CHAPTER 2
MALAYSIAN
EQUITY MARKETS AND TRANSACTIONS
Types of Market and
Financial Instrument
Initial Public
Offerings (IPOs)
Bursa Malaysia and
MESDAQ
Securities Commission
Trading on Bursa
Malaysia and MESDAQ
On-line Investing
2.1 INTRODUCTION
In
accordance to understand on types of market and financial instrument, we have
have to familarise with the term of financial system. A Financial system can be
defined as a set of institutional units and markets that play a role in
mobilizing funds for investment by providing facilities in a complex commercial
activities.
2.2 TYPES OF MARKET AND FINANCIAL INSTRUMENTS
Financial
markets can be divided into three main categories: - Money Market, Capital
Market and Derivatives Market in which there are various fractions of assets
based on level of the risks, the period of maturity and different
characteristics.
2.2.1
Money Market
Money market basically consists of the securities or financial
instruments that are short-term nature, low risk and marketable. Given below
are the financial instruments in the money market:
Treasury
bill
Certificates
of Deposit
Commercial
Paper
Bankers
Acceptance
Repo
& Reverse
Eurodollar
Federal
Fund
LIBOR
/ KLIBOR
A.
Treasury Bill
The government will issue Treasury bills to the public and
corporate sectors as their short-term financing. It is a very marketable
financial instruments and highest in demand.
This is because the treasury bills is highly liquid, which are easily
converted into cash and has low risk.
Apart from that, the interesting features are the profits on purchases
of treasury bills for some of the government is exempt from tax. Investors who are interested to buy the bills
are sold at a discounted price which the purchase price is lower than the face
value / par. Treasury bills will be sold or handed over to the government when
they reach maturity at par. The
difference between the selling price and buying price is the profits earned on
these investments.
The maturity of treasury bills was 91 days, 182 days and 52 weeks.
Treasury Bills 91 and 182 days are offered by the government on a weekly basis,
while Treasury Bills 52 days is offered every month. The selling method of the
bills is by auctioning the bills; the highest bidder will get the contract.
Individual investors who are interested can get directly through the Treasury
bill auction session or make a purchase from the secondary market. The purchase
can be requested through the authorised financial dealer / broker.
Suppose you are invested in Treasury Bills with face value of RM10,000.00 at a discounted price RM
9,500.00. The bills are due in 6 months from today (Maturity period of Treasury
bills 182 days). As the result, the earnings of those instrumentswere:
Profit
= Selling Price – Cost Price
= RM10, 000 - RM9, 500
= RM500
Effective
Rate = Total Profit__
Amount invested
= 500
9,500
=
0.0526% @ 5.26% within 6 months.
B.
Certificates of Deposit
Certificate of deposit is similar to fixed deposit in the
bank. It is different from the regular
deposits (saving accounts) because the certificate of deposit has a specific
maturity date as agreed between investors and bankers. During maturity period, the investor will
gain return on principal and interest of the certificate of deposit. This
certificate can be transferred or sold to other investors if those investors
need to cash their certificate before it reached maturity.
C.
Commercial Paper
The large companies (blue chip Company) will usually produce
short-term debt notes called commercial paper as collateral for loans to avoid
making loans directly from financial companies. Commercial paper is a note
which will be supported by any bank to ensure the company which issued the note
will be able to make payment on the maturity of the promissory note.
Usually, the maturity of commercial paper is 270 days while the
promissory notes will have longer maturity period and it should register at the
Securities Commission. Nevertheless, the promissory notes with more than 270
days maturity period are rarely issued.
The commercial paper is one of the most reliable financial assets
because of their short maturity which allows investors to evaluate the performance
of its issuer.
International rating companies like Moody's Investor Services,
Standard & Poor's Corporation, Finch, and Solomon Brothers Investor
Services are those who are graded and rated the level of trade paper which
available in the market. Rating is very important because it acts as an
indicator on the performance of the companies issuing the promissory notes.
D.
Banker's Acceptance
The customer of the bank will order the bank to make a specified
sum of money on a specified date to a named person or the bearer of the
draft. Usually the customer will order
the bank to pay the banker’s acceptance at a future date, typically within six
months. At this stage, it is like a post-dated
check. When the bank endorses the order
for payment as "accepted", it becomes a liability to the bank to pay
the holder of the acceptance. Normally,
these notes are sold at a discounted value just like a treasury bills and
available in the secondary market.
E.
Repo & Reverse
A repo is quite similar to a secured loan, where it has a short term of
maturity period and involves government securities. Usually it has a one-day maturity
transaction, thus the investors will gain the profit overnight when the
government will pay at a higher price for the next day. By the way of explanation, the purchase of
this instrument with the agreement to sell them at a higher price at a specific
future dates in order to raise short-term capital.
As for 30 days of loan, term repo will be issued by the
government. Both types of these repo instruments are reliable financial
instruments because they are secured and guaranteed by the government
securities.
F.
Eurodollar
Eurodollar deposits refer to the denomination (currency) of
certain country which available at foreign banks or local bank branches in the
foreign countries. Consequently, this
type of deposits is subject to comply with that country's central bank. Investors will receive interest on these
deposits as savings in the fixed deposit account or a Certificate Of Deposit.
G.
Federal Fund
Every bank which operates in an economy is required to make the
reserve deposit (savings) in the Central Bank or the Federal Reserve System.
The total reserves that imposed on a bank aredepending on the amount of
deposits of the customers. The purpose
for this reserve is to protect the interests of customers in the event of an
undesirable risk to the bank.
Furthermore, this accumulated deposit known as the Federal Fund
shall be used as a loan by any bank that has insufficient funds to avoid an
overdraft of their reserve account, hence to cover their deficiencies in the
short-term period and available for immediate spending. Normally, these loans are made for one day
only, that is overnight and the rate is known as the Federal Funds Rate.
H.
LIBOR / KLIBOR
LIBOR is the acronym for London Interbank Offered Rate (Interbank
Lending Rates at London) and KLIBOR refers to the Kuala Lumpur Inter Bank
Offered Rate (Interbank Lending Rates in Kuala Lumpur). The Kuala Lumpur Interbank Offered Rate is
the average interest rate at which term deposits are offered between prime
banks in the Malaysian wholesale money market or interbank market. It can best
described as a benchmark for the short-term interest rate on loans that set by
the major banks to their borrowers (other banks) that need funding. In other words, any bank that needs to raise
their capital may borrow from any bank and the interest on loan is based on
LIBOR or KLIBOR (if in Malaysia).
Rate of Return in Money Market
Instruments.
As mention above, the instruments in the Money Market is a low
risk investment. Though, it does not mean that the instruments are free from
any risk. Therefore, investors should make thorough and wise judgement and
attention in making decisions on investments of the securities that are
discussed earlier. As for rate of return on investment in these instruments, it
is lower than the rate of return on investment in the Capital Market
instruments.
2.2.2 Capital Markets
As we discussed earlier, the money market instruments have a
short-term investment period as compared to capital market instruments, which
have a long-term investment period. Therefore, it relatively exposed to the
highest risk, and offers higher rate of return than money markets.
Respectively, capital markets give a significant contribution to
the economic and industrial development.
This is because the existence of long-term funding to enable the surplus
can be transferred to those in need of additional funds. Given below are the examples of capital
market instruments such as bond and share.
A.
Bonds
Bonds are long-term debt securities issued either by governments
or large companies in order to obtain funds without making any bank loans or
issuing new shares. Bond offers benefits to those who publish them because there
are no monthly installment payments such as bank loans. In addition, it provides the issuer with the
external funds to finance long-term investments for a company and for
government, to finance current expenditure.
The bondholders do not have any right to vote or act as a proxy in an
organisation or a company.
Since the government is refrain from issuing shares (as the
government is not a company), then issuing bonds is one of the alternative used
by the government to obtain source of long-term fund other than bank loans or
the International Monetary Fund (IMF). However for the investors, they will get
the return or fixed interest rate every year for the duration of bond holdings.
Payment of interest on the bonds may be just once a year, 2 times a year or
every quarter of the year, depending on the terms stated in the contract. Interest rates on bonds are known as the
coupon rate.
The bonds that available in the market today are government bonds,
corporate bonds, municipal bonds, international bond, convertible bond,
mortgage bonds and loans from federal agencies.
I) Treasury Bonds :Usually Treasurybond that issued and sold by the government has a
maturity period between 10 to 30 years
with a minimum face value of RM1, 000.00 or
higher. Investors will receive a
coupon rate once or more in a year. Normally, the government will make an early call for
repayment of the bonds at face or par value,
for example 5 years earlier than the maturity date. With this, the government did not have to pay
the coupon rate for the next 5 years. Since these bonds are issued by the government of a country, then
the risk is relatively lower as compared
to other bonds. In order to attract investors,
there is some countries offer tax exemption on income from investments in
treasury bonds.
ii. Corporate Bonds :Issued by private companies or large corporations as a direct
source of long-term financing from the
households’ investor. Corporate bonds
are more risky as compared to
government bonds. Corporate bonds can be
divided into three categories namely
secured bonds, debentures and subordinate debentures.
iii. Municipal Bond: Bonds are issued by state or local government. Some of the bonds
offer tax exemption on revenue and profits on investments. Other features of
the bond are similar to treasury bonds as we discussed earlier.
iv. Convertible Bond: Convertible Bond is the only bond that allows the issuer to change
the status of the bond. Thus, investors who previously bought the bond will
become a shareholder of the company and entitled to receive an annual dividend.
B.
Shares
Investment in shares is a long-term investment. This is because
the shares have no maturity period, and it continues to exist as long as the
companies still exist. Shares can be divided into two types: ordinary shares
and preference shares. Ordinary share is a financial instrument that represents
ownership of a company.
Common stockholders are the true owners of the company and have
the right to vote and determine the direction of the company in the future.
Apart from having the right to vote, they are also entitled to earn any
dividends or profits of the company, however, the dividends of ordinary shares
is flexible due to profit arise. Therefore if the company suffered a loss, the
liability of shareholders is limited to the number of shares they invested in.
The ordinary shareholders will have the right to make a claim on
company’s property when all the debts have been settled. Although common
shareholders bear more risk than preference shareholders, they have more
control and can reap greater benefits in the form of dividends (the dividend of
ordinary shares is not fixed) and increase in the value of shares.
Preference shares have different
characteristics as compared to ordinary shares, in terms of dividends;
preference shares receive fixed dividend payments during the holding period. At
the same time, if the company experienced bankruptcy, property claims will be
paid to ordinary shareholders. The
preference shareholders entitled to namely fixed dividends and also able to
receive an additional dividend at the specified rate after dividend to ordinary
shareholders is amortised. This type of
shares entitled to be paid its dividend twice.
Today, the ordinary shares in
public limited companies can be traded in the open market at the worldwide
stock exchange and it is growing rapidly. In Malaysia, the stock market traded
at the Kuala Lumpur Stock Exchange (KLSE)
2.2.3 Derivatives Market
One of the markets that are blooming
in today’s environment of investment is the Derivatives Market. Derivatives
markets can be described as where a financial instrument is pegged to the value
of an asset or commodity basis. These markets have been introduced since 1975
and are very useful as a way to safeguard the value of commodity price changes
dramatically. These positive market developments will encourage more assets to
be traded including stocks, bonds, commercial papers and, etc. The return on
this investment is depending on the performance of the movement of underlying
asset price. The basic instruments in the Derivatives Market are the Option,
Forward and Futures. (Further discussion in Chapter 7)
Types
of Markets and instruments available.
2.2.4 Differentiate between Money Market and
Capital Market
Based
on early discussion, the Money Market and Capital Marketcan be distinguished on
the basis as follows:-
1. Maturity
Period:
The money market instruments
deals in the lending and borrowing or investing of short-term finance (i.e.,
for one year or less), while the capital market deals in the lending and
borrowing or investing of long-term finance (i.e., for more than one year).
2. Credit
Instruments:
The main credit instruments of
the money market are certificates of deposits, bankers' acceptance, repurchase
agreements, commercial paper and bills of exchange. On the other hand, the main
instruments used in the capital market are stocks, shares, debentures, bonds,
securities of the government.
3. Risk and
Return Exposure:
There are more speculations in the capital market as compare to
the money market because capital market offers longer maturity periods on the
credit instruments. Moreover, higher returns are paid on the securities traded
in thecapital market to compensate the higher risk.
Risk is slightly lower in Money market hence the maturity of one
year or less gives little time for a default to occur.
4. Purpose of Loan:
In terms of financing purposes, the money market meets the
short-term credit needs of business especially to provide working capital to
cover short term operating cost for the business but, the capital market, on
the other hand, caters the long-term credit needs of the industrialists and
provides fixed capital to buy land, machinery, etc.
Dimension
|
Money Market
|
Capital Market
|
Maturity Period
|
Short-term financing (one year or less)
|
Long-term financing
|
Credit Instrument
|
T-bill, Bankers
Acceptance, Certificate of Deposit, Repo & Reverse, etc.
|
Stock, Share,
Debenture, Bond
|
Risk and Return
Exposure
|
Low
|
High
|
Purpose of Loan
|
Financing for working capital
|
To finance fixed capital
|
Table: The differences between Money Market
and Capital Market.
