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Transparency vital for world-class capital market

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James Bladen
James Bladen joined Alpha Southeast Asia in 2015. He has written on a wide range of issues covering capital markets, Islamic finance and M&A. He worked as a consultant in Indonesia (2013-2017) and moved to New York in 2020 where he continues to cover Southeast Asia.

THIS year certainly presents a window of opportunity for Malaysia to raise the efficacy and integrity of its capital market.

As a low-beta market, Malaysia almost always underperforms on the upside, which isn’t necessarily a good thing in a hot market. But when global markets are cooling off like they are now, and volatility and uncertainty exist, Malaysia is seen as a safe haven.

We can already see this in the stock price performance among regional markets in the year to date. With a roughly 4.3% gain since January, the FTSE Bursa Malaysia KL Composite Index has outperformed most of the regional indices, including the Shenzhen and Shanghai Composite Indices, Singapore’s Straits Times Index and Thailand’s SET.

And with palm oil prices rebounding in tandem with Malaysia’s broader economy, things are really looking up. Bursa Malaysia has already said it expects better trading volume and more initial public offerings in 2010.

So, given that Malaysia is a stock market which is continually seeking quality foreign capital to fund the growth of its companies so as to enhance its appeal as a capital-raising destination amidst regional competition, there is a commensurate need to step up its credentials.

That’s why the case of Pharmaniaga Bhd is so relevant.

Pharmaniaga is the largest integrated local healthcare company in Malaysia. It manufactures, sells and promotes generic pharmaceuticals, handles its own logistics and distribution as well as equips hospitals.

It is also 86.81%-owned by the Government via the UEM Group, and thus its market is mainly focused on government hospitals. Which means not only is it a publicly traded company, Pharmaniaga also belongs to the people.

But when it announced that its manufacturing licence was revoked due to critical findings over its storage and segregation of reject and quarantine materials, as well as its handling of reject and recalled materials or products, many investors were shocked and surprised. (Pharmaniaga announced on Monday that it has got back its manufacturing licence.)

Firstly, Pharmaniaga is a medical supplier to government hospitals nationwide.

Its Pharmaniaga Logistics Sdn Bhd subsidiary holds a 15-year concession to supply and distribute pharmaceutical and medical products to hospitals and medical institutions as mandated under the Health Ministry. And a concession agreement related to the privatisation of the Health Ministry’s medical laboratory and store has also been extended for a further 10 years.

While Pharmaniaga did address shareholder concerns when it said the percentage contribution of manufacturing to group pre-tax profit was only 23% for financial year ended December 2009, it did not address wider, health-related concerns.

As a concession holder of a government licence to supply medicine to government hospitals, there ought to be a duty of care to all stakeholders of the company. Pharmaniaga itself said in its 2008 annual report, in its corporate governance section, that: “The board must have responsibility for the company as a whole. This covers not only shareholders as the owners of the company but also those who work for the company and all who may be affected by the operations of the company.”

It was only on Bursa’s prodding that more information was forthcoming on the reasons for the licence revocation.

The integrity of our capital market is of paramount importance. Malaysia has some good companies. Some are even world class. But imagine if we stepped up our best practices and the vast majority of our listed entities were built on solid corporate governance standards and integrity.

We could be exemplary world leaders!

Thus, there is a real need to build and instil professionalism among all market players, including the senior company management and their boards of directors.

Another reason Pharmaniaga’s share price did not react more negatively is another major malaise affecting Malaysia: the fact that its free float is so low because the Government owns 86.81% of the company.

Question: Does having a company’s shares so closely held by the Government allow complacency to set in?

The answer is emphatically a No. Nevertheless, the challenge would be for the Government and Khazanah Nasional, which is the ultimate owner of Pharmaniaga, to find ways to create more free float, which would help make Malaysia an attractive destination for quality, long-term fundamentally driven foreign funds.

In short, broad, in-depth adherence to corporate governance and a real will to unshackle state ownership of listed company shares are measures Malaysia needs to proactively address and constantly improve on.

That is one way for us to get closer to world-class standards for the Malaysian stock exchange.

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