Syed Zaid Albar said the decision to grant PLCs a further extension of time to submit their financial statements will depend on how long the MCO lasts. “The current MCO period ends on April 28. We will review [the extension] when the time comes.”

 

Firms most vulnerable if virus prolongs

The SC sees increased downside risks to the credit profiles of aviation, oil and gas, and trading and services companies, says executive director of market and corporate supervision Kamarudin Hashim.

“This segment under stress represents about 8% of the total corporate bond issuances. Issuers within this segment may experience some financial stress in the short term that could weaken their credit position, but not necessarily result in defaults as the majority of them are in the ‘AAA’ and ‘AA’ rating categories.

“Typically companies with these rating levels are also backed by guarantees by Danajamin Nasional Bhd and banks,” he says.

Kamarudin says bond issuers, in their terms of issuance, would also have a requirement to provide money in the reserve accounts six months before any payment of interest or principal is due. “So far, we have not received any feedback from the trustees to say that any of the issuers are struggling or not able to put the money into the reserve accounts.”

Still, he notes that as investors in the corporate bond market are predominantly institutional investors, in the event of default by the bond issuers, they would be able to pursue various options to preserve their investments through negotiations such as rescheduling or restructuring, or rigorously pursuing their contractual rights and priority of claims against the issuer.

Default rates in the corporate bond market have declined significantly in the last 20 years, from 9.4% after the Asian financial crisis to below 1% in the last year.

Meanwhile, given the prevailing uncertainty, the commission anticipates some initial public offerings may be delayed this year as companies need to relook at their capital requirements and business strategies, says Syed Zaid.

There were 30 new listings last year — the most since 2006. Of these, four were on the Main Market, 11 on the ACE Market and the remaining 15 were on the LEAP Market. The total amount of funds raised from these new listings last year was RM2.02 billion.

On whether more punitive measures for independent directors will be imposed in order to protect minority shareholders’ rights, the SC spokesman says the current punishments for directors, both independent and non-independent, as prescribed by the Capital Market and Services Act 2007 (CMSA), are adequate.

“Malaysia already has laws, regulations and guidelines in place, governing the conduct of directors, both independent and non-independent. These are provided in the CMSA, Companies Act 2016 and Bursa Listing Rules. We also have the Malaysian Code of Corporate Governance to steer boards in leading their companies according to good CG practices,” he says.

“For criminal enforcement actions, the sentences imposed against the accused persons are at the discretion of the courts.

“In the eyes of the law, the core duties and obligations of independent and non-independent directors, as directors, are one and the same. All directors are expected to exercise their duties and responsibilities in good faith and owe a fiduciary duty to the company and act in the best interests of the company, as opposed to their personal interests, should such a conflict arise.

“When investigating any questionable transactions, the SC takes into consideration all facts and evidence related to the potential or alleged issue, the prevailing circumstances and the public interest element. We apply proportional enforcement outcomes that are commensurate with any breach committed,” the spokesman adds.

According to the SC Annual Report 2019, the commission reviewed 26 cases relating to possible violations of securities regulations last year. The largest portion of these cases was related to market manipulation and securities fraud.

Meanwhile, the portion of insider trading investigations continued its yearly decrease, marking an overall significant reduction in insider trading investigations since 2014.

On another matter, the SC dismissed claims suggesting that the Audit Oversight Board’s (AOB) sanctions have been mostly against small and medium-sized audit firms.

The spokesman says enforcement actions by the AOB are taken against firms and individual auditors based on the level of severity and impact of the inspection findings arising from its regular inspection programme. “The AOB does not differentiate between firms in any way, and certainly not in terms of size, for its enforcement actions.”

 

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