Shearn Delamore & Co Newsletter December 2017

Vol 16 No 4 | December 2017

In this Issue:

INTELLECTUAL PROPERTY

The Chatime Dispute — La Kaffa International Co Ltd v Loob Holdings Sdn Bhd and Another Case[1]

IN THIS ARTICLE, PAW YING HUI ANALYSES THE HIGH COURT CASE OF LA KAFFA INTERNATIONAL CO LTD V LOOB HOLDINGS SDN BHD[2] (WHICH WAS HEARD TOGETHER WITH THE HIGH COURT CASE OF LOOB HOLDING SDN BHD V LA KAFFA INTERNATIONAL CO LTD[3] IN THE CONTEXT OF GRANTING INJUNCTIVE RELIEF IN PENDING ARBITRAL PROCEEDINGS.

Background

La Kaffa and Loob first entered into a Regional Exclusive Distribution Cooperation Agreement (“REDCA”) which had provided for La Kaffa to be a franchisor and Loob to be the master franchisee of the Chatime franchise in Malaysia. A later agreement, the Regional Exclusive Representation Agreement (“RERA”), was entered into. This superseded the REDCA.

Subsequently, a dispute arose where La Kaffa alleged that Loob committed the following breaches:

In view of the alleged breaches, La Kaffa commenced arbitral proceedings in Singapore against Loob. Loob gave a notice of counterclaim alleging that La Kaffa had breached the RERA.

The following reliefs were sought by La Kaffa in the Malaysian High Court:

Power of the Court to grant injunction

The Judge held, amongst others, that the Court may only grant interim measures which will facilitate the arbitration. In doing so, the Court must not decide on the merits of the dispute which should only be decided by the arbitral tribunal.

Relief v

The Court held that La Kaffa has an unusually strong and clear case for the Court to grant an interim mandatory injunction to compel Loob to return Chatime materials and La Kaffa’s proprietary information to La Kaffa.

The Court considered the fact that Loob has started its Tealive franchise and had stopped using Chatime materials. Further, Loob had accepted La Kaffa’s termination of the RERA. This relief was conceded to by Loob.

Relief iv

La Kaffa contended that Loob has committed the tort of passing off as the TeaLive franchise business rides on La Kaffa’s goodwill. It was also submitted that, alternatively, Loob had committed the tort of inverse passing off by passing off beverages made up of La Kaffa’s proprietary information as Tealive beverages.

However, the Court refused to grant an injunction as it would not support, assist, aid or facilitate the arbitral porceedings in Singapore. The Court further explained that, in the event such a tort can be established, a suit can be filed against Loob seeking final relief rather than an interim measure.

Relief i-iii

The relevant sections of the Franchise Act 1998 (“FA”) which the counsel relied on for La Kaffa sought to rely on are:

Despite the wording of section 27(1) of the FA which provides that a written guarantee shall be given by a franchisee to a franchisor that “the franchisee … shall not carry on any other business similar to the franchised business operated by the franchisee”, the Court held that sections 26 and 27 of the FA do not incorporate the guarantees into franchise agreements. The Court based its decision for the following reasons:

In relation to section 28(1), the Court explained that the section does not apply as there was no provision in the RERA which has the effect of binding La Kaffa or Loob to waive compliance with any provision in the FA.

The Court held the following:

Conclusion

The Court ordered Loob to:

subject to undertakings.

PAW YING HUI
INTELLECTUAL PROPERTY PRACTICE GROUP

[1] [2017] MLJU 1243
[2] ORIGINATING SUMMONS NO: WA-24IP-3-02/2017
[3] ORIGINATING SUMMONS NO: WA-24IP-6-03/2017

TAX & REVENUE

Budget 2018 Highlights

IN THIS ARTICLE, BOO SHA-LYN HIGHLIGHTS SOME OF THE TAX PROVISIONS IN THE RECENT 2018 BUDGET.

The Prime Minister, Datuk Seri Najib Tun Razak, tabled Budget 2018 in his capacity as Finance Minister on 27 October 2017, with the theme: “Prospering An Inclusive Economy, Balancing Between Worldly and Hereafter, For The Wellbeing of Rakyat, Towards TN50 Aspiration”.

Several key highlights from Budget 2018 are discussed below and, unless otherwise stated, the budgetary proposals will take effect from Year of Assessment (“Y/A”) 2018 when passed by Parliament

Corporate tax

Participation in the Organisation for Economic Cooperation and Development (“OECD”) taxation initiatives

In his 2018 Budget speech, Datuk Seri Najib Tun Razak announced that Malaysia is committed to fulfilling the OECD’s BEPS Action Plan Initiative.

