Easing Down the Merit-Disclosure Continuum: A Case Study of Malaysia and Taiwan

Introduction Capital market regulatory systems may be studied by examining where they fall along a "merit-disclosure continuum": history and classical economic theory(1) suggest that as markets mature, market regulation moves from merit regimes to disclosure or "mixed" systems. (2) Most markets lie somewhere along this continuum rather than at one of the extremes, with precise location determined by history, stage of development, government policy, and other factors. Developing countries have generally relied heavily upon merit regulations to protect their young capital markets. As they race to attain developed-country status, the governments of these countries struggle with the ongoing tension between promoting free markets and the extensive government regulation that may be expected by the public. Location on the merit-disclosure continuum has become the focus of concern because a country's regulatory structure determines its access to both the domestic and international capital markets. As a consequence, countries like the Republic of China (Taiwan) and Malaysia, which have merit regulatory regimes,(3) have announced plans to move from their merit models to disclosure systems to accelerate economic growth. This Article analyzes the difficult transition from the merit end of the continuum to the disclosure end by examining Taiwan and Malaysia, two countries that have bold plans to become Asian financial centers. (4) The experiences of Taiwan and Malaysia illustrate the different forms of merit regulation, associated regulatory problems, resulting market distortions, obstacles to change, and potential solutions. The analysis focuses on the regulation of primary distributions,(5) particularly initial public offerings (IPOs) made in conjunction with listing on an exchange,(6) because equities markets are usually the most viable and attractive means of accessing capital markets available in developing countries, and listing increases the value and appeal of securities. Equity issues give companies access to new funds as well as capitalization of earnings, which is important to dominant shareholders seeking to preserve their shareholding position. (7) Regulation of the bond markets, in contrast, has traditionally been very stringent. (8) A comparison of the IPO regulatory structure of Malaysia and Taiwan will be helpful not only for understanding the changes occurring in these two countries, but also for understanding other emerging Asian markets, which share fundamental similarities in the way business is conducted. Hence, the capital market's influence on the path of economic growth in Taiwan and Malaysia will shed light on the direction of change in other Asian markets. Part I of this Article compares Taiwan's and Malaysia's regulatory structures and primary offering rules and regulations, highlighting the strengths and weaknesses of each merit regime. Part II evaluates the difficulties in moving from a merit structure to a disclosure system and draws lessons for other developing markets. I. Regulatory Systems in Malaysia and Taiwan A. Market Composition and History Despite recognition that the primary market for equity securities plays a crucial role in financing economic growth, the governments of Malaysia and Taiwan have constructed high barriers for companies desiring access to the equities market. (11) Consequently, relatively few corporations in each country have been able to raise capital through IPOs and other equity listings on the national exchanges (the Kuala Lumpur Stock Exchange (KLSE) and the Taiwan Stock Exchange (TSE). (12) Most large Taiwan companies remain narrowly held, unlisted, "public" companies despite the prestige of listing and the cheaper capital that listing makes available. (13) The stricter regulation of corporate debt has made such issues even less attractive, resulting in underdeveloped markets in both Malaysia and Taiwan. …