Najibnomics – Lesson 5

Ho Chun Yau provides the highlights of the Prime Minister's Speech at the Invest Malaysia Conference 2009

 

 

 

NAJIBNOMICS

The origins of Najibnomics can be traced back to 4 November 2008 when Dato' Sri Mohd Najib bin Tun Abdul Razak, then the Deputy Prime Minister of Malaysia, as part of the groundwork for his succession to the office of Prime Minister, unveiled an RM7.0 billion stimulus package to counter the effects of the global recession.

 

After assuming the Finance Ministry portfolio, Dato' Sri Mohd Najib delivered the second lesson of Najibnomics on 10 March 2009 when he unveiled an RM60.0 billion second stimulus package to counter-act the further deterioration in the global economy.

 

Shortly after assuming the office of Prime Minister of Malaysia, Lessons 3 and 4 of Najibnomics were delivered in quick succession with the announcement of the liberalisation of twenty-seven services sub-sectors and of the financial services sector on 22 and 27 April 2009 respectively.

 

Lesson 5 of Najibnomics was delivered by the Prime Minster in his key-note address at the Invest Malaysia Conference 2009 on 30 June 2009 when he announced two significant measures to accelerate the liberalisation of the Malaysian economy, namely the deregulation of the investment guidelines administered by the Foreign Investment Committee (“FIC”) and the liberalisation of equity ownership holdings in capital market intermediaries.

 

 

DEREGULATION OF FIC

 

Background

The FIC was formed in 1974. Its original task was to formulate policies to ensure that the objectives of the New Economic Policy are achieved, namely the eradication of poverty and the correction of the economic imbalance so that bumiputeras, other Malaysians and foreign interests would hold 30%, 40% and 30% respectively of the nation's economic wealth. This resulted in the introduction of the Guidelines on Acquisition of Assets, Mergers and Take-Overs in 1974 ("1974 Guidelines").

 

The 1974 Guidelines remained in force until 2004 when they were replaced by two sets of guidelines, namely the Guideline on Acquisition of Assets, Mergers and Take-Overs by Local and Foreign Interests ("2004 Acquisition Guideline") and the Guideline on Acquisition of Properties by Local and Foreign Interests ("2004 Property Guideline"), both of which took effect retrospectively from 21 May 2003. In a significant change in policy, the Government liberalised equity conditions and permitted all equity in a company to be held by local or foreign interests, subject only to the requirement that 30% equity must be held by bumiputeras.

 

 

Repeal of 2004 Guidelines

At the Invest Malaysia Conference 2009, Dato' Sri Mohd Najib said that the Government had carried out a comprehensive review of the FIC guidelines. According to the Prime Minister, "the guidelines of the FIC appear to have outlived its usefulness" in view of the competition for investments.

 

Accordingly Dato' Sri Mohd Najib announced the repeal of the 2004 Acquisition Guideline and the 2004 Property Guideline with immediate effect. The 2004 Acquisition Guideline would not be replaced by any other guideline but the 2004 Property Guideline would be replaced by the Guideline on the Acquisition of Properties ("EPU Guideline").

 

The Prime Minister further announced that all conditions imposed earlier on companies by the FIC would be waived automatically.

 

Notwithstanding the foregoing, a company may still be subject to equity conditions through sector regulators if it falls within sectors which the Government deemed as strategic sectors that are of national interest. Some of these sector regulators mentioned by Dato' Sri Mohd Najib in his speech include the Energy Commission, Commercial Vehicles Licensing Board, National Water Services Commission and Malaysian Communications and Multimedia Commission.

 

 

New EPU Guideline

 

The EPU Guideline will be administered by the Economic Planning Unit of the Prime Minister's Department (“EPU”).

 

The EPU Guideline prescribes 2 categories of property transactions that require the approval of EPU:

 

(a) direct acquisition of property valued at RM20 million and more which results in the dilution in the ownership of property held by bumiputera interest and/or government agency; and

(b) indirect acquisition of property by non-bumiputera interest through acquisition of shares which results in a change of control of a company owned by bumiputera interest and/or government agency where more than 50% of the total assets of the company consists of property and the value of such property exceeds RM20 million.

 

An indirect acquisition of property requires the approval of the EPU only if it results in a change in control of the target company from bumiputera and/or government agency to non-bumiputera. The word “control” is defined as any individual, company or parties acting in concert (a) having interests of more than 50% in a local company or local institution or (b) empowered to make and implement decisions pertaining to the business or administration of a local company or institution.

 

Except for property acquisitions which are prohibited under paragraph 10 of the EPU Guideline, the acquisition of property by foreign interests from non-bumiputeras does not require approval from the EPU, irrespective of the value of the property.

 

Appendix I of the EPU Guideline sets out 11 categories of transactions that do not require the approval of the EPU. These include acquisition of industrial land by a manufacturing company, acquisition of residential units under the "Malaysia My Second Home Programme", acquisition of property by MSC status companies within MSC areas for its operations or for residence by its employees and acquisition of properties by companies that have been granted special status by various ministries of the Government of Malaysia, such as International Procurement Centre, Operational Headquarters, Representative Office or BioNexus status.

 

Where a transaction required the approval of the EPU, the following conditions will be imposed:

 

(a) the company is to have 30% bumiputera interest; and

(b) a local company which is owned by local interest is to have at least RM100,000 paid-up capital whereas a local company which is owned by foreign interest is required to have at least RM250,000 paid up capital.

