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Security Issues in the Secondary Market

posted 1 month ago

What is Secondary Market

The secondary market refers to a financial market where investors trade previously issued financial instruments and securities after a company has made an initial public offering of its securities on the primary market. It is a market where securities that were previously sold in the primary market are traded among investors rather than being sold directly by the issuing company.

The secondary market facilitates liquidity for investors, allowing them to sell their securities readily and expeditiously should the need arise to access funds.

As such, the terms ‘secondary market’ and ‘stock market’ or ‘stock exchange’ are used interchangeably.

Capital Raising Securities

Upon successfully floating its securities through a primary market transaction and securing a listing of its securities on Bursa Malaysia, a diverse array of alternative capital-raising opportunities emerges. These avenues allow the company’s shareholders and the market at large to be approached for additional issuances of equity and debt securities.

Modes of Issuing Securities

Listed companies have at their disposal a range of methods to issue additional securities. While some of these issues may be aimed at raising equity capital to facilitate business expansion or diversification, others serve different purposes. The following are brief discussions of some of these modes of issuing securities on the secondary market.

Public Issue

A public issue represents the issuance of new shares available for public sale at a price agreed by the issuer and its Principal Adviser.

Rights Issue

The issuance of new shares to existing shareholders for cash, typically at an advantageous price (discounted from the current pre-announcement market price), constitutes a right issue.

It is a requirement that a rights issue is renounceable, allowing shareholders to either subscribe to the new shares or sell their rights, in whole or in part, to a third party on Bursa Malaysia. Additionally, any rights issues without irrevocable written undertakings from shareholders to subscribe to their full entitlement must be underwritten.

Private Placement

A private placement involves the issuance of securities that are not available to the general public but are instead offered to independent parties who are not under the control or influence of the issuer’s directors or substantial shareholders.

The pricing of these securities is typically based on the weighted average market price of the shares over the preceding five days before the placement takes place.

Issues for Acquisitions, Take-overs, Mergers

The issuance of shares for acquisitions, take-overs, mergers of another company involves offering shares to acquire assets or capital from the other entity. This process may lead to dilution of existing shareholders’ holdings, prompting the listed issuer to negotiate for the highest possible value for their shares to mitigate the dilution impact.

Issue of Shares from Conversion of Warrants and Convertibles

This is an additional issue of shares to holders of other classes of securities (such as warrants and convertible securities) upon exercise or conversion of securities held. When they are issued, warrants are usually bundled together with debt securities (particularly bonds).

The holder of a warrant has the right to purchase a proportional quantity of shares from the issuing company at a pre-established price during a specified timeframe.

Convertible securities, on the other hand, are a form of deferred equity. The company can secure funds upon issuance, while the holder of convertible loans has the option to convert them into company shares at a predetermined price within a specified timeframe.

Warrants and convertible securities are commonly issued by companies undertaking projects with extended development periods. The issuance is strategically timed so that the expiration of warrants or convertible securities, which results in the issuance of additional company shares, aligns with the period when potential earnings from the projects begin to materialize. As a result, the subsequent issuance of shares is anticipated to be strengthened by the increased earnings of the company.

Issue of shares from ESOS

Certain companies offer Employee Share Option Scheme (ESOS) to their staff, aiming to, amongst other things, foster allegiance and loyalty to the organization. This grants employees the opportunity to acquire a specified quantity of company shares within a timeframe, up to a maximum of 10 years, at a predetermined exercise price.

Bonus Issue

This is an offer given to the existing shareholders of the company to subscribe for additional shares at zero cost in specified proportion of shares that they already held.

Bonus issue does not involve any cash outflow, rather only book entries in the accounts of the company for the transfer of the company’s retained profits or reserves available to the share capital account to pay up the bonus shares which are to be distributed to the shareholders. Thus, there are no changes to the worth of the company.

Legal dimensions, their Objectives, and Safeguarding Investors

The legal dimensions pertaining to securities issuance in the secondary market in Malaysia encompass a diverse array of regulations and factors, all directed towards the objectives of fostering transparency, equity, and safeguarding the interests of investors. Essential legal facets governing this area is discussed below.