Implementation of earning stripping rules to replace thin capitalisation rules

In line with various initiatives of the OECD to curb aggressive tax planning between related companies, Malaysia had initially introduced the Thin Capitalisation Rules (“TCR”) during the 2009 Budget and its implementation was deferred until 31 December 2017 to provide taxpayers with adequate time for its implementation.

However, as the OECD has recently recommended a new initiative, namely the Earning Stripping Rules (“ESR”), the Budget 2018 proposes that the ESR be implemented in place of TCR in order to address tax leakages due to excessive interest claims on loans made between related companies and to comply with transfer pricing guidelines.

Under the ESR, the interest deduction on loans between related companies will be limited to a ratio as determined by the country’s tax authority, ranging from 10% to 30% of the company’s profit before tax either using the Earning Before Interest and Taxes (“EBIT”) or the Earning Before Interest, Tax, Depreciation and Amortisation (“EBITDA”) formulas.

Effective from 1 January 2019.

Capital allowance for information and communication technology (“ICT”) equipment and software

In order to assist companies remain competitive in the digital era and to adopt the latest technology, the Government proposes that capital allowances be given on the following capital expenditure:

Goods and Services Tax (“GST”)

Merger of Customs Appeal Tribunal (“CAT”) and Goods and Services Tax Appeal Tribunal (“GSTAT”)

The Government proposes to merge the CAT and GSTAT and all appeals relating to the decision of the Director General of Customs are to be heard by a single Tribunal — CAT. Through this merger, taxpayers or companies aggrieved by the decision of the Director General of Customs on either customs or GST matters may submit their appeal to CAT.

This comes into effect from 1 January 2019.

Harmonising GST treatment on reading materials

It is proposed that the GST treatment on magazines, journals, periodicals and comics (which are currently subject to GST standard rate of 6%) be harmonised with the treatment on all types of books which are reading materials (which are zero-rated supplies) so as to be similarly considered as zero-rated supplies.

This comes into effect on 1 January 2018.

Harmonising GST treatment on management and maintenance services of stratified residential buildings

In order to harmonise GST treatment on management and maintenance services (including cost recovery of group insurance, quit rent and land assessments) of stratified residential buildings which are supplied by a joint management body and management corporation to owners of houses held under strata titles, it is proposed that such services supplied by housing developers are to be also treated as an exempt supply.

Currently, the provisions of the above services by parties other than joint management bodies and management corporations, such as housing developers, are subject to GST at 6%.

This comes into effect on 1 January 2018.

GST relief on big ticket items

To promote investment in new and modern assets and enhance Malaysia’s competitiveness in the aviation, shipping and oil and gas industries as well as to improve the cash flow position of companies, the Government proposes that companies carrying out activities in these industries be given relief from paying GST on the importation of big ticket items.

The list of big ticket items and the terms and conditions of approvals are to be stipulated by the Minister of Finance. This comes into effect on 1 January 2018.

Tax exemptions and incentives

Exemption on the Green Sustainable and Responsible Investments (“Green SRI”) Sukuk grant

To encourage the issuance of Green SRI sukuk, the Government proposes that income tax exemption be given to each recipient of the Green SRI sukuk grant to finance the external review expenditure in line with the guidelines as set out by the Securities Commission Malaysia (“SCM”). This is effective for applications received by the SCM from 1 January 2018 to 31 December 2020.

Exemption on management fee income for Sustainable and Responsible Investment (“SRI”) funds

To further promote fund management activities globally, it is proposed that fund managers managing a SRI fund (approved by the SCM) be given tax exemptions on management fee income from managing conventional and Shariah-compliant SRI funds. This is effective from Y/A 2018 to Y/A 2020.

Incentive for automation

To further promote automation in the manufacturing sector, particularly in enhancing productivity and efficiency in the labour intensive industries, the incentive period in regard to labour-intensive industries (rubber, plastic, wood and textile products) is extended for another three years. Manufacturing companies in these industries will therefore be eligible for Accelerated Capital Allowance (“ACA”) of 100% and Automation Equipment Allowance (“AEA”) of 100% on the first RM4 million for qualifying expenditure incurred during the relevant basis periods. This allowance is fully claimable within one year.

This is effective for applications received by the Malaysian Investment Development Authority (“MIDA”) from 1 January 2018 to 31 December 2020.