2.3 INITIAL PUBLIC OFFERING (IPO)
Initial Public Offerings (IPOs) is refers to the
process of selling stock by a private company to the public at the first
time. Normally, IPOs are often issued
by smaller or younger companies seeking for additional capital to expand
their business. In investment, IPO also known as ‘going public’.
In an IPO, the issuer obtains the assistance of an
underwriting firm which is investment bank, which helps the company to
determine what type of security to issue (common or preferred).
At the same time, this institution will determine the
best offering price and the right time for the shares to enterthe market.
2.3.1 The Procedure
involved in IPO
The listing procedure in Bursa Malaysia can be divided
into two different categories, Main Market and ACE Market. These two new markets
were introduced by Bursa Malaysia on 3rd August 2009 as a
replacement of Main Board, Second Board and MESDAQ Market in Bursa Malaysia.
|
MAIN
MARKET – merging of Main Board and Second Board
ACE
MARKET – revamp of MESDAQ Market
|
This new framework for
listings and equity fund-raisings is aimed at allowing efficient access to
capital and investments, as well as making Bursa Malaysia a more attractive
platform for Malaysian and foreign companies.
There is a significant shift in the regulatory approach with regards to listings and equity fund-raisings. This shift to a more market-based regulatory approach is to ensure greater efficiency and competitiveness without compromising on investor protection. At the same time it will help the Security Commission in terms of monitoring the corporate governance.
There is a significant shift in the regulatory approach with regards to listings and equity fund-raisings. This shift to a more market-based regulatory approach is to ensure greater efficiency and competitiveness without compromising on investor protection. At the same time it will help the Security Commission in terms of monitoring the corporate governance.
Main Market application requires:-
i.
The Company’s prospectus to be registered with the SC and the
commission will generally complete its assessment and register the IPO
prospectus within 60 working days from the date of a full and complete
application. (As stated under Section 212 of the Capital market and Service Act
2012).
ii.
Comply with the Equity Guidelines and the applicant’s directors
and substantial shareholders are free from any adverse records and corporate
governance issues.
iii.
The IPO prospectus will be reviewed for adequacy of disclosure and
compliance with Prospectus Guidelines- Equity and Debt.
2.3.2 The reasons for IPO
i.
Alternative source of financing
An alternative financing option from conventional bank loans,
which are costly & require fixed terms of repayment. Capital from new shareholders at minimal/ no
cost (save for administrative cost).
ii.
Ability to grow
Growth opportunities with new capital outlay generated from
shares.
iii.
Enhanced image and status of company
Preference often given to listed companies in awarding major
projects as they are generally viewed to be more stable and financially viable
than private held companies.
iv.
Enhanced Liquidity
Liquidity of securities greatly enhanced since quoted securities
are easily tradable & potentially trades at premium. Quoted securities tend
to be accepted by lenders as collateral.
v.
Ability to attract and retain quality employees
Companies are able to attract and retain quality staff &
professionals.
Table
shows the IPO’s in Bursa Malaysia in year 2012
NAME OF COMPANY
(Stock Code / Stock Short Name) |
OFFER PERIOD
|
ISSUE PRICE
(Per Ordinary Share) |
NO OF SHARES
|
LISTING
SOUGHT |
DATE OF
LISTING |
||
Opening
|
Public
Issue (Mil) |
Offer
For Sale
(Mil)
|
Private Placement
(Mil)
|
||||
Astro Malaysia Holdings Berhad
- Retail Offering - Institutional Offering (6399/ASTRO) |
21-09-12
|
RM 3.00
|
259.8
214.4 |
- 1,044 |
-
|
Main
Market
(Trading / Services) |
19-10-2012
|
IGB REAL ESTATE INVESTMENT TRUST
(5227/IGBREIT) |
27-08-12
|
RM 1.25
|
-
|
670
|
-
|
Main
Market
(REITS) |
21-09-2012
|
Datasonic Group Berhad
(5216/DSONIC) |
03-08-12
|
RM 2.00
|
20
|
up to
7.9
|
1.85
|
Main
Market
|
03-09-2012
|
Pasukhas Group Berhad
(0177/PASUKGB) |
02-08-12
|
RM 0.12
|
90
|
-
|
55
|
ACE
Market
(Trading / Services) |
29-08-2012
|
Felda Global Ventures Holdings Berhad
(5222/FGV) |
31-05-12
|
RM 4.55
|
980
|
1,208
|
N/A
|
Main
Market
|
28-06-2012
|
Source:
Bursa Malaysia; Initial Public Offering; Last updated: 13 Dec 2012
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