Long-term Financing in

Malaysia
 Lecture Objectives
• Understand the venture capital market and
its role in financing new businesses
• Understand how securities are sold to the
public and the role of investment bankers
• Understand initial public offerings and the
costs of going public
 Venture Capital
• First form in Malaysia in 1980s
• In a nutshell “risk money”
• No collateral, little or no control over
management of company, but high return
• Typically equity based, i.e., takes a percentage
of the equity in the company
• Capital gains when investee company get listed
• Not only mere providers of capital, but provide
guidance, management assistance and
networking
 Difference between VC and
Debt Financing
VC DF

Objective Capital Gains Interest and

principal
Holding period Mid-long term Short-to-mid term

Collateral No Yes

Criteria Potential returns Interest spread

on investment and security
 Difference between VC and
Debt Financing
VC DF
Impact on B.S. Reduce leverage Increase lev.

Impact on cash Dividend payout Interest/prin.

flow repayment
Monitoring Seat on Board, Loan servicing
monthly/qtrly rpts
Value add Mgmt assist., None
networking
Exit mechanism IPO, trade sales, Principal
buy- back repayment
 STAGES OF COMPANY
GROWTH

• Seed
• Startup
• Growth/expansion
• Mezzanine/Pre- IPO
• IPO/Public
 Why is Venture Capital
Needed?
• During the early stage of company growth
a company may still be developing its
products, thus sales is limited
• Also due to lack of tangible, bankable
assets and a reliable track record,
financing will be difficult
• VC funds are geared towards funding
high-risk early stage companies that have
high growth potential
 Who are the Venture
Capitalists?

• A pool of investors
• Malaysian Venture Capitalist Association
with 44 membership companies
 Selling Securities or Going Public
• Efficient and cost-effective way to raise
funds (interest-free)
• Reasons for Going Public:
 Higher profile – greater visibility
 Confidence – reputation and credibility are
enhanced
 Additional funds and potential to raise more
funds – once company is well-managed and
displays strong responsibility
 Expansion – able to expand overseas, more
publicity on their activities
 PROCEDURES FOR INITIAL
LISTING
• Getting approval for listing from Securities
Commission
• Submit articles of association to KLSE
• Applicant:-
– issues prospectus if it is a public offer of securities
– advertises the prospectus
• Applicant files with KLSE a listing application
together with supporting document.
• Exchange grants approval-in-principal for the
admission of securities.
 MAIN BOARD LISTING
REQUIREMENT
• Min. paid-up capital - RM60 million, comprising
ordinary shares of not less than 10 sen each.
• At least 25% of issued and paid up capital at
time of listing shall be in the hands of public
shareholders
• Fulfil public spread requirements
• Historical performance – uninterrupted after-tax
profit record for the past 3 – 5 years, total of
RM30 mil, and RM8 for most recent financial
year.
 Requirement of min. public
shareholdings
Nominal value of issued Min. number of
and paid-up capital shareholders
RM40 mil < RM60 mil 750

RM60 mil < RM 100 mil 1,000

RM100 mil and above 1,250

 SECOND BOARD LISTING
REQUIREMENT
• Min. paid up cap. - RM40 million, comprising
ordinary shares of not less than 10 sen each.
• At least 25% of the company's issued and paid
up capital at the time of listing shall be in the
hands of public shareholders.
• Fulfil public spread requirements.
• Historical performance – uninterrupted after-tax
profits for 3 – 5 years, total of RM12 million and
most recent financial year of RM4 million.
 IPO Underpricing
• Initial Public Offering – IPO
• May be difficult to price an IPO because there
isn’t a current market price available
• Additional asymmetric information associated
with companies going public
• Underwriters want to ensure that their clients
earn a good return on IPOs on average
• Underpricing causes the issuer to “leave money
on the table”
 Rights Offerings: Basic
Concepts
• Issue of common stock offered to existing
shareholders
• Allows current shareholders to avoid the dilution
that can occur with a new stock issue
• “Rights” are given to the shareholders
– Specify number of shares that can be
purchased
– Specify purchase price
– Specify time frame
 Rights Offerings: Basic
Concepts
• In offering a rights issue, the company sends out
a provisional allotment letter (PAL) to all existing
shareholders informing them of the rights issue
entitlement.
• Shareholders are required to follow all the
instructions given in the PAL in subscribing their
rights for the new shares. PAL can be sold to the
open market (if quoted) or the entitlement can
be renounced to someone else.
 The Value of a Right
• The price specified in a rights offering is
generally less than the current market
price
• The share price will adjust based on the
number of new shares issued
• The value of the right is the difference
between the old share price and the “new”
share price
 Rights Offering Example
• Suppose a company wants to raise RM10
million. The subscription price is RM20
and the current stock price is RM25. The
firm currently has 5,000,000 shares
outstanding.
– How many shares have to be issued?
– How many rights will it take to purchase one
share?
– What is the value of a right?
 Types of Long-term Debt
• Bonds – public issue of long-term debt
• Private issues
– Term loans
• Direct business loans from commercial banks,
insurance companies, etc.
• Maturities 1 – 5 years
• Repayable during life of the loan
– Private placements
• Similar to term loans with longer maturity
– Easier to renegotiate than public issues
– Lower costs than public issues
 CORPORATE BONDS
• Types of corporate bonds issued in the Malaysian
capital market:
1. Straight bonds
2. Convertible bonds
3. Bonds with warrants
4. Floating rate bonds
5. Zero-coupon bonds
6. Mortgage bonds
7. Islamic bonds
8. Secure and unsecured bonds
9. Guaranteed bonds