Incentive for transformation to industry 4.0

To encourage the transformation to Industry 4.0 which involves the adoption of technology drivers by the manufacturing sector and its related services, it is proposed that the ACA and AEA be provided on the first RM10 million qualifying capital expenditure incurred in Y/A 2018 to Y/A 2020 and is fully claimable within two years of assessment.

This is effective for applications received by MIDA from 1 January 2018 to 31 December 2020.

Incentive for Principal Hub

Tax incentives for Principal Hub was introduced in 2015 by offering income tax exemption according to three-tier preferential tax rates of 0%, 5% or 10% based on certain criteria. To further strengthen Malaysia’s competitive position as a global operations centre for multinational companies, particularly in strategic services activities, it is proposed that the Principal Hub incentive be extended for another three years while adhering to the criteria of Forum on Harmful Tax Practices.

This is effective for applications received by MIDA until 31 December 2020.

Incentive for hiring the disabled

To support those who have been affected by accidents/critical illnesses and are able to secure suitable employment, the Government proposes that a further deduction be given to their employers. The Medical Board of the Social Security Organisation (“SOCSO”) would need to certify that these employees are able to work within their capabilities.

Extension of incentive for four and five Star Hotels

Currently, for applications received until 31 December 2018, new four and five star hotels enjoy the following tax incentives:

In order to promote the tourism sector and in line with the Visit Malaysia Year 2020 campaign, it is proposed that the application period for existing tax incentives for investments in new four star and five star hotels in Peninsular Malaysia, Sabah and Sarawak be extended for another two years until 2020.

This is effective for applications submitted to MIDA until 31 December 2020.

Extension of incentive for tour operating companies

Currently, tour operating companies are given 100% income tax exemption on their statutory income derived from the business of operating tour packages as follows:

tour packages within Malaysia participated by not less than 1,500 local tourists annually; and
tour packages to Malaysia participated by not less than 750 foreign tourists annually.

To further encourage tour operating companies to boost tourism activities in conjunction with the Visit Malaysia Year 2020 campaign, it is proposed that the above tax incentives be extended for another two years until Y/A 2020.

Extension of incentive for medical tourism

The current incentive for medical tourism is a tax exemption on statutory income equivalent to Investment Tax Allowance of 100% of qualifying capital expenditure for a period of five years and which can be set-off with up to 100% statutory income (subject to several conditions). It is proposed that the application period for the tax incentive for new and existing companies carrying out a new investment or which will be undertaking an expansion, modernisation or refurbishment of private healthcare services be extended for another three years, subject to the following conditions:

at least 10% of the total number of patients receiving private healthcare services are comprised of qualified healthcare travellers per Y/A; and
at least 10% of the company’s gross income is derived from qualified healthcare travellers for each Y/A.

This exemption is applicable to applications submitted to MIDA until 31 December 2020.

Incentives for export of private healthcare services

To promote growth in healthcare services and establish Malaysia as a healthcare hub for foreign patients, it is proposed that the level of tax exemption on income derived from the export of healthcare services to foreign clients either in Malaysia or from Malaysia be increased from 50% to 100% of the value of increased exports of services and to be set-off against 70% of statutory income, subject to the following conditions:

at least 10% of the total number of patients receiving private healthcare services comprise of qualified healthcare travellers per Y/A; and
at least 10% of the company’s gross income is derived from qualified healthcare travellers for each Y/A.

This exemption is applicable from Y/A 2018 to Y/A 2020.

Expansion of scope of double deduction incentive for expenses incurred in obtaining certification for quality system and standard

To build the confidence of healthcare travellers on the level of safety and quality of services offered, it is proposed that companies that provide dental and ambulatory healthcare services and are registered with Malaysia Healthcare Travel Council be given double deduction for expenses incurred in obtaining certification for quality systems and standards from the approved certification bodies.

Incentives for venture capital

The Government proposes the following tax treatment:

Venture Capital Management Corporation

Income which is exempted from tax to be expanded to include income received from management fees and performance fees in managing Venture Capital Company funds.

Venture Capital Company
1. the investment limit in the venture company at the seed, start-up and early stages be reduced from 70% to 50% and the 50% balance is allowed for other investments; and
2. companies or individuals with business income investing into the Venture Capital Company funds created by the Venture Capital Management Corporation be given tax deduction equivalent to the amount of investment made and restricted to a maximum of RM20 million per year for each company or individual.

