Prime Minister Najib Razak announced a comprehensive series of liberalisation measures during his key note address at the Invest Malaysia 2009 conference at the end of June 2009. The measures announced, which could have far reaching consequences for the Malaysian economy, build substantially on the liberalisation programmes announced on 22 April and 27 April 2009 (as summarised in our e-bulletin of 12 May 2009).
Deregulation of the Foreign Investment Committee (FIC) Guidelines and related measures
The FIC guidelines were introduced in 1974 as one of the policy instruments to achieve the target of at least 30% Bumiputera (broadly speaking, the indigenous people of Malaysia) ownership over corporate equity in Malaysia. At that point in time, Bumiputera owned only around 2% of the equity of companies in Malaysia and therefore such equity allocation policies were viewed as relevant and necessary to redress a perceived imbalance created by the lack of opportunities available to the Bumiputera majority of the country.
Now, however, Prime Minister Najib has concluded that "in the context of the challenges that the nation faces, the guidelines of the FIC appear to have outlived their usefulness..." and that "an objective assessment would conclude that the FIC in its current form does not facilitate growth nor does it effectively promote sustainable equity for the 'capital-disadvantaged' Bumiputera."
The review of the FIC guidelines has resulted in significant changes in the rules governing:
- the acquisition of equity stakes, mergers and takeovers;
- listing requirements and subsequent fund raising by listed companies; and
- the acquisition of real estate.
Acquisition of equity stakes, mergers and takeovers
With immediate effect, and building on from previous liberalisation measures implemented in relation to the financial and service sectors (see oure-bulletin of 12 May 2009), the FIC guideline covering the acquisition of equity stakes, mergers and takeovers has been repealed. As a result:
- subject to limited exceptions (some of which are discussed below), there will no longer be a general 30% Bumiputera equity condition imposed by the FIC;
- regulators of certain strategic sectors will, however, be able to continue to impose equity conditions on companies in those sectors. These regulators include Bank Negara Malaysia (BNM), the Energy Commission, the Commercial Vehicles Licensing Board, the National Water Services Commission, the Malaysian Communications and Multimedia Commission (see our e-bulletin of 12 May 2009 for details of changes in the foreign equity restrictions imposed by BNM on the banking and insurance sectors); and
- the government has also decided to release companies from all other existing conditions (equity or non-equity) imposed by the FIC with immediate effect.
Listing requirements and subsequent fund raising by listed companies
Initial Public Offerings
Steps have also been taken to improve Malaysia's attractiveness as a listing destination. Prior to 30 June 2009, companies with Malaysian based operations1 that sought a listing on Bursa Malaysia were required to satisfy:
- the FIC guideline 30% Bumiputera equity condition;
- a 25% public spread (i.e. free float) requirement under the Bursa Malaysia Listing Rules; and
- any sector specific equity conditions imposed by sector regulators (see above).
Following Prime Minister Najib's recent announcement, the FIC guideline 30% Bumiputera equity condition is now no longer applicable. Instead, a company with Malaysian based operations wishing to list on Bursa Malaysia must satisfy:
- a 25% public spread or free float requirement imposed by the Securities Commission (SC), provided that at least half (i.e. 12.5%) of that public spread must on listing be offered to Bumiputera investors; and
- any sector specific equity conditions imposed by sector regulators (see above).
It should be noted that existing Bumiputera shareholders who individually will hold less than 5% of the enlarged (i.e. post-listing) share capital of the company seeking a listing can be recognised as part of the Bumiputera equity requirement for that company at the time of listing.
Subsequent fund raising / corporate actions
The general rