Demutualisation of Kuala Lumpur Stock Exchange

Skrine discusses the demutualisation of the KLSE under the Demutualisation (Kuala Lumpur Stock Exchange) Act, 2003




Among the various initiatives recommended by the Securities Commission ("SC") under the Capital Markets Masterplan ("CMCP") introduced in February 2001 is the demutualisation and listing of the Malaysian stock exchange to enable it to respond to changing market dynamics and pursue commercially-oriented strategies in an effective and timely manner (Strategic Initiative 3.2).


The first stage of this initiative was achieved on 5th January 2004 with the enforcement of the Demutualisation (Kuala Lumpur Stock Exchange) Act 2003 ("Demutualisation Act").  At the same time, amendments were made to the Securities Industries Act 1983, the Securities Commission Act 1993, the Securities Industry (Central Depositories) Act 1991 and the Future Industries Act 1993 to address issues that arise from the demutualisation and the eventual listing of the Kuala Lumpur Stock Exchange ("KLSE").



The Demutualisation Process

Demutualisation entails the conversion of the KLSE from a non-profit company limited by guarantee of its members into a public company limited by shares.


Demutualisation of the KLSE is facilitated by the provisions of the Demutualisation Act which inter alia permits the KLSE, with the prior written approval of the Minister of Finance ("Minister"), to convert its legal status from a company limited by guarantee to a public company limited by shares on a date to be determined by the Minister (Section 3). The conversion took effect vide Gazette Notification P.U.(B) 9/2004 whereby the Minister appointed 5th January 2004 as the effective date of the conversion.


The Demutualisation Act also provides that upon the conversion of the KLSE –


  • any member who is recorded on the register of members of the KLSE shall cease to be a member thereof immediately before the conversion date;
  • the KLSE shall issue voting shares to such persons and in such proportions as specified by the Minister on the recommendation of the SC (Section 4);
  • the Minister may designate a wholly-owned subsidiary of the KLSE as the "transferee company" to whom such assets, rights, obligations and liabilities of the KLSE as may be specified by the Minister, are to be vested (Sections 8 and 9); and
  • each existing member company of the KLSE shall be recognised as a "participating organisation" by the "transferee company" (Section 6).


In furtherance of the powers under Section 4, the Minister has authorised the KLSE to issue five hundred million fully-paid voting shares of RM0.50 each as follows –




Capital Market Development Fund


Minister of Finance, Inc


Licensed Stockbroking Companies


Eligible Remisiers



In the exercise of his powers under Sections 8 and 9, the Minister has designated the Malaysia Securities Exchange Berhad ("MSEB") as the "transferee company" and has vested therein the stock exchange business of the KLSE with effect from 5th January 2004 (Gazette Notifications P.U.(B) 8/2004 and P.U.(A) 16/2004).  At the same time, the KLSE has been approved as an "exchange holding company" pursuant to Section 11D of the Securities Industry Act 1983.


It is interesting to note that under the Rules of the MSEB, which took effect from 5th January 2004, access to trading facilities of the stock exchange will henceforth be accorded to corporations which are registered as "participating organisations" (Chapter 3, Rules of the MSEB). This represents a radical departure from the previous regime where trading access was restricted exclusively to members of the KLSE.




It can be seen from the foregoing that apart from facilitating the demutualisation of the KLSE, the Demutualisation Act has enabled the KLSE to be transformed into a holding company with subsidiaries that operate securities, financial and derivative exchanges and ancillary businesses such as a central depository for securities, and clearing houses for securities and derivatives.


We shall in the next issue of LEGAL INSIGHTS examine the safeguards put in place by the Malaysian legislators to deal with the concerns as to the ability of the MSEB to exercise effective oversight over its holding company upon the listing of the KLSE on the MSEB and to resolve conflicts of interest that may arise from such a relationship between the parties.





20th February 2004


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