5 Questions to ask before a Company Undertakes an IPO in Malaysia

1.What should promoters consider when deciding whether to list their companies?

Promoters should weigh the benefits and drawbacks before deciding whether to undertake an initial public offering (“IPO”) and listing exercise for their companies. The key considerations include:

• A public listed company (“PLC”) has greater access to capital compared to a private company as a PLC may raise funds from the public. 
• A company may incur substantial cost to undertake an IPO exercise and comply with listing obligations and corporate governance practices once the company is listed.
• Certain information about a PLC is required to be announced to the public under the Listing Requirements, which may attract media coverage. Such publicity may affect the PLC’s business and reputation positively or negatively. For example, a PLC is required to announce the acquisition or loss of a contract, franchise or distributorship rights and material litigation under the Listing Requirements.[i]
• A PLC is subject to stricter regulatory regime under listing rules compared to a private company which in turn, increases the credibility and enhances the corporate governance of the PLC.
• Promoters, directors and officers of a PLC, being the “insiders” possessing information not generally available to the public, are subject to insider trading restrictions under the Capital Markets and Services Act 2007. They should consider whether they are accustomed to being subject to restrictions on dealing with their shares. Failure to comply with insider trading provisions is an offence punishable by up to ten years’ imprisonment and a fine not less than RM1 million.[ii]
• The public shareholding requirement under the Listing Requirements requires certain percentage of shares in a PLC to be held by the public, which dilutes the promoters’ control over the companies they founded. Shareholders may question directors on how a PLC is managed. Shareholders may vote and decide on matters, which are subject to shareholders’ approval under the Listing Requirements and Companies Act 2016, such as remuneration of directors and certain transactions undertaken by the PLC.
• A PLC may become a target for a takeover by a competitor.
• The success of an IPO exercise depends on the industry outlook and market condition, which should be taken into account in deciding the time for companies to go public.

2.Which market should a company choose for listing in Malaysia? 

The following are three markets available for listing in Malaysia, which cater for companies with different profiles and stages of growth. 

Main Market

• Prime market for established companies that have met the standards in relation to quality, size and operations
• Accessible to public

ACE (Access, Certainty, Efficiency) Market

• Sponsor-driven market for fast-growing companies
• Accessible to public

LEAP (Leading Entrepreneur Accelerator Platform) Market

• Adviser-driven market for small and medium enterprises
• Only accessible to sophisticated investors, namely accredited investors, high net-worth entities and high net-worth individuals as specified in Part 1 of Schedule 6 or Part 1 of Schedule 7 under the Capital Markets and Services Act 2007. 

3.What are the preparations for an IPO? 

Preparation to meet the listing criteria 

Depending on the market which a company is seeking to list on, certain listing criteria take time to comply with. For examples:

• A Main Market applicant which seeks listing under the profit test must have an uninterrupted profit of three to five full financial years based on audited financial statements prior to submission to the Securities Commission Malaysia (“SC”), with an aggregate after-tax profit of at least RM20 million and an after-tax profit of at least RM6 million for the most recent financial year. The applicant or the corporation within the group which is the largest single contributor to the after-tax profits, must have been operating in the same core business over at least the profit track record prior to submission to the SC.

For a Main Market applicant seeking listing under the market capitalisation test, the applicant’s ordinary shares must have a total market capitalisation of at least RM500 million upon listing. The applicant or the corporation within the group representing the core business must have been incorporated and generated operating revenue for at least one full financial year prior to submission to the SC.

A Main Market applicant seeking to list under the infrastructure project corporation test must have the right to build and operate an infrastructure project in or outside Malaysia, with project costs of not less than RM500 million and the concession or licence for the infrastructure project must have been awarded by a government or a state agency, in or outside Malaysia, with a remaining concession or licence period of at least fifteen years from the date of submission to the SC.[iii]

• A Main Market applicant must have had continuity of substantially the same management at the level of executive directors and senior management for at least three full financial years prior to submission to the SC or for Main Market applicant seeking to list under the market capitalisation test or the infrastructure project corporation test, since the commencement of its operations, if less than three full financial years.[iv] A Main Market applicant must appoint a chief financial officer, finance director, or the individual holding an equivalent position in relation to the applicant’s business, at least six months prior to the submission to SC.[v]
• While there is no minimum operating track record or profit requirement for listing on the ACE Market, an ACE Market applicant is similarly required to have continuity of substantially the same management at the level of executive directors and senior management for three full financial years before submitting its listing application to Bursa Malaysia Securities Berhad or since its incorporation (if less than three full financial years).[vi]

