Interest Schemes Bill 2015 Malaysia

After some gestation time, the Interest Schemes Bill 2015 has been tabled for First Reading at the last Parliamentary Session. With the First Reading, the passage of the legislation should be relatively smooth and we expect to see the enactment some time in 2016.

It is interesting that the Companies Commission of Malaysia (better known with its Bahasa Malaysia name, Suruhanjaya Syarikat Malaysia or SSM) made the determination that the interest scheme sector that has been regulated under the Companies Act 1965 deserves a separate regulatory framework. Many industry players regard this as a positive move.

The Federation of Interest Scheme Operators Malaysia (FISOM) hails this new legislation as an important first step in the SSM's big picture plan to address the crying need for funding solutions for the small and medium enterprises (SME) sector in Malaysia.

In one sense, the Interest Schemes Bill transitions the regulation of right to use public offerings such as sports and recreational clubs and timeshare as well as common enterprise investment models from the Companies Act 1965 to the new regulatory framework.

In another sense, the new Bill offers another alternative to SMEs for medium to long term funding that is quite outside of the conventional capital market and financial market models of equity and debt instruments.

Interest schemes is a medium that facilitates the matching of SMEs with funding needs to expand their enterprises and businesses with astute investors who have an appetite for a regulated exotic investment product that allows them to enjoy direct returns on their investments. Where equity investments depend upon dividend returns, common enterprise investment models offer either contractually committed annual or semi-annual payouts calculated on the percentage value of the investment or, as a percentage of gross profits or net yield.

Due to their relative ignorance of the potential of the Malaysian common enterprise interest scheme sector, the Malaysian capital market intermediaries and the financial press media tend to be reticent and outright cynical about the relative importance and role that common enterprise interest schemes can play in the development of the Malaysian economy. Their conventional wisdom is that only the Securities Commission knows best.

It should be pointed out that the precursor to the Capital Markets and Securities Act 2007 was the Securities Industry Act 1983 that was actually managed and regulated by the Registry of Companies (ROC) which is now better known by its statutory alter ego, the SSM. Within the old ROC was a body known as the Capital Issues Committee (CIC).

It was only in 1993, that the Securities Commission was created from the proverbial rib of the ROC via the Securities Commission Act 1993.

It should also be pointed out that, within the existing regulatory framework, the procedure for the prescription of securities is still at the behest of the Minister responsible for the Companies Act 1965.

It is rather unfortunate that the commonplace perception is that the SSM's statutory role is confined only to the regulation of the incorporation of companies and company secretaries. This misconception must be dispelled through greater public awareness of the important economic role played by the SSM beyond company incorporations and company secretaries.

Together with Bank Negara Malaysia, SSM is the leading regulator that protects Malaysian investors against investment scams. And, as the principal regulator that deals with ALL incorporated business entities in Malaysia, SSM is the most appropriate government agency to look into and, address the need to facilitate the SME sector's funding needs via the common enterprise interest scheme model.

Dismissal of Employees - What Employers Must Do

We have come across far too many incidents involving dismissal of employees in Malaysia where the actual conduct or misconduct of the employee does appear to justify or warrant the decision by the employer to dismiss the employee.

Yet, in many such cases, the employer had an adverse decision from the Industrial Court. 

This has left many employers in Malaysia with the perception that the Malaysian Industrial Court tends to favour the grievances of employees over the the plight of employers who had to deal with a recalcitrant employee.

Are employers correct in this perception?

Of course, that perception is incorrect.

Based on our experience in matters of employment, we find that the Malaysian employers are alarmingly ignorant of some basic principles of dealing with employees on matters of discipline.

First of all, employers must be made aware that in any complaint involving labour and industrial relations, the burden of proof lies with the employer. The employer must prove, always with documentary evidence i.e. letters, emails, memoranda, showing that the employer has conducted itself properly.

So, what is the standard or test used by the Industrial Court to measure an employer's conduct in relation to dismissal of employees?

