PWC Alert - Business Trust Alternative Listing Vehicle

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PwC Alert

Business trust - An alternativelisting vehicle

Issue 108 September 2013

PP 9741/10/2012 (031262)

www.pwc.com/my

Page 4 What is a BT?

Page 6Pros and cons of a BT

Page 8Listing requirements

5Considerations



Introduction

With RM1.4 trillion worth of investments expected from theprivate sector as envisaged under the Economic TransformationProgramme, Malaysia’s capital market will play an increasinglyimportant role in mobilising domestic and international funds tofinance the country's transformation initiatives.

In an effort to broaden fund-raising avenues and provide

flexibility in financing arrangements, the Securities Commission(“SC”) has introduced the Business Trust (“BT”) scheme as analternative listing vehicle for raising capital.

Formation of BTs in Malaysia is now possible following theamendments to the Capital Markets and Services Act 2007, andissuance of the Business Trust Guidelines by the SC on 28December 2012. The BT vehicles offered in Malaysia encompass

both conventional as well as Syariah compliant vehicles.

Business trust – An alternative listing vehicle2 PwC Alert Issue 108, September 2013



With the introduction of BTs, Malaysia joins the ranks of onlySingapore and Hong Kong as countries in this region whichoffer BT as an alternative listing vehicle to raise funds.

Since the first listing of a BT on the Singapore Exchange in2006, Singapore now has 16 listed BTs. The assets managed bythese BTs range from hospitality, infrastructure and shipping,commercial property, medical facilities and container ports tocable television. This year, the Singapore bourse has captured afurther 3 BT listings up until August 2013 i.e.:

• OUE Hospitality Business Trust (hospitality industry)

• Croesus Retail Trust (retail real estate industry)

•

Asian Pay Television Trust (cable television industry)In Hong Kong, the first BT was listed in 2011, followed by asecond listing two years later. The former is in thetelecommunications industry (Hong Kong Telecom Trust) whilethe latter is in the hospitality industry (the Langham HospitalityTrust). A third BT listing is currently in the pipeline.

In Malaysia, no BT has been listed as at the time of writing thisarticle.

Please refer to the Appendix for a brief comparison of the BTs inMalaysia, Hong Kong and Singapore.

3 Business trust – An alternative listing vehiclePwC Alert Issue 108, September 2013



What is a BT?

A BT is a hybrid structure which incorporates both elements of atrust and a company. It is formed through a trust deed andmanaged by a trustee-manager who is the legal owner of the BT’sassets. The unit holders of the BT have an economic interest inthe business assets of the BT. They also have the rights toparticipate in the profits or income arising from the managementof the assets in the BT via receipts of distributions declared by the

trustee-manager.

BTs in Malaysia could either be registered or recognised by theSC, as follows:

(i) Registered BT - BT established in Malaysia which complies with the requirements stipulated by the SC.

(ii) Recognised BT -BT established outside Malaysia which

complies with both the requirements of its home jurisdiction and the SC.




The SC requires the trustee-manager to be a company incorporated in Malaysia or elsewhere, thatis not an exempt company (or equivalent to an exempt company). The trustee-manager isrequired to be licensed by the SC for the regulated activity of fund management and set up for thesole purpose of managing the operations of the BT.

Business trust in a nutshell

A business trust is created when a company hives off some of its assets into the care of anappointed party that acts as both trustee and manager of the assets. The trustee-manager, whichthen legally owns those assets, manages them for the benefit of unit holders looking to ride onthe assets' prospects. Assets that are hived off and put into a business trust are essentially yield-generating assets.

Unit holders

Business trust

Assets/ properties

Trustee-manager

Holds units

Management and

trustee services

Legal ownershipBeneficial ownership

Holds units

Holdsinterest


Promoter



Pros andcons of a BT

1. Distribution of returns

Unlike companies, distribution of returns is not governed by theBT’s accounting profits. A BT is able to pay out distributions solong as there is:

• sufficient cash flow, and

• the board of directors of the trustee-manager has declared in writing that the trustee-manager is able to fulfil the liabilities

of the BT as and when they fall due.This feature is particularly attractive for capital intensiveindustries, such as infrastructure and telecommunications. Thecompanies in these industries generally have strong stable cashflows but reduced operating margins due to substantialdepreciation of their assets, which restricts the amount ofdividends that can be paid.

Advantages

Due to its unique structure, a BT extends a variety of advantagesto both the owner of the assets or properties (the promoter) andthe investors, notably in the following areas:




3. No restriction on the type of assets held

As the name suggests, a BT is free to operate a business in anyindustry and therefore there is no restriction on the type ofassets it may hold. A BT is not subject to the requirementsimposed on a real estate investment trust (REIT) by the SC inrelation to the type of assets that can be held.

4. Gearing

There is flexibility in meeting the funding arrangements for aBT as it is not subject to any gearing restrictions.

The drawbacks

From an investor’s perspective, a BT may be deemed a riskierform of investment due to the flexibility discussed above. Based

on the experience of other countries, the typical concerns raised by investors include governance issues and the risk level of BTscompared to other forms of investments e.g. shares incompanies and units in REITs.