Regulatory Framework

Securities issuance within the secondary market is governed by an extensive regulatory framework established by authorities such as the Securities Commission Malaysia (SC) and Bursa Malaysia. These regulations outline the requirements and processes on the issuance, trading and listing of securities on the secondary market.

Chapter 6 of Bursa Malaysia’s Listing Requirements sets out the requirements that must be complied with by the company for any new issue of securities.

Companies seeking to issue new securities is required to submit to Bursa Malaysia an application for the listing of and quotation of the new shares to be issued as well as seek its shareholders’ approval prior to such issuance of securities and adhere to the specific requirements as set out in Chapter 6 of the Listing Requirements.

Disclosure Obligations

Issuers of securities on the secondary market are typically mandated to furnish exhaustive and precise information to investors. This entails providing, inter alia, financial statements, reports, prospectuses, information memorandums and other pertinent disclosures to enable investors to make informed investment decisions.

Chapter 9 of the Listing Requirements mandates that any proposed issue or offer of securities must make an immediate announcement to Bursa Malaysia and such announcement must contain all information as set out in Part A of Appendix 6A of the Listing Requirements.

Prevention of Insider Trading and Market Manipulation

Legislative and regulatory provisions are in place to prohibit insider trading and market manipulation, safeguarding against the unauthorized exploitation of confidential information or the manipulation of security prices for personal gain. These measures are implemented to maintain market integrity and ensure fair treatment of all investors.

Insider trading happens when an individual holds confidential information that, if disclosed, would significantly impact the price or value of the company’s securities, and then engages in trading or transactions involving those securities.

According to the Capital Markets Act 2007, insider trading constitutes a criminal offence. If convicted under sections 188(2) or (3), the perpetrator faces a minimum fine of RM1,000,000 and a maximum prison sentence of 10 years.

Corporate Governance Standards

Malaysia has made significant strides in enhancing corporate governance practices with the aim of promoting transparency, accountability and ethical behavior.

The Malaysian Code on Corporate Governance (MCCG) sets out principles and best practices to guide companies in improving their corporate governance standards. It covers areas such as board composition, responsibilities of the board and management, risk management and disclosure practices.

Regulatory authorities do actively monitor and enforce compliance with such corporate governance regulations with penalties and sanctions in place on companies and individuals found to be in violation of these regulations.

Enforcement Mechanisms and Penalties

Entities such as SC and Bursa Malaysia possess authority to enforce securities laws and regulations, enabling them to investigate and impose penalties for any breaches. Violations may lead to consequences such as fines, sanctions and legal actions to ensure that the integrity of the marketplace and in turn, reflect genuine market supply and demand.

Authorities are equipped with numerous enforcement actions against violations of regulations concerning market misconduct and abusive trading practices. These actions were taken in response to activities that lead to false or misleading appearances of active trading or manipulated the prices or markets for securities and derivatives.

The type of penalties taken is determined on a case-by-case basis depending on considerations such as the severity of the misconduct or breach, its duration and frequency, its impact on the public or market, any ill-gotten gains and whether the actions were intentional or reckless. Violations that significantly impact the market, causing harm and disrupting its orderly operation, are subject to a more severe penalty.

In a Nutshell

The legal framework governing securities issuance in the secondary market is comprehensive and meticulously crafted to address various aspects of market operation and investor protection.

The regulations are designed to instill confidence among investors by setting clear guidelines and standards to provide the necessary assurance their investments are being conducted in a transparent and regulated environment.

Preservation of market integrity is also a key focus of the regulatory framework. Market integrity ensures that transactions are conducted fairly and that prices reflect supply and demand dynamics. Regulations against market manipulation and insider trading help maintain a level playing field for all participants.

The regulatory framework too, aims to facilitate the efficient operation of capital markets. By establishing rules for timely and accurate disclosure of information and standards for corporate governance and market conduct, the framework ensure that capital flows smoothly and efficiently between investors and companies.

Overall, the legal intricacies governing securities issuance in Malaysia’s secondary market are essential for fostering investor confidence, preserving market integrity, and ensuring the efficient operation of capital markets. Compliance is crucial for all stakeholders to uphold the integrity of the securities market and contribute to its long-term sustainability.

About the author

Laurel Lim Mei Ying
Corporate & Commercial
Halim Hong & Quek
[email protected]

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