Pre-IPO Restructuring 

An applicant may carry out a pre-IPO restructuring exercise prior to it being listed for the following purposes:

• to streamline the business of the listing group which show an identifiable core business of the group and enhance the listing group’s valuations to attract investors.
• to exclude companies from the listing group where the business of such companies is not viable or involves non-compliance issues.
• to resolve any conflict-of-interest issues arising from the businesses undertaking by the promoters, substantial shareholders and directors.

Due Diligence Exercises

An adequate due diligence process also provides a defence for any allegation of false or misleading statement or omission from any prospectus or documents submitted to the SC.[vii]

To facilitate the due diligence process, the management of the listing group should establish an effective team to manage the due diligence exercise including responding to requests for information from IPO advisers. The following steps may be taken:

• Proper record should be kept in respect of the documents of the listing group, particularly those in the last three financial years prior to listing. Certain matters such as related party transactions (“RPT”), material contracts and financial information for the said period must be disclosed in the prospectus.[viii] It is prudent for the company to keep documents such as price comparisons and quotations obtained from various suppliers or service providers to substantiate that the RPTs were undertaken on arms-length basis.
• As various IPO advisers may request for the same documents for their due diligence exercise, having a virtual data room where advisers are granted access to due diligence documents would facilitate the due diligence process. The management of the listing group should keep a list of people who have access to the virtual data room and keep the access secured at all times to ensure confidentiality.
• Where information is provided in a virtual data room, the documents should be properly indexed, labelled and organised to facilitate the review process.

Determination of Pre-IPO share price 

The applicant must ensure that the exercise price of warrants and options, and the conversion price of convertible securities that are issued prior to or as part of the listing scheme must not be lower than the price of the ordinary shares offered to the general public under the IPO.[ix]

4.What is the IPO and listing process?

The IPO and listing process is depicted in the following diagram on Bursa Malaysia’s website:

Listing Process for Main Market & ACE Market

Listing Process for LEAP Market

Source: https://www.bursamalaysia.com/listing/get_listed/listing_process

5.What makes a successful IPO and listing? 

• The company should have an effective IPO team comprising its senior management and professional advisers. The senior management is responsible for providing information in respect of the listing group and to facilitate the professional advisers in their respective parts of the IPO. The professional advisers include principal adviser/sponsor, solicitors, financial advisers, independent market researcher, reporting accountants and auditors should have the relevant industry knowledge and experience of listing in Malaysia.
• The company should be able to attract investors through its business proposition and position in the market, as well as other non-financial metrics such as brand values, corporate strategies and environmental, social and governance (ESG) efforts.
• The company should make early preparation to ensure that it meets the criteria for listing, engage advisers to carry out assessment of its readiness for listing and have sufficient time to resolve any non-compliance in order to meet the timeline for listing, which should coincide with favourable market outlook.
• A PLC is required to appoint independent directors. As it takes time to assess suitability of director candidates, the process of assessing candidates should start early.
• There should be a realistic timeline for the IPO and listing exercise to ensure the company makes its initial public offering when the market condition is favourable.

[i] Paragraph 9.04 of the Main Market Listing Requirements and Rule 9.04 of the ACE Listing Requirements

[ii] Section 188(4), Capital Markets and Services Act 2007

[iii] Paragraph 5.02, Part II of the Equity Guidelines

[iv] Paragraphs 5.05 and 5.06, Part II of Equity Guidelines

[v] Paragraph 5.06A, Part II of Equity Guidelines

[vi] Rule 3.06 of the ACE Market Listing Requirements

[vii] Sections 215 and 250, Capital Markets and Services Act 2007

[viii] Paragraph 5.04, Chapter 7 and Chapter 9, Part II, Division 1 of the Prospectus Guidelines

[ix] Paragraph 5.13, Part II of Equity Guidelines and Rule 3.12(2) of ACE Market Listing Requirements

By Tay & Partners, Malaysia, a Transatlantic Law International Affiliated Firm.

For further information or for any assistance please contact malaysia@transatlanticlaw.com

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