1. Introduction
1.1 On 30 April 2020, Bank Negara Malaysia (BNM) issued updates and amendments to the Foreign Exchange Policies with a view to improving business efficiency and providing flexibility for corporations to better manage their foreign exchange risk exposures (“BNM Foreign Exchange Policies Refinement”). Two days prior to that, i.e. 28 April 2020, we saw the Securities Commission of Malaysia (“SC“) rolled out certain amendments to the Guidelines on Unlisted Capital Market Products under the Lodge and Launch Framework (LOLA Guidelines) (“LOLA Framework Enhancement”).
1.2 BNM Foreign Exchange Policies Refinement and LOLA Framework Enhancement are certainly initiatives welcomed by the industry, especially local business corporations or foreign business entities investing in Malaysia who face liquidity or funding issues during the Covid-19 pandemic. This article provides a quick overview on the positive impacts of such initiatives by the BNM and the SC.
2. BNM Foreign Exchange Policies Refinement
2.1 Certain amendments have been introduced as a result of the BNM Foreign Exchange Policies Refinement, the key ones include:
(a) Residents are now free to obtain financial guarantee from non-residents for any amount. No approval or registration will be required. Previously, residents can only obtain financial guarantees up to an aggregate limit of RM100 million. With this relaxation, local business entities will be able to obtain greater support from other non-resident entities for their operations in Malaysia.
(b) On the same vein, residents are now free to issue financial guarantee to non-residents for any amount, subject to certain exceptions, such as, where the financial guarantee is issued to secure:
(i) foreign currency borrowing obtained by a non-resident special purpose vehicle from a non-related non-resident entity, external borrowing limit under Notice 2 will be applicable; and
(ii) foreign currency borrowing obtained by a non-resident where the repayment of the borrowing will be paid by a resident (other than when the financial guarantee is called upon under an event of default), investment abroad limit under Notice 3 will be applicable.
Previously, residents can only issue financial guarantees up to aggregate limit of RM50 million. This enable Malaysia-based entities to better support their operations in other jurisdictions.
2.2 The refined BNM Foreign Exchange Policies further clarify that a resident is now allowed to borrow in Ringgit in any amount from a non-resident through the issuance of redeemable preference shares or Islamic redeemable preference shares or Ringgit corporate bond or sukuk pursuant to the relevant guidelines issued by the Securities Commission (referring to the LOLA Guidelines), excluding non-tradeable Ringgit corporate bond or sukuk issued to a non-resident entity outside the resident entity’s group or a non-resident financial institution.
3. Overview Of Lola Guidelines In Respect Of Issuance Of Convertible Notes
3.1 Under the Capital Markets & Services Act 2007 (“CMSA”), a person who intends to make available, offer or subscription or purchase unlisted capital market products shall seek authorisation of the SC pursuant to section 212(5) of the CMSA (“SC Authorisation Requirement”) , unless any exemptions under Schedule 5 of the CMSA is applicable.
3.2 Of such exemptions, one that is often relied on by the industry is Part I of Schedule 5, which provides that any issuance or offer made (i) to persons specified in Part I of Schedule 6 or Part I of Schedule 7 of the CMSA; and (ii) in compliance with the requirements of the LOLA Guidelines, shall be exempted from the SC Authorisation Requirement.
3.3 Therefore, previously, for any issuance of unlisted capital market products (including convertible notes) to a venture capital firm or private equity firm (who satisfies the criteria set out under Part I of Schedule 6 or Part I of Schedule 7 of the CMSA) must observe certain requirements under the LOLA Guidelines, the key ones include:
(a) identification of all responsible parties accountable or responsible in the lifecycle of an unlisted capital market product, which may include without limitation the issuer itself and a person licensed by or registered with the SC (“Responsible Parties”);
(b) lodgement concerning the unlisted capital market products must be made by a principal adviser (being a person licensed to carry out the regulated activity of advising on corporate finance and eligible to act as principal adviser pursuant to the Principal Adviser Guidelines); and
(c) use of Fully Automated System for Issuing/Tendering (FAST) and the Real Time Electronic Transfer of Funds and Securities (RENTAS) system operated by Paynet to facilitate the issuance of the unlisted capital market products on a scripless basis,
(“Relevant LOLA Requirements”).
4. LOLA Framework Enhancement
4.1 The LOLA Framework Enhancement permits any business corporation who issues conventional convertible notes to venture capital firms and private equity corporations registered with the SC under the Guidelines on the Registration of Venture Capital and Private Equity Corporations and Management Corporations (“Specific Registered Persons”) to be exempted from the Relevant LOLA Requirements, subject to certain criteria (“Eligibility Criteria“).
4.2 Such exemptions see the following benefits come into play:
(a) identification of Responsible Parties by the issuer of the convertible notes will no longer be required;
(b) a business corporate may now conduct the lodgement to the SC by way of e-mail for the launch of its conventional convertible notes without the appointment of a principal adviser;
(c) the lodgement fees payable to the SC will no longer be applicable; and
(d) the issuance of the convertible notes will no longer be subject to the use of FAST and RENTAS system, rendering the fund raising process by the business entities to be more cost and administrative efficient.
4.3 The Eligibility Criteria are as follows:
(a) the issuance and offering of the conventional convertible notes must solely be made to Specific Registered Persons;
(b) the convertible notes must not be transferable save and except to Specific Registered Persons;
(c) the convertible notes must only be convertible into shares of the issuer; and
(d) the tenure of the convertible notes must not exceed 7 years from the date of issuance, which shall be a date falling within 60 business days from the date of lodgement with the SC.
5. Views
5.1 With the introduction of the BNM Foreign Exchange Policies Refinement, it is now clarified that foreign Specific Registered Persons are able to invest in ringgit denominated unlisted capital market products such as redeemable preference shares and convertible notes in any amount without any limit.
5.2 Further, with the LOLA Framework Enhancement, foreign Specific Registered Persons now have greater options in the types of investment instruments in Malaysia available to them, in addition to the typical investment method in the form of subscription of ringgit denominated redeemable preference shares.
5.3 The BNM Foreign Exchange Policies Refinement and LOLA Framework Enhancement implemented by the BNM and the SC respectively collectively provide greater cost and administrative efficiency for local business entities to seek funding from local and foreign venture capital firms or private equity firms registered with the SC, and are definitely initiatives much applauded by the industry.
5.4 Please refer to our next article for insights relating to the matters to be considered in choosing between redeemable preference shares and convertible notes as investment / fundraising instrument.
If you have any queries on the BNM Foreign Exchange Policies Refinement or the LOLA Framework Enhancement, please do not hesitate to contact us.
This legal update is for general information only and is not a substitute for legal advice.
Published on: 12 June 2020