This tax exemption will be given for the period of five years from Y/A 2018 until Y/A 2022 for applications received by the SCM from 1 January 2018 until 31 December 2018.

Extension of incentive for angel investors

Angel investors who invest in investee companies in the form of ordinary shares are currently entitled for tax exemption equivalent to the amount of investment made in the investee companies (subject to several conditions). To attract prospective angel investors to contribute to economic activities through capital injection in investee companies, it is proposed that the application period for this tax incentive be extended for another three years for applications submitted to the Ministry of Finance from 1 January 2018 until 31 December 2020.

Personal tax

Reduction of individual income tax rates

As a measure to increase the disposable income of the middle income group and to address the rising cost of living, the Government has proposed that individual income tax rates for resident individuals be reduced by 2% for the following three chargeable income bands as follows:

Incentive for women returning to work after career break

To encourage women who have been on a career break of at least two years on 27 October 2017 to return to the workforce, it is proposed that their employment income up to a maximum of 12 consecutive months be given individual income tax exemption.

Applications can be submitted to Talent Corporation Malaysia Berhad from 1 January 2018 to 31 December 2019 for approval of the income tax exemption which is to be claimed in Y/A 2018 to Y/A 2020.

Exemption on rental income from residential homes received by Malaysian resident individuals

To encourage Malaysian resident individuals to rent out residential homes at reasonable rates, it is proposed that 50% income tax exemption be given on rental income received by Malaysian individuals subject to the following conditions:

rental income received does not exceed RM2,000 per month for each residential home;
the residential home must be rented under a legal tenancy agreement between the owner and the tenant; and
tax exemption is given for a maximum period of three consecutive years of assessment.

This comes into effect from Y/A 2018 until Y/A 2020.

Stamp duty

Extension of period for stamp duty exemption to revive abandoned housing projects

To further ease financial burden on the original house purchasers and to encourage the involvement of rescuing contractors to revive abandoned housing projects, it is proposed that the existing stamp duty exemptions (as described in the table below) be extended for another three years:

The exemption would be applicable to loan agreements and memorandums of transfer executed from 1 January to 2018 to 31 December 2020 for abandoned housing projects certified by the Ministry of Urban Wellbeing, Housing and Local Government.

Exemption for Trading of Exchange Traded Funds (“ETF”) and Structured Warrants (“SW”)

To further promote development of the capital market and to make Malaysia’s capital market more competitive at the international level, the Government proposes that stamp duty exemptions be given on contract notes for trading of ETF and SW by investors executed from 1 January 2018 to 31 December 2020.

BOO SHA-LYN
TAX & REVENUE PRACTICE GROUP

DISPUTE RESOLUTION

Is a Chargee Bank Acquiring its Interest from a Fraudulent Purchaser Protected?

IN THIS ARTICLE, TAN CHUAN YI DISCUSSES THE CASE OF CIMB BANK BHD V AMBANK (M) BHD[1].

In CIMB Bank Bhd v AmBank (M) Bhd & Ors, the Federal Court had the opportunity to consider whether the chargee bank that obtained its interest from a fraudulent purchaser was entitled to the protection under the proviso to section 340(3) of the National Land Code (“NLC”).

The facts

On 23 March 2006, the owners (“the Chings”) of a piece of land (“the Property”) executed a charge on the Property in favour of Southern Bank Berhad (“SBB”) as a security for a banking facility. SBB’s banking business was transferred to CIMB Bank Berhad (“CIMB”).

On 4 November 2008, Wong Chee Keong (“Wong”) applied for a loan from AmBank to finance the purchase of the Property and charged the Property to AmBank as security for the loan. Wong’s solicitors informed AmBank’s solicitors that Wong had settled the differential sum between the balance purchase price and the loan sum and the Chings had settled the outstanding loan due to CIMB.

AmBank’s solicitors also received the Issue Document of Title (“IDT”) of the Property, duly stamped memorandum of transfer (“MOT”) and discharge of CIMB’s charge via Form 16N. AmBank was then registered as chargee of the Property and it was later discovered that the discharge of CIMB’s charge was forged. CIMB and AmBank both claimed as the interest holder in the Property.

Decision of the High Court and Court of Appeal

The High Court decided in favour of CIMB and ruled that AmBank was an immediate purchaser and hence their interest was not protected under the proviso to section 340(3) of the NLC.

The Court of Appeal, however, held that AmBank was a subsequent purchaser and therefore was protected by the proviso to section 340(3) of the NLC in accordance with the deferred indefeasibility principle.

