Thursday, November 18, 2010

Fund-raising for SMEs using Interest Schemes

In the present economic climate there may be one bright spot for entrepreneurs with sound business ideas but who are experiencing challenges to secure funding from traditional sources.

Regulated by the Companies Commission of Malaysia (CCM) the most popular interest schemes at present are promoted in the golf and recreational clubs and timeshare sectors.

The same set of regulations that govern golf and recreational clubs and timeshare sectors are versatile enough to be applied to commercial ventures and enterprises where entrepreneurs commit to sharing the profits or financial returns with investors who are called interest-holders.

To-date, the value of interest schemes approved by the CCM since 2007 is approaching the RM1 billion mark.

Clearly, interest schemes should be recognized as a viable alternative source of fund-raising for Malaysian SMEs.

Solicitation of funds from the public by unapproved schemes

The bane of CCM has been the incidence of enterprises that have solicited funds from the Malaysian public using business models that does not comply with the existing Malaysian regulations.

In using a “Balanced Enforcement” doctrine, the CCM has demonstrated an understanding that many entrepreneurs fail to make the requisite applications to CCM for approval of their interest schemes due to ignorance.

As such, CCM’s approach is to establish a continuous programme to create public awareness that CCM’s regulatory approval is required for common enterprise interest schemes.

Recent CCM actions that have been widely reported include investigative actions for non-compliance by swiftlet schemes and landbanking interest schemes.

General features of a common enterprise interest scheme

While interest schemes promoted in the golf and recreational clubs and timeshare sectors involve the enjoyment for the use of sports, recreational and accommodation, the key feature of a common enterprise interest scheme is the periodic financial yield or return that interest holders can look forward to receiving.

Typically, a common enterprise interest scheme will involve a start-up process where the enterprise is prepared and primed for commencement of business operations. This is where the funds received from interest holders are used to establish and develop the enterprise.

During the start-up phase, the management company for the interest scheme is obliged to commit to pay each interest holder a fixed financial yield or return.

Once the enterprise commences operations, the periodic financial yield or return is calculated as a share of profits from the operations of the enterprise.

Use of independent experts and other safeguards

One measure to safeguard the interest of interest holders, the management company for the interest scheme is required to retain the services of an independent expert in the business operations of the enterprise. For example, an oil palm plantation interest scheme will have its plantation operations audited by the independent expert or, an animal husbandry interest scheme will be operationally audited by a veterinary expert.

The other safeguard is the trustee who represents the interests of all interest holders. In this respect, the role and function of a trustee in a common enterprise scheme is broadly similar to that of golf and recreational clubs and timeshare schemes.

Since interests are taken up be members of the public, a prospectus is necessary.

Efficient alternative fund raising mechanism for SMEs

An interest scheme may prove to be an efficient fund raising mechanism for SMEs with the appropriate business model. It enables an SME to reach out directly to the Malaysian public and, foreign investors, to take up interests in the enterprise.

SMEs involved in agricultural activities, such as oil palm plantations and reafforestation operations and, animal husbandry such as fish-breeding and cattle farming, are suitable candidates to tap into this fund raising mechanism. Boutique hotels and commercial property operators are also suitable candidates.