2. Retaining control of the assets

The promoter would normally hold majority interest in thetrustee-manager as well as the predominant share of the unitsin the business trust. This gives them control over the assets ofthe BT and ensures optimal monetisation of assets to thepromoter from the listing of the BT.

In addition, the removal of a trustee-manager requires not lessthan two-thirds of the voting rights of all the unit holdersentitled to vote at a general meeting.




Listingrequirements

Legislative changes were made to the Main Market ListingRequirements of Bursa Malaysia Securities Bhd to facilitate theemergence of this new BT framework.

The listing provisions applicable to a corporate listed issuer aregenerally also applicable to a BT, subject to the necessarymodifications in light of its trust structure. These provisions

include requirements on admission, public spread, compositionof independent directors, and post listing obligations such as therequirements for disclosure including immediate announcementof specific events, quarterly reports and annual reports,requirements on related party transactions and financialcondition. Bursa Malaysia is committed to ensure that investorsin BTs are accorded the same level of investor protection as that

given under a corporate issuer. Related amendments have also been made to the Rules of the Bursa Depository.




Criteria Listing requirements

Financial / track

record

Satisfy the market capitalisation test as follows:

(a) Market capitalisation

A total market capitalisation of at least RM1

billion based on the issue or offer price.

(b) Pro forma accounts

Where a listing of a BT is sought based on the

strength of the BT group, the BT seeking

listing (if it has been established) and the

subsidiary entities of the BT must have

common controlling unit holders or controlling

shareholders for at least one full financial year

prior to submission to the SC.

(c) Operating historyHas been in operation and generated

operating revenue for at least one full financial

year prior to submission to the SC.

In addition to the above requirements, where the

core business of the BT group is that of an

infrastructure undertaking, it should also fulfil the

following requirements:

• Concession or license to build and operate the

infrastructure awarded by a government or a

state agency in or outside Malaysia

• A development cost of at least RM500 million

• Remaining concession or license period of at

least 15 years from the date of submission to

the SC.

Core business • Identifiable core business of which the BT has

majority beneficial ownership and the trustee-

manager (acting on behalf of the BT) has

management control.

• The core business is not the holding of

investments in other listed BTs or listed

corporations.

The more pertinent BTlisting requirements underthe Business TrustsGuidelines and the MainMarket of Bursa MalaysiaSecurities Berhad areoutlined in this table:




Criteria Listing requirements

Financial position

and liquidity

The BT group has a healthy financial position,

with:

(a) sufficient level of working capital for at least

12 months from the date of the listing; and

(b) positive cash flow from operating activities.

Public spread • Initial listing: 25% of total units in the hands of

at least 1,000 public unit holders holding not

less than 100 units each.

• Continuing basis: 25% in the hands of the

public.

Board composition • At least 2 directors or 1/3 of the board,

whichever is higher, as independent directors.

• Audit committee comprises a majority of

independent directors.

Transactions with

related parties

(see diagram on

the next page)

• Based on terms and conditions which are not

unfavourable to the BT and are not detrimental

to the interests of the unit holders.

• All trade debts exceeding the normal credit

period and all non-trade debts, owed by the

interested persons or major unit holders to the

BT, must be fully settled prior to the BT’s

listing.

Listing requirements




Related parties in a BT framework

* A person who has an interest or interests in one or more units in a business trust and the unit, or theaggregate of those units, is:

(a) equal to or more than 10% of the aggregate of the units in the BT; or(b) equal to or more than 5% of the aggregate of the units in the BT where such person is the largest

unit holder of the BT.

** A person who has an interest or interests in one or more voting shares in the trustee-manager andthe nominal amount of that share, or the aggregate of the nominal amounts of those shares, is:

(a) equal to or more than 10% of the aggregate of the nominal amounts of all voting shares in thetrustee-manager; or

(b) equal to or more than 5% of the aggregate of the nominal amounts of all voting shares in thetrustee-manager where such person is the largest shareholder of the trustee-manager.


Director or majorshareholder** oftrustee-manager

Trustee-manager

Person connected withany director or major

shareholder of trustee-manager

Person connected withtrustee-manager or a

major unit holder

Major unit-holder*

Related parties ina business trust



Taxtreatment

Tax rate

A BT is treated as a company for tax purposes. Therefore a BT istaxed at the prevailing corporate tax rate, currently at 25%.

Residence status

The residence status of a BT is determined based on the residence

status of the trustee-manager. The trustee-manager is considereda Malaysian resident if the business of the BT is carried out inMalaysia and the management and control of the business isexercised in Malaysia.

Tax incentives

In general, a BT is eligible for tax incentives applicable to acompany with the exception of those which are given to acompany incorporated under the Companies Act 1965.

Transfer of assets to a business trust

The control transfer provisions of the Income Tax Act 1967 whichapply to the transfer of assets between two parties (where one has“control” over the other or where both are subject to common“control”) on which capital allowances or other similar allowanceshad been claimed, are also extended to the transfer of assets froma unit holder to a business trust. The control transfer provisioneffectively allows the transferee to continue to claim capitalallowances on the asset and defers the computation of balancingcharge or allowance until subsequent disposal of the asset by the

transferee.