Other than extreme cases of misconduct, usually involving criminal elements that justifies summary dismissal, the test used by Industrial Court involves 3 steps-

1. Was the employee warned about the poor performance or misconduct? Here, written warnings are 100% better than verbal warning.
2. Was the employee given an opportunity to improve?
3. Despite being given the opportunity to improve, the employee failed to do so.

As with all court matters, the employer can only discharge its burden of proof in 2 basic ways-

• Witness testimony; and
• Documentary evidence.

Documentary evidence is absolutely important. If an employer relies purely on oral evidence from witnesses, there is a high degree of risk that the Industrial Court will not be impressed at all with the employer's conduct.

Why would the Industrial Court be unimpressed?

Employers must understand that by dismissing an employee, the employer has removed the employee's livelihood or means of earning a living. The right to a livelihood is protected by the Federal Constitution.

So, employers must be made aware that the dismissal of an employee is a process. This process must always be in writing and documented.

MyCC tells Professional Bodies to dismantle Scale of Fees

The Malaysia Competition Commission (MyCC) has issued letters to four professional bodies requiring them to dismantle their scale of fees in order to uphold the spirit of competition law. MyCC was of the view that scales of fees fixed by professional bodies were contrary to the provision of Competition Act 2010 (CA 2010). It said the Malaysian Institute of Arbitrators (MIArb) had already dismantled their scale of fees.

MyCC is reported to have given each professional body up to 30 days to comply with its requirements for the dismantling of the fees.

As part of the engagement process with the professional bodies on the fixing of scale of fees, MyCC conducted a public consultation session on May 19, 2014.

MyCC conducted a study on professional bodies which can be found here.

Source: MyCC

Malaysia committed to implementing Trade Facilitation Agreement

Sourced from here.

Malaysia is committed to implementing the Trade Facilitation Agreement (TFA) and is ready to commit almost 100 per cent of the provisions under Category A in the Agreement, which will be notified by July 31, 2014, says Datuk Seri Mustapa Mohamed.

The International Trade and Industry Minister said Malaysia has always been a strong advocate of trade facilitation, pointing out that it benefits both the business community and governments in developed and developing economies as well as create jobs and contribute towards economic growth.

"The global economy requires certainty and predictability and this requires the World Trade Organisation (WTO) and APEC to play a leading role in monitoring trade-distorting and protectionist measures that will have adverse impacts on global economic recovery," he said in a statement Sunday.

Mustapa also emphasised the need to remain vigilant to prevent the proliferation of protectionist and trade-distorting measures, while calling on economies to firmly resist any protectionist measures and refrain from raising barriers to international trade.

"Instead, they should continue efforts towards the establishment of a more liberalised and fair global trading environment.

"In addition, Malaysia supports the proposal to extend the APEC standstill commitment as well as the rollback of protectionist and trade-distorting measures through the end of 2018," he said.

Malaysia is concerned at the lack of progress in concluding WTO's Information Technology Agreement, and urges all parties to move away from their entrenched positions and be pragmatic, he said.

"Malaysia will be actively involved in the negotiations and we hope that all economies can work extra hard for the swift conclusion of the ITA expansion," Mustapa said.

Malaysia supports the new initiative on APEC Strategic Blueprint for Promoting Global Value Chains (GVC), he said, adding the blueprint should be designed to facilitate GVC development through a systematic approach.

The enhanced collaboration among economies will help small and medium enterprises (SMEs) to enhance their capacity and capabilities and encourage investment in value-added activities including manufacturing related services among others, he pointed out.

"In addition, GVC should provide the gateway for SMEs to be integrated into the global network which should be a priority for APEC economies in the years ahead," Mustapa added.

Tough times for trustees in Malaysia

The recent Federal Court decision in the Pesaka Astana bonds case is said to have "rattled the bond market" in Malaysia.

The case involved many issues centering about the duties and responsibilities of the lead arrangers for bond issuances and, equally importantly, the role of trustees in relation to the protection or, "ring fencing" of assets used to secure the bond issuance.

One of the important issues in the case involved the apportionment of liability between the lead arranger and the trustee in relation to the losses suffered by bondholders.

Lead arrangers are off the hook?

The Federal Court decision gave much weight to the cautionary notice contained in information memoranda (IM) and prospectuses. The Federal Court ruling appears to absolve and release lead arrangers from further responsibilities in bond issuances for so long as the cautionary notices are set out and highlighted in IM and prospectuses.

The implication of that ruling appears to put an onerous burden on bondholders to make their own detailed due diligence inquiries on every prospective bond issue.

In the complex and high-speed world of debt markets and capital markets the Federal Court ruling is well and truly a possible "spanner in the works" for the Malaysian debt and capital market.

How much weight to give IM?

Prior to the Federal Court ruling, the debt market practice would be for most bondholders to rely on the representations and advisory contained in IM issued by the issuing company but put together by the lead arranger and advisers.

The dilemma of prospective bondholders in the wake of the Federal Court ruling is, "How much weight do we give representations in the IM?"

This takes the contract principle of caveat emptor to a whole different level in the context of debt markets, in the form of IM and, with possible shockwaves to the capital markets, in the form of prospectuses.

Trustees bear the whole brunt of liability?

That said, what about the plight of the hapless trustee companies who are meant to be the custodians of secured assets in debt instrument issuances?

The risk profile for trustees to act as custodians for debt instruments just went to a completely different level; not in a good way. Actuaries will have their work cut out for them to calculate new liability levels of trustees.

In the matter of apportionment of liability here's the possible score at different stages of the Pesaka Astana bonds case-

Court                    Lead Arranger's liability  Trustee's liability

High Court                60%                                     40%

Court of Appeal        50%                                     50%

Federal Court              0%                                   100%

Interest Schemes, the Malaysian economy and the way forward

In early 2013, just days before the Chinese Lunar New Year, the management company for the Country Heights Growers Scheme (CHGS) announced plans to voluntarily terminate CHGS. 

In order to do so, it needed to convene a General Meeting of CHGS investors, also known as, Growers. The events surrounding the announcement and the lead up to the actual General Meeting was widely covered by the media. As such, there is no need to revisit the events.

Instead, it is far better to examine the nascent Interest Scheme sector and its economic contribution to corporate fundraising for SMEs and, even large corporations.

Fast forward to the present, media reports here indicate that the CHGS investors will begin to receive the first instalment of a full refund of their investment capital and the final annual nett yield payment.

In the wake of the announcement of the voluntary termination and the lead-in into the General Meeting of CHGS investors, many media commentators gave their views. As always, some views were pertinent and many others were borne from knee-jerk and a superficial understanding of the matter at hand.

Now that the dust is settling it is timely to better understand the burgeoning Interest Scheme sector and regulatory challenges.

Regulatory perspectives

Interest Schemes come within the regulatory framework governed by the Companies Commission of Malaysia which is better known as Suruhanjaya Syarikat Malaysia (SSM). 

This regulatory framework deals, among other things, with corporations, enterprises and businesses that seek to create a pool of partners and investors linked by contractual arrangements and a legal trust relationship. The pooling of partners and investors with the goal of sharing enterprise risk and reward is called a "common enterprise".

How did the current regulatory framework fare when tested by recent events?

Firstly, the mechanism followed assiduously by the voluntary termination of an interest scheme is materially similar  to many approved corporate debt financing schemes in the Malaysian and, even international, capital market. 

Secondly, the regulatory framework is in line with basic and internationally-accepted principles of corporate regulation on the matter of investor protection. In particular, each new partner or investor must be given the latest copy of the prospectus governing an SSM-approved common enterprise scheme. 

Thirdly, still on the matter of investor protection, risk factors are categorically set out in each prospectus together with an audited financial statement that details the state of play of the scheme promoter and the underlying enterprise. The prospectus for each common enterprise scheme is required to be renewed and updated every 6 months.

Fourthly, SSM requires an independent consultant with experience and familiarity with the underlying enterprise, be it oil palm plantations, agro-fisheries or technology enterprise, to audit the enterprise operations and prepare a report for inclusion in the prospectus and updated with each renewal.

Add to the above factors many compliance features including monitoring of funds flows and site visits and inspection by SSM officials and the scheme's trustees, there are adequate safeguards directed primarily at the basic principle of investor protection. These safeguards are in line with the best regulatory practices adopted by capital market regulations.

Business risks and returns

A reasonable comment from an objective reading of the the matters set out above would be; if the regulatory framework and safeguards were all that good, then, why was there a need for voluntary termination by an interest scheme?

The starting point is to recognise that investing in a  business enterprise is all about risks and returns. As such, in the context of good corporate governance and regulations, every corporation that seeks to reach out to the investing public for funds are required to prepare a prospectus.

This is true for corporations operating in the capital market regulated by the Securities Commission and true also, for bank and financial institutions regulated by Bank Negara Malaysia. This is equally true for corporations seeking to raise funds under common enterprise schemes regulated by the SSM.

Even with the detailed regulations and guidelines for corporations operating in the capital market there have been occurrences of  corporate issues surrounding so-called privatisation exercises by public-listed corporations. For example the privatisation of Maxis and more recently MISC. In almost all cases of such privatisations, there have been minority shareholders who disagreed with the privatisation plan. Still, in accordance with the rules and regulations available, the will of the majority prevailed. This is how it should be under current corporate governance principles.

In fairness to SSM and the Interest Scheme sector, there are many material similarities between privatisation exercises in the capital market when compared with voluntary termination of an Interest Scheme. This is something media commentators overlooked.

Investor protection

What do these capital market occurrences tell us when we review the Malaysian Interest Scheme sector?

We can surmise that regulators and stakeholders must be ever vigilant about corporations that tap public investment funds. This is the all-important corporate governance principle of investor protection.

In spite of the best efforts of regulators and stakeholders, do investor protection provisions cater for the ever-changing environment of businesses?

In the event where there is intentional corporate malfeasance, do the investor protection provisions truly protect the investors?  Can more be done to protect investors?

What happens when business enterprises are operating properly, as was  evidently the case with CHGS whose oil palm plantations was in profit, except that the level of profits was not commensurate with the nett yield obligations?  Would investors wish to vote for the Scheme to remain operating and for the nett yield obligations to be varied?  Or would a buyback option or put option mechanism accord a better protection?

The intent behind corporate regulations including those applicable to Interest Schemes is to institute and ensure disclosure of business risks by requiring timely disclosures of corporate financial and operational health. 

A closer examination of the prospectuses published by Interest Scheme companies will show that such disclosures are contained in chapters on the accountant's report and the report of the independent consultant.

Disclosure obligations under Interest Scheme regulations compares favourably with disclosure rules in the capital market. Naturally, there is always room for improvement.

That said, public investors and regulators need to recognise that it is impossible to eliminate business risks.

The way forward for Interest Scheme regulations

It should be noted that in spite of occasional controversy by participants in their jurisdiction neither the Securities Commission nor Bank Negara Malaysia has ever shrunk away from regulating existing corporate activities in their respective jurisdictions.

Nor have either regulator shrunk away from further approvals of new corporate activities.

The SSM should, likewise, continue to strengthen the regulatory framework for Interest Schemes and continue to encourage and cultivate SMEs and large corporations to conduct corporate fundraising through Interest Schemes.

The Australian experience in this self-same area is very relevant and instructive. What we, in Malaysia, call Interest Schemes are known as Managed Investment Schemes (MIS) in Australia.

Has the Australian MIS sector been problem-free since its rise in the 1980s? Of course, not. You can read about some bad episodes here and here.

The point for the SSM to note is that its fellow regulators in the form of the Securities Commission, Bank Negara Malaysia and, even the Australian Securities and Investments Commission (ASIC) have endured corporate failures by market participants in their respective jurisdictions.