The law

Sub-sections (2) and (3) of section 340 of the NLC provide:

“(2) The title or interest of any such person or body shall not be indefeasible —

(a) in any case of fraud or misrepresentation to which the person or body, or any agent of the person or body, was a party or privy; or

(b) where registration was obtained by forgery, or by means of an insufficient or void instrument; or

(c) where the title or interest was unlawfully acquired by the person or body in the purported exercise of any power or authority conferred by any written law.

(3) Where the title or interest of any person or body is defeasible by reason of any of the circumstances specified in subsection (2) —

(a) it shall be liable to be set aside in the hands of any person or body to whom it may subsequently be transferred; and

(b) any interest subsequently granted there out shall be liable to be set aside in the hands of any person or body in whom it is for the time being vested:

Provided that nothing in this subsection shall affect any title or interest acquired by any purchaser in good faith and for valuable consideration, or by any person or body claiming through or under such a purchaser.”

In the Federal Court case of Tan Ying Hong v Tan Sian San & Ors[2], Arifin Zakaria CJ held at [52] and [53] that section 340(3) could not apply to an immediate transferee of any title or interest in any land.

It was further held that the Federal Court erred in an earlier decision of Adorna Properties Sdn Bhd v Boonsom Boonyanit[3] for giving recognition to immediate indefeasibility that was contrary to the provision of section 340 of the NLC.

In Kamarulzaman Omar v Ors v Yakub Husin & Ors[4], Jeffrey Tan FCJ held at [41]:

“Whenever a registered title or interest is sought to be set aside under s. 340, first ascertain whether the title or interest under challenge is registered in the name of an immediate purchaser or a subsequent purchaser. If the title or interest is registered in the name of an immediate purchaser, the bona fide of the immediate purchaser will not offer a shield of indefeasibility. The title or interest of an immediate purchaser is still liable to be set aside if any of the vitiating elements as set out in s. 340(2) had been made out. If the title or interest is registered in the name of a subsequent purchaser, then the vitiating elements in s. 340(2) would not affect the title or interest of a bona fide subsequent purchaser. The title or interest of a subsequent purchaser is only liable to be set aside if the subsequent purchaser is not a bona fide subsequent purchaser. The title or interest acquired by a subsequent purchaser in good faith for a valuable consideration, or by any person or body claiming through or under such a subsequent purchaser, is indefeasible.”

Decision of the Federal Court

Md Raus Sharif CJ, delivering the majority judgment, held that AmBank was a subsequent purchaser. The Federal Court noted that lodgment and registration of AmBank’s charge only came after lodgment of the discharge of CIMB’s charge and MOT from the Chings to Wong, although the presentation of those documents happened on the same day.

As such, CIMB’s charge was discharged before Wong was registered as the proprietor of the Property and AmBank had derived interest as chargee from Wong, and not CIMB. When AmBank became the chargee pursuant to Wong’s memorandum of charge, AmBank became the subsequent purchaser and is therefore protected under the proviso to section 340(3) of the NLC.

Dissenting judgement

Jeffrey Tan FCJ, however, dissented on the ground that Wong was not a purchaser under the definition of section 5 of NLC. Under section 5 of the NLC, a purchaser means “a person or body who in good faith and for valuable consideration acquires title to, or any interest in land”.

As Wong was found to be the fraudster, Wong would not qualify as a purchaser in good faith. Therefore, Wong could not be the immediate purchaser. As such, AmBank could not have said to have derived its interest from Wong.

For the title or interest of the subsequent purchaser to be indefeasible, both immediate and subsequent purchasers must be purchasers in good faith and for valuable consideration. AmBank’s interest was therefore defeasible.

Conclusion

Following the Federal Court’s majority decision in the instant case, chargee banks are protected under section 340(3) for any interest derived from a forger in a fraudulent transaction of property. The interest of chargee banks as bona fide subsequent purchasers in such circumstances will be indefeasible.

The net result was that CIMB, the initial interest holder and chargee bank, lost out on its interest despite the fact that the discharge of charge was forged.

TAN CHUAN YI
DISPUTE RESOLUTION PRACTICE GROUP

[1] [2017] 9 CLJ 145

[2] [2010] 2 CLJ 269

[3] [2001] 2 CLJ 133

[4] [2014] 1 CLJ 987

Employment Insurance System Bill 2017 — Social Safety Net for Loss of Employment

IN THIS ARTICLE, WONG KIAN JUN LOOKS AT THE PROPOSED EMPLOYMENT INSURANCE SYSTEM BILL 2017.

In recent times, the Government has introduced numerous measures and legislation to widen the protection afforded to employees in Malaysia for example:

Parliament has just passed the Employment Insurance System Bill 2017 (“EIS”). The aim of this piece of legislation is to create a safety net for individuals who have lost their employment. An Employment Insurance Fund would be created wherein both employers and employees are to contribute to it. The individual who has lost his employment can receive allowances by making a claim from this fund.

In this article we look into certain issues which may arise from the introduction of this legislation which is slated to come into force next year.

Basis for its introduction questioned

The Malaysian Employers’ Federation (“MEF”) has voiced its concerns about EIS which, amongst others, are as follows:

Determination on question of loss of employment

The EIS provides that an insured person who considers that he has lost his employment shall submit an application for claim for benefits to SOCSO within 60 days from the date he considers that he has lost his employment[1].

An individual who considers that he has lost his employment may submit a claim for benefits under the EIS. Apart from employees who have been retrenched or participated in a Voluntary Separation Scheme (“VSS”) other categories of loss of employment are also covered such as:

Instances where an employee was retrenched or had taken a VSS would be relatively obvious. However, when it comes to resignation as a result of constructive dismissal, threat or sexual harassment things become less obvious and would require considerable deliberation as well as documentary and testimony evidence.

Who then would determine whether such instances of threat, sexual harassment and others have occurred?

Pursuant to the EIS, any questions or disputes on whether loss of employment has occurred shall be determined by the organisation, being SOCSO in this particular case[2]. However, many questions remained unanswered such as:

Despite many unanswered questions, we can only know for sure how the EIS will be implemented when it comes into force next year.

Furthermore, issues such as constructive dismissal have always been the purview of the Industrial Court pursuant to the Industrial Relations Act 1967 whereas the Department of Labour has the powers to determine issues relating to sexual harassment as provided for under the Employment Act 1955.

The provisions in the EIS have effectively created a duplication of roles and functions for all these agencies. Will the Industrial Court and SOCSO determine issues relating to constructive dismissal independently of one another? What if both arrive at different views?

As it stands, proceedings at the Industrial Court or Labour Court may result in long drawn out legal processes which could include appeals, judicial review and so on. Therefore, an additional forum to determine the same issues may in turn be detrimental to the individual who is unemployed and may also incur more time and costs. Furthermore, such duplication of roles may result in a wastage of public monies.

The EIS provides that, in determining the issue of loss of employment, it may refer to any authorities under any written laws for the verification of the loss of employment in relation to any claims for benefits by any insured person under this Act[3]. However, will SOCSO rely on the determination by the Industrial Court or Department of Labour? What if the individual does not file a claim at either forum?

The purpose and intention of the EIS are indeed noble; however, based on the provisions of the EIS alone, many issues remain unclear and unanswered. Many are of the view that we should wait for the EIS to be implemented to truly appreciate and understand its workings. However, some are also of the view that legislation should have been clear and unambiguous at the outset.

WONG KIAN JUN
EMPLOYMENT AND ADMINISTRATIVE LAW PRACTICE GROUP

[1] Clause 28 of the Employment Insurance System Bill 2017.

[2] Clause 31(1) of the Employment Insurance System Bill 2017.

[3] Clause 31(2) of the Employment Insurance System Bill 2017.

FINANCIAL SERVICES

Launch of BIX: Malaysia’s First Bond + Sukuk Information Exchange

IN THIS ARTICLE, KRYSTLE LUI LOOKS AT THE CENTRALISED BOND + SUKUK INFORMATION EXHANGE PLATFORM.

The Securities Commission Malaysia (“SCM”), in partnership with the bond and sukuk industry in Malaysia, have launched a centralised bond and sukuk information platform called the Bond + Sukuk Information Exchange (“BIX”) on 6 November 2017 at the SCxSC Digital Conference 2017.

Although the retail bond framework has been in place since 2012, retail bonds and sukuk have not generated much interest since its first launch in 2013. Under the existing framework, retails bonds and sukuk may be issued by certain eligible issuers and traded either on the stock exchange of Bursa Malaysia Securities Berhad or over-the-counter via appointed banks. Thus far, there has only been one issuer (DanaInfra Nasional Bhd) of exchange traded bonds and sukuk (“ETBS”) on the stock exchange of Bursa Malaysia Securities Berhad[1].