 

For direct acquisitions, the equity and paid-up capital conditions must be complied with before the ownership of the property is transferred. In the case of indirect acquisitions, the equity and paid-up capital conditions are to be complied with within 1 year after the issuance of EPU's written approval.

 

 

Fund Raising by Listed Companies

 

The Prime Minister also announced that Malaysian companies that seek a listing on Bursa Malaysia are only required to allocate 50% of the 25% public spread requirement to bumiputera investors. Hence the bumiputera equity condition will be subsumed within the public spread requirement. The exemption of foreign companies that seek a listing on Bursa Malaysia from compliance with any equity condition is maintained.

 

To ease fund-raising in the capital markets, the Prime Minister announced that post-listing fund raising exercises will no longer be subject to any equity condition.

 

 

Clarifications by the Securities Commission

The Securities Commission of Malaysia ("SC") released a set of Frequently Asked Questions ("FAQs") in relation to "Bumiputera Equity Requirements for Public Listed Companies" which provided further details on the announcements made by the Prime Minister.

 

In the FAQs, the SC clarified that companies with Malaysian-based operations that seek a listing on the Main Market of Bursa Malaysia are required to allocate 50% of the public spread requirement to bumiputera investors.

 

Companies that seek a listing on the ACE Market of Bursa Malaysia are only required to allocate 12.5% of their enlarged share capital to bumiputera investors recognised by the Ministry of International Trade and Industry within 1 year after achieving the profit required for a listing on the Main Market or 5 years after being listed on ACE Market, whichever is the earlier.

 

The SC further clarified in the FAQs that shares held by existing bumiputera shareholders who are not substantial shareholders can be included in determining whether the bumiputera equity requirement has been fulfilled. However, a company which undertakes a public balloting exercise is required to make available 50% of the shares to be balloted even if the company has fulfilled the 12.5% bumiputera equity requirement.

 

The FAQs also clarify that companies that have MSC status or BioNexus status and companies with predominantly foreign-based operations are exempted from the bumiputera equity requirement.

 

As regards post-listing fundraising exercises, the SC clarified that the new bumiputera equity requirement will apply where an issue of share results in the entry of one or more new controlling shareholders of the company, the rationale being that the SC treats reverse takeovers and backdoor listings like initial public offerings.

 

In the case of reverse take-overs, the company is required to comply with the 12.5% bumiputera equity requirement 3 years after the implementation of the proposal. For transfer of listing, the bumiputera equity requirement is to be complied with at the point of the transfer.

 

 

LIBERALISATION OF EQUITY HOLDINGS IN CAPITAL MARKET INTERMEDIARIES

 

The liberalisation measures announced by The Prime Minister at the Invest Malaysia Conference 2009 in respect of capital market intermediaries are discussed below.

 

Increase in Foreign Equity Limits

The wholesale segment of the fund management industry is fully liberalised. Qualified and leading foreign fund management companies will be permitted to establish wholly-owned operations in Malaysia.

 

In respect of the retail segment, the foreign shareholding limit for unit trust management companies is raised from 49% to 70%.

 

Similarly, the foreign shareholding limit for existing stockbroking companies is increased from 49% to 70%.

 

The Prime Minister acknowledged in his speech that liberalisation of the capital markets is inevitable and expressed the hope that liberalising ownership rules would encourage foreign players to use Malaysia as the base for their regional and international operations.

 

It is the Government’s view that the increase of foreign participation in the capital market intermediaries will increase the level of competition and promote innovation to drive growth at a faster pace.

 

 

Clarifications by the Securities Commission

In the FAQs issued by the SC on the "Liberalisation of Equity Holdings in Capital Market Intermediaries", the SC clarified that new fund management licences will only be issued to foreign companies which can demonstrate strong value proposition and add value to the Malaysian capital market.

 

The SC also emphasised in the FAQs that an applicant is expected to have a good track record in their international operations including financial position, reputation and expertise, and demonstrate proven competence. An applicant is required to provide a viable business plan and any licence issued to an applicant which is substantially foreign-owned will be conditional upon its meeting specific measurable deliverables within time-frames agreed upon with the SC.

 

The foregoing criteria will also apply to applicants for new licences for unit trust management companies. The SC added that in addition, new licences will only be issued to applicants who can value add to the growth of the local market, such as through lower transaction cost and greater product range.

 

The SC clarified in the FAQs that no new stockbroking licences will be issued other than the 3 new licences to be issued under the special scheme for stockbroking companies that can intermediate funds from the Middle East announced during Budget 2008 (of which one has been awarded to Nomura Securities).

 

Existing capital market intermediaries are permitted to restructure their shareholdings to take advantage of the liberalisation. The prior approval of the SC will be required if such restructuring results in a change in controller (as defined in section 60(7) of the Capital Markets and Services Act, 2007) of the licensee.

 

 

CONCLUSION

 

The pragmatic approach adopted by Dato' Sri Mohd Najib can be seen from his recognition of the inevitability of the liberalisation of capital markets and the need to adapt domestic policies to the growing competition for investments. In the words of the Prime Minister, "The pie must expand. There is no point in having a larger share of a shrinking pie."

 

The liberalisation measures announced at the Invest Malaysia Conference 2009 confirm the Government’s rhetoric in liberalising the Malaysian economy and should be applauded.

 

The nation eagerly awaits Lesson 6 of Najibnomics which is likely to be delivered by Dato' Sri Mohd Najib at his maiden budget speech on 23 October 2009.

 

 

HO CHUN YAU ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it )

 

 
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