Last week, Bursa Malaysia Securities Bhd (Bursa Securities) publicly reprimanded and imposed a fine of RM350,000 on RHB Investment Bank Bhd (RHB IB) for two breaches of the ACE Market listing requirements.
The breaches led to the rejection of the proposed initial public offering (IPO) of an unnamed ACE Market applicant, for which RHB IB was the sponsor and principal adviser.
The first breach was RHB IB’s failure to conduct proper due diligence on the IPO applicant to ensure all material information was properly and accurately disclosed in the initial submission.
The second breach was its failure to immediately notify Bursa Malaysia of three material agreements — including an agreement with a related party — entered into by the IPO applicant after the initial submission.
It was a strongly worded statement, and it was obvious the stock exchange regulator was extremely unhappy over RHB IB’s transgression.
“RHB IB had failed in the discharge of its duties as the sponsor and principal adviser which was unacceptable, particularly in view of the numerous engagements and queries by Bursa Malaysia Securities, and the breaches had led to the rejection of the proposed listing of the applicant,” the regulator said.
Bursa Securities said it viewed the breaches seriously in light of the primary and crucial role played by the sponsors and advisers in the assessment of the suitability of an applicant for admission to the ACE Market.
It noted the ACE Market is a “sponsor-driven” market and that sponsors must ensure quality, accurate and adequate disclosures in the initial public offering and prospectus for the proposed listing of an applicant.
However, what was possibly the most damning part of Bursa Securities’ statement was a line that stated “RHB IB had previously committed breach(es) of the listing requirements”.
The regulator did not provide any details about these previous breaches. However, like any journalist worth his salt, I searched the websites of Bursa Malaysia and the Securities Commission Malaysia (SC) to find out what these breaches were.
Lo and behold, I discovered that RHB IB was reprimanded on at least two other occasions by the capital market regulators in the last five years.
SC takes action
On July 22, 2020, the SC reprimanded and fined RHB IB RM400,000 for breaching provisions of the Capital Markets and Services Act 2007 (CMSA).
It said RHB IB, as the principal adviser, had caused the issuance of the abridged prospectus of Pasdec Holdings Bhd which contains information from which there is a material omission in respect of the pending approval from the ministry of finance for Perbadanan Kemajuan Negeri Pahang (PKNP) to subscribe for the PKNP entitlement.
In December 2018, the SC reprimanded RHB IB and slapped it with a RM900,000 fine over various breaches of the CMSA. The regulator said RHB IB had failed to conduct on-going due diligence and scrutiny of the trading account of seven of its clients.
In addition, RHB IB failed to discover and report suspicious transactions in five accounts to the financial intelligence and enforcement department of Bank Negara Malaysia (BNM).
Its then managing director and CEO Chan Cheong Yuen was also reprimanded and fined RM200,000 for failure to ensure adequate policies and procedures are in place to organise and control RHB IB’s affairs responsibly and effectively.
A day after the rebuke and fine by Bursa Securities for its latest violation, RHB IB vowed to strengthen its due diligence procedures.
Managing director and CEO Ganesh Sabaratnam said the bank will exercise a “higher degree of due diligence and compliance” with regulatory requirements. He also revealed it is working with an external adviser to ensure the bank continues to align with due diligence processes and procedures to “market best practices”.
How ironic – the principal adviser needs an external adviser to ensure compliance with capital market regulations.
Reprimands and paltry fines
It appears that the regulators’ penalties have had limited success in promoting improvement in the behaviour and actions of the financial institutions that they oversee.
The fines imposed seem paltry when compared to the huge profits enjoyed by Malaysia’s banking groups. A fine of RM350,000 is less than pocket change for the RHB Group which recorded a net profit of RM2.7 billion in FY2022.
Its high time that the financial regulators – SC, Bursa Securities and BNM – review their penalty structure, especially for repeat offenders like RHB IB.
Public reprimands and small fines are just like water off a duck’s back, especially for repeat offenders. Regulators need to crack down hard and hit them where it hurts. Suspend their licences, or cancel it if they continue to flout the regulations.
Perhaps they could take a leaf from California’s “Three strikes and you’re out” law. In 1994, California voters voted for this law in response to the tragic murders of two women. The law imposed a life sentence for almost any crime, no matter how minor, if the defendant had two prior convictions for crimes defined as serious or violent by the California Penal Code.
If we have a capital markets version of “Three strikes and you’re out”, it is likely that our big banks will keep to the straight and narrow path.
The views expressed are those of the writer and do not necessarily reflect those of FMT.