“Control” in the context of a BT refers to the right to not less thanfifty per cent of residual profits of the BT available fordistribution, or not less than fifty per cent of any residual assets ofthe BT available for distribution on a winding up.




Group relief

Group relief of tax losses which applies to companies within thesame group is extended to BTs. Based on Public Ruling10/2013 [Taxation of business trust], the Inland Revenue Boardtakes the view that the group relief provisions in the context of aBT are restricted to BTs within a group.

Exemptions from stamp duty and real property gainstax

To promote the establishment of BTs, the government hasgranted the following exemptions for purposes of initial offeringof BTs:

• Stamp duty exemption on all instruments executed by atrustee- manager on behalf of a BT in relation to the transferof any business, asset or real property to a BT

• Real property gains tax exemption for the transfer of realproperty and shares in real property companies to a BT.

Taxation of unit holders

Similar to a company, income tax of a BT is paid at the trustlevel while trust distributions (like dividends) are not taxable inthe hands of unit holders.




Considerations

If you are considering a BT as an alternative business and listing vehicle, here are some issues to consider:

• Ability of the business to generate strong regular cash flows –This is relevant if the objective of the BT is to distributeregular high returns to unit holders.

• Funding requirements – The size of funds and timing of when

funds are required, are relevant factors in choosing between aBT or a company as the listed vehicle.

• Transaction costs - As with any restructuring exercise, there will be transaction costs involved because businesses/assetsare being moved around. Identify these costs so you candetermine the quantum involved and enable appropriatestructuring of the transaction to achieve cost efficiencies.

• Tax efficiency of BT group – Consider the tax position of theBT group upon formation of the BT, to minimise any taxinefficiencies/leakages and ensure that entitlement to existingtax incentives (if applicable) continues.




Conclusion

The BT structure is suitable for businesses with large capitaloutlay and assets generating strong and stable cash flows. It can

be used as a vehicle to unlock the value of capital assets held andensure optimal monetisation of assets to the promoter, providefunding to the business within a relatively short period of timeand give high returns to its investors/unit holders. On a macrolevel, the launch of the BT as an alternative listing vehicle,

enhances the government’s objective of further developing theMalaysian capital market.

From a tax perspective, clarity on the treatment of BTs has beenprovided through legislative amendments and the recently issuedPublic Ruling 10/2013. In general, the tax rules put BTs and unitholders on the same footing as companies and shareholdersrespectively.




Malaysia Hong Kong Singapore

Legal structure Created by a trust deed(not a separate legal entity) Created by a trust deed(structure involves a trust and

a listed company which is a

separate legal entity)

Created by a trust deed(not a separate legal entity)

Legal

ownership of

trust assets

Trustee-manager Listed company Trustee-manager

Listing Listed on the Main Market of

Bursa Malaysia

Listed on the Hong Kong

Stock Exchange

Listed on the Singapore

Stock Exchange; or may beunlisted

Investment

restrictions

None None None

Gearing limit None None None

Distribution • Paid out of cash flows,

subject to solvency

requirements

• Distributions from trust -

paid out of cash flows,

subject to solvencyrequirements

• Distributions from listed

company - restricted by

legal requirements of

jurisdiction of incorporation

• Paid out of cash flows,

subject to solvency

requirements

Tax treatment • BT- Taxed at corporate tax

rate of 25%

• Unit holders - Trustdistributions not taxable

• BT - taxed at profits tax rate

of 16.5%


• BT - Taxed at corporate

tax rate of 17%


Regulatory

framework

• Capital Markets and

Services Act 2007

• Business Trust Guidelines

• Bursa's Main Market

Listing Requirements

• Hong Kong Companies

Ordinance

• Hong Kong Stock Exchange

Listing Rules

• Hong Kong Code on

Takeovers and Mergers

• Securities and FuturesOrdinance

• Singapore Business Trusts

Act 2004

• Singapore Securities and

Futures Act

• Singapore Exchange

Listing Manual

Primary

regulator

• Securities Commission

• Bursa Malaysia Securities

Berhad

• Hong Kong Stock Exchange • Monetary Authority of

Singapore

• Singapore Stock

Exchange

* The concept of business trusts in Hong Kong is achieved using the “share stapled units” model whereby investors holdshare stapled units jointly issued by the BT and listed company.

A regional comparison of BTs

Appendix




Notes




Let’s talk

PwC Alert is a digest of topic al financial and business information for clients and busin ess associates of PwC Malaysia. Whilst every c are has been taken in compiling this newsletter, wemake no representations or warranty (expressed or implied) about the accuracy, suitability, reliability or c ompleteness of the information for any purpose. PwC Associates Sdn Bhd, its

employees and agents accept no liability, and disclaim all responsibility, for the consequ ences of anyone acting, or refraining to act, in reliance on the information contained in thispublication or for any decision based on it. Recipients should not act upon it without seeking specific professional advice tailored to your circumstances, requirements or needs.

© 2013 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” and/or “PwC” refers to the individual members of the PricewaterhouseCoopers organisation in Malaysia,

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Tel:+603 2173 1469 [email protected]

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