BIX is a non-profit information platform (www.bixmalaysia.com) that provides free public access to information on ringgit-denominated bonds and sukuk issued in Malaysia[2]. This is part of the SCM’s effort to enhance transparency of the market and liberalise the bond and sukuk market in Malaysia for retail participation.

The launching of BIX is also intended to spur the interest of retail participants and enhance their understanding of the bond market as the lacklustre trading performance in the ETBS market is attributed to retail investors’ unfamiliarity with the bond market.

Issuers of bonds and sukuk in Malaysia are more inclined to issue the bonds and sukuk in the wholesale bond market which is only accessible to institutional investors notwithstanding the existence of a retail bond framework[3].

BIX would be an important component of the overall bond and sukuk market infrastructure and

“[t]he platform is the first of its kind to consolidate price and credit information combined with an advanced search function and other useful tools to help investors make more informed investment decisions and increase greater participation in the bond and sukuk market[4].”

Information on BIX comprises all short- and long-term ringgit government and corporate bonds and sukuk issued in Malaysia.

There are several tools on BIX to help investors make more informed investment decisions and increase participation in the bond and sukuk market. For instance:

BIX offers a variety of educational content such as articles and tutorials, video and audio gallery including bond and sukuk gallery. Investors will be educated on information such as bond characteristics, pro and cons of bonds including how to invest in bonds. Articles are updated monthly whilst BIX endeavours to upload new videos at regular intervals.

Market insights in the form of reports from Malaysian Rating Corporation Berhad (“MARC”) and RAM, credit rating agencies in Malaysia, as well as Bond Pricing Agency Malaysia are uploaded from time to time.

BIX allows for searches of issuer announcements to Bursa Malaysia Securities Berhad within selected dates. Further, upcoming bond and sukuk issuances and new issuances are accessible under the News & Announcements tab. Under the 10 top daily transactions tab, a user may search for specific bond or sukuk issuers.

What makes BIX interesting is that it also offers the following search functions:

The information available on BIX is merely to assist investors in making more informed investment decisions and is not to be relied on as financial advice.

The SCM is working on further liberalisation to enable greater retail access to the corporate bond and sukuk market by the first quarter of 2018. The SCM has indicated that this would include a review of the primary market issuance processes and disclosure requirements and the secondary market to enable retail investors to access bonds and sukuk which are traded in the wholesale market.

KRYSTLE LUI
FINANCIAL SERVICES PRACTICE GROUP

Taking a leap with SMEs

IN THIS ARTICLE, NG KEN YUNG DISCUSSES BURSA MALAYSIA’S NEWLY-ESTABLISHED LEADING ENTREPRENEUR ACCELERATOR PLATFORM (“LEAP”) MARKET.

Introduction

The new LEAP Market Listing Requirements (“LEAP LR”) and the consequential amendments to the Bursa Malaysia rules which govern the trading, clearing and depository framework for the LEAP Market came into effect on 16 June 2017[1]. On 3 October 2017, the LEAP Market officially went “live” with the inaugural listing of Cloudaron Group Berhad[2]. This was followed closely by the listing of Red Ideas Holdings Berhad on 8 November 2017. More listings are expected by Bursa Malaysia in 2018.

The newly-established listed market aims to enhance the existing funding eco-system of small- and medium-sized enterprise (“SMEs”)[3] by providing them with fund raising access through the capital market. In essence, the LEAP Market is intended to broaden the funding options available to companies that are too small to list on either the Main Market or the Access, Certainty, Efficiency Market.

In addition, the LEAP Market also provides SMEs the visibility of being a listed entity and assisting these companies in their transformation to better governance and operational standards.

The framework for the LEAP Market is premised on three key guiding principles, namely:

Some of the key features of the LEAP Market are set out as below.

Which companies qualify for listing on the LEAP Market?

All public companies incorporated in Malaysia with a clearly identifiable core business can apply for admission to the LEAP Market through an Approved Adviser, that is, an adviser approved by Bursa Malaysia to carry out both the initial listing activities and post-listing activities[4].

“Core business” is defined under the LEAP LR as “a business which provides the principal source of operating revenue or after-tax profits to a corporation and which comprises the principal activities of the corporation and its subsidiary companies”. Therefore, companies with diversified business activities should take note of the above to ascertain if the test set out in the LEAP LR can be fulfilled.

In contrast with the Main Market, there is no profit track record or operating history required for companies wishing to be listed on the LEAP Market. That said, the Approved Adviser is required to ensure that the company is suitable for listing[5]. In this regard, the Approved Adviser must make all reasonable due diligence enquiries and consider all relevant matters[6].

A company will not be considered suitable for listing if it is:

What are the methods of admission?

Admission to the LEAP Market will be through an issue of new securities by way of an excluded issue or by way of an introduction[8]. An “excluded issue” means an issue which is specified in Schedule 7 of the Capital Markets and Services Act 2007 (“CMSA”) or which is prescribed by the Minister to be an excluded issue under Section 230(1)(b) of the CMSA. These issues are made to the accredited investors or high-net worth entities or individuals as listed in the Schedule. An applicant which makes an excluded issue may distribute its securities either by way of a public offer, placement or book building, or a combination of these methods.

The issue or offer of securities on the LEAP Market is based on an information memorandum, rather than a full prospectus registered with the Securities Commission Malaysia (“SCM”) under section 232 of the CMSA. However, it is imperative to note that an information memorandum is deemed to be a prospectus in so far as it relates to the liability of the issuer thereof for any statement or information that is false or misleading or from which there is a material omission[9].

What is the public spread requirement?

The public spread of the shares must be equal to or more than 10% at admission[10]. The LEAP LR is, however, silent as to the requirement to maintain any minimal public spread post-listing. In contrast, at least 25% of post-listing share capital of a listed company on the Main Market must be in the hands of minimum 1,000 shareholders holding not less than 100 shares each[11].

In order to ensure commitment from promoters, the LEAP LR applies a moratorium over their entire shareholdings for a period of 12 months from the date of admission and, thereafter, the promoters’ aggregate shareholdings amounting to at least 45% of the total issued shares of the listed corporation must remain under moratorium for another period of 36 months[12].

Who can invest in companies listed on the LEAP Market?

As one of the guiding principles for the LEAP Market is to have facilitative rules and regulations, trading on the LEAP Market is limited to sophisticated investors (categorised as accredited investors, high-net worth entities and individuals) mentioned in Part 1 of Schedule 6 or 7 of the CMSA) who are deemed to have better knowledge on the potential risk and return of the market[13].

The examples of sophisticated investors include:

What is the role of an Approved Adviser? Why do I need one?

A company that seeks to be listed on the LEAP Market is required to appoint an Approved Adviser whose main responsibility is to assess the suitability and commercial viability of listing by undertaking due diligence and making reasonable enquiries on the company. They are also responsible for the preparation of the listing documents and to guide the company on compliance with post-listing requirements[14].

Who is the approving party for listing?

Bursa Malaysia Securities Berhad is the single approving authority for an initial listing application on the LEAP Market. All requirements relating to admission will be governed under the LEAP LR. However, a listing applicant is still required to deposit a copy of the information memorandum with the SCM[15].

Conclusion

The LEAP Market aims to bring together potential issuers, intermediaries and sophisticated investors onto a new platform to create a conducive marketplace for fund raising by SMEs in the country. SMEs now have a new avenue to raise funds via the capital market in an efficient manner.

NG KEN YUNG
CORPORATE AND COMMERCIAL LAW PRACTICE GROUP

[1] Bursa Malaysia Media Release (15 June 2017) www.bursamalaysia.com/corporate/media-centre/media-releases/5149.

[2] Bursa Malaysia Media Release (3 October 2017) www.bursamalaysia.com/corporate/media-centre/media-releases/5357.

[3] Bank Negara Malaysia’s Circular on New Definition of Small and Medium Enterprises (SMEs) BNM/RH/CIR 028-www.bnm.gov.my/files/2013/sme_cir_028_1_new.pdf.

[4] Part A, Chapter 3 of the LEAP LR.

[5] Paragraph 4.10 of the LEAP LR.

[6] Ibid.

[7] Paragraph 3.02 of the LEAP LR.

[8] “By way of an introduction” simply means listing by introduction.

[9] Section 246 of the CMSA.

[10] Paragraph 3.03 of the LEAP LR.

[11] Paragraph 3.06 of the Main Market Listing Requirements (“MMLR”).

[12] Paragraph 3.07 of the LEAP LR.

[13] Paragraph 2.24 of the LEAP LR.

[14] For the list of Approved Advisers, see www.bursamalaysia.com/market/regulation/rules/listing-requirements/leap-market/register-of-advisers/.

[15] Sections 229 and 230 of the CMSA.

CORPORATE & COMMERCIAL LAW