And, more to the point, not once did any of these regulators declare that they were abandoning the processing and approval of new entrants.

The reason is pure and simple; corporate activities such as corporate fundraising via Interest Schemes are part and parcel of the economic rubric.

Remove avenues such as Interest Schemes and the Malaysian economy would be that much poorer.

And, let's not even get started on the futility of policing unregulated corporate fundraising schemes if there is no avenue to allow promoters of such schemes to comply with regulations.

So, the hope expressed here is that SSM shrugs off the naysayers and dusts off the negativity in order to move forward to strengthen Interest Scheme regulations and continue the all-important role of processing and approval of new entrants for the benefit of the Malaysian economy.

Additional perspectives can be found here.

Land banking companies in UK found guilty of unlawful investment sales

James Maynard of Countrywide Land Holdings faces ban and £32m fine to FSA for unauthorised sales to UK consumers

The Financial Services Authority (FSA) found three land banking companies guilty of unlawfully selling plots of land to UK consumers, and imposed a ban and fines of £33m. Photograph: Clive Gee/PA

Jill Insley

guardian.co.uk, Wed 21 Mar 2012 11.55 GMT

Three land banking companies who sold plots of land unlawfully to UK consumers have been ordered to pay a total of £33m to the Financial Services Authority.

The high court ruled that James Kenneth Maynard, Countrywide Land Holdings Limited (Countrywide) and Plateau Development & Land Limited (Plateau) operated collective investment schemes without authorisation.

Maynard, who operated through the trading names Regional Land and Countrywide, has been banned for life from selling for business purposes in the UK, and has been ordered to pay just under £32m to the FSA. A bankruptcy order has also been made against Maynard, who is believed to be living in Northern Cyprus.

Plateau, which is now in liquidation, was instructed to pay £918,975, while the firm's director Wasim Minhas, has been ordered to pay £75,000.

However, the regulator has warned that victims are unlikely to get any of their money back. Although the FSA is trying to trace the funds paid by investors, it not yet identified any assets that would enable more than a small proportion of these payments to be made, and therefore it is unclear how much will ultimately be returned to investors.

Maynard, Countrywide and Plateau sold plots of land across the UK with the promise that investors would make a significant profit when the land obtained planning permission and was sold. Investors were also told by sales staff that Maynard, Countrywide and Plateau would apply for planning permission for the land or that they had corporate buyers lined up to purchase the sites.

In reality there was no intention to seek planning permission or help buyers sell their land and the plots were in locations unlikely to ever gain planning permission, such as areas of outstanding natural beauty.

The Guardian and Observer warned readers about the risks of investing in land banking as far back as 2006.

The FSA first obtained injunctions against Maynard and Countrywide in August 2010 to freeze assets and stop them from selling more land. But the regulator then discovered that Plateau had been set up subsequently to continue the business. It secured a similar injunction against Plateau in December 2010.

The FSA does not regulate the sale of land, but deemed that land banking amounted to a collective investment which does require its authorisation.

Because these schemes were unauthorised, their victims are not protected by the Financial Services Compensation Scheme.

Tracy McDermott, acting director of enforcement and financial crime at the FSA, said: "We have to be realistic about the low probability of securing meaningful compensation for victims of these scams, but this is still an important victory. Proving that a land bank is operating a collective investment scheme – and should therefore be FSA authorised – is very complicated, so every success puts us in a stronger position to tackle other schemes."

McDermott said the decision should send a clear message to other land banks.

"We have also started court actions against others that we believe have been involved in Maynard's scheme.

"Anybody investing in land should always have it independently valued to check its worth. Furthermore, if you are ever sold land as an investment with the promise of fabulous returns, and on the basis that someone else will manage it for you as part of a wider site, you should check the firm is authorised by us."

Anyone who believes that they may have been contacted by a land banking operation or any other unauthorised financial services provider can call the FSA's consumer helpline for guidance: 0845 606 1234. The regulator has produced a video explaining what land banks are which is available on the FSA website.

Sourced from here.