Storm brewing in Malaysian debt capital market as new entity set to take control of RAM rating agency

The independence and credibility of RAM Holdings have come under question following the green light from the Securities Commission (SC) for the acquisition of the credit rating firm by CTOS Digital Bhd, MalaysiaNow has learnt.

MalaysiaNow can also reveal that CTOS Digital, which is linked to Creador, a multibillion private equity firm owned by Brahmal Vasudevan, was given approval by the SC to acquire a more than 51% stake in RAM, the company established by Bank Negara Malaysia in 1990 to support the local debt capital market.

RAM is accepted as the industry leader in credit ratings by many fund managers, and its credit opinions have become a crucial reference for banks as well as financial regulators.

But one hurdle CTOS faces is a clause in RAM’s constitution barring any individual stakeholder from owning more than 20% of shares in the company.

To overcome this, a proposal is being put to vote at RAM’s upcoming annual general meeting (AGM) to amend the clause, allowing this limit to be breached.

MalaysiaNow has sighted the proposal which was included in the notice of the June 9 AGM distributed to members.

Under the current provision, the prescribed limit to paid-up share capital for each shareholder in RAM is 20%, a level designed to ensure the agency’s independence.

The proposed amendment would however see a drastic change, allowing a member to hold more than 20% of the paid-up capital as long as “the prior approval of the SC and/or any relevant authority… has been obtained in accordance with the law, regulations and guidelines from time to time imposed by the SC and/or any relevant authority for that member to hold interest in shares in excess of the prescribed limit”.

The AGM notice sighted by MalaysiaNow further informs members that the SC on April 28, 2022 gave its approval for CTOS to own majority shares in RAM, as well as any subsequent increase in shares.

CTOS currently holds 11.52% paid-up capital in RAM, which will be increased to 19.25% “pending completion of administrative steps”, according to a request from CTOS to amend RAM’s constitution ahead of its AGM.

The request will be placed under “special business” during the AGM, which is set to be held as a hybrid meeting.

‘Death of financial integrity’

The proposal was met with alarm by several fund managers and bankers who spoke to MalaysiaNow on condition of strict anonymity.

Some pointed out what they described as the “gradual subversion of RAM” over the years, saying non-banking as well as foreign entities were among more than a dozen shareholders in the agency.

“This exercise will be the final nail in the coffin as far as RAM’s credibility is concerned, considering that CTOS is owned significantly by a private equity firm, and recently listed on Bursa Malaysia.

“With the green light to own RAM, it has the ultimate control over RAM which is supposed to act as an independent credit rating agency,” said a senior executive at a Kuala Lumpur-based equity firm.

Adding to the fear is the potential conflict of interest of individuals in CTOS.

“We know for a fact that at least one CTOS non-executive director is sitting on the SC board of directors,” a capital market analyst told MalaysiaNow.

“So when it is only CTOS that has been given the nod to acquire 51% in RAM, it is not only classic conflict of interest but the death of integrity in Malaysia’s financial sector, especially when its credit reports have implications in the bonds market.

“This is detrimental to Malaysia as the issuing of debt ratings is now dictated by a single entity.”

The fund manager also pointed out that Malaysia was already grappling with paying very heavy interest payments to 1MDB-related bonds.

“Some of those bonds were approved by the SC. The basis for the approval of the tenure and coupon of those bonds has also raised eyebrows. There are many questions on this, given the price of what we have to pay as interest on the 1MDB family of bonds.

“The public must be aware that this is no small decision.”

MalaysiaNow is attempting to contact the relevant parties for a response.