Breaking the Sacred Cow

Malaysia reforms decades old race-based policy

“These measures demonstrate Malaysia’s readiness to compete on a more level playing field based on meritocracy.”
- Datuk Seri Mohd. Najib
Tun Abdul Razak,
Prime Minister of Malaysia

Desperate times call for desperate measures as the old saying goes. And while one would not call the Malaysian economic situation desperate or even dire, we cannot deny that things aren’t exactly bright and beautiful as well. In a contracting global economy, the need to bring in foreign investments becomes even more important than ever. Admittedly, while Malaysia was once a prime destination for FDIs in the region, it has lost its lustre of late. This is owing to several factors – some external and some internal. External factors include the increased popularity of countries like China and Vietnam as investment destinations owing to cheaper cost of labour and land. Internal factors include red tape and regulations that serve to keep investors at bay.

An unexpected announcement

While Malaysia cannot do much – if anything – about external forces, it can definitely do something about the internal factors that present problems for the investors. As such, economic liberalisation has become one of the main priorities for Datuk Seri Najib Tun Razak since he became the Prime Minister. In April 2009, not long after he took office, the Prime Minister – who is also the Finance Minister – made the announcement that the Government will be liberalising 27 services sub-sectors by allowing increased foreign ownership. This was followed by a further announcement that foreign ownership rules in the finance sector would also be relaxed.

Many people were thus expecting more reforms, and this was promised by the Government. What many, however, did not expect though would be the scope of these reforms. It started with Datuk Seri Najib’s keynote speech at the Invest Malaysia conference on the 30th of June. Being his first appearance as Prime Minister in the annual conference, he was most likely looking to make a memorable mark.

And so he did when he announced that the Government will be lifting the 30% Bumiputra equity requirement for companies seek-ing to be listed on the stock exchange. With this bold move, the Government has addressed one of the bugbears of many investors and companies. Explaining the rational for this decision, Datuk Seri Najib said “Investment policies creating regulatory uncertainty and that are not in line with international practice, will only constrain our growth potential.”

Furthermore, along with the relaxation of the equity ruling, the Government has also decided to cut down the powers of the Foreign Investment Committee (FIC) which has also been a bete noire for foreign investors in the country. As he stated, “the dynamism and complexity of today’s economy does not sit well with the blunt ‘one size fits all’ approach of FIC.” 

Amongst the changes implemented would be the repeal of the FIC’s role in approving acquisition of equity, mergers and takeovers. Furthermore, the FIC has also been stripped of its powers to approve property transactions by non-Bumiputra and foreign companies. As such, its approval is only required for transactions of property where Bumiputra companies or the Government has an interest valued above RM20m.

Reactions

The fact that the Government is willing to address what has long been a sacred cow in Malaysia’s political-economic structure – namely the 30% Bumiputra equity for public-listed companies is extremely noteworthy. While reactions have been mixed with the private sector and foreign missions generally being supportive of it, there has also been some misgivings by members of the public over the move.

One person who has welcomed the move is H.E. Abdel Kader Pierre Fall – the Ambassador of Senegal and the Vice-Dean of the African diplomatic group in Malaysia who described the moves as “a step in the right direction”. He explained that at times, African businessmen who were seeking to invest in Malaysia did not understand the reason behind the equity rulings and as such did not feel as secure and confident as they should be.

The moves were also applauded by the Australian Government, whose Foreign Minister Stephen Smith said that it was “an important sign of Malaysia’s commitment to liberalisation and an open economy”. Positive sentiments were also expressed by Dr. Yeah Kim Leng, the Chief Economist at RAM Holdings who said, “Given the sharp drop in foreign direct investments, this move will put Malaysia in a favourable position to attract FDIs and sustain domestic investments which have been in the doldrums since the 1998 Asian financial crisis.”

However, along with the commendations there have also been condemnations and criticisms over this move. These mainly came from quarters which expressed concern that these measures will retard the socio-economic goal of achieving equitable Bumiputra participation in Malaysia’s economic life.

At the end of the day though, we cannot ignore the fact that the amount of FDIs in Malaysia have been lagging behind other countries in the region. For instance in 2008, the country reported FDIs of US$13.32b compared to US$60.27b for Vietnam, US$0.86m for Thailand, and US$92.40b for China.

Taking China out of the equation, because its large economy has attracted the lion’s share of foreign investments since it opened up in the 1990s, we can see that Malaysia has not been doing too well. After all, back in 2004, Malaysia managed to secure US$7.57b worth of FDIs compared to Vietnam’s total of US$2.08b. Of course some will point to the fact that Thailand has been lagging in terms of FDIs, but that can be attributed to the political instability it has encountered in the past few years.

There is thus no doubt that as other countries open up their markets, Malaysia’s attractiveness as an investment destination is diminished, and the Bumiputra regulations do not help in anyway. In a nutshell, whether one likes it or not, it was high time that the Government looked at this situation.

Hold the applause

It should be noted though that the liberalisation measures do not in any way signal the end of the Government’s long-term plans for Bumiputra advancement in business and the economy. Explaining that the Government seeks substance over form, Datuk Seri Najib noted that, “A 30% minority stake in a given company in fact does not provide an avenue for representative participation. Further, it has been shown that the lack of capital results in the 30% stakes held at company level not being sustainable.”

Instead of requiring companies to have a 30% Bumiputra equity upon listing, the new ruling states that they need to offer 50% of the compulsory 25% public share offering to Bumiputra thus bringing the required equity stake to 12.5%. Furthermore, this stake is a one-time requirement, which means that if the Bumiputra stake is reduced, the company does not need to ‘top-up’ the balance.

However, in order to help ensure continued Bumiputra participation, the Government has also set up Ekuiti Nasional Berhad (Ekuinas) – a private equity firm that will make purchases of shares in companies. Through this, Ekuinas will seek to invest in companies and will then promote capable Bumiputra managers and executives.

Furthermore, it should be noted that liberalisation does not extend to sectors and companies that are deemed to be of strategic national interests. As the Prime Minister explained, these include businesses that are regulated by statutory bodies such as Bank Negara, the Energy Commission, the Commercial Vehicles Licensing Board, the National Water Services Commission and the Malaysian Communications and Multimedia Commission. As such, equity requirements for companies in these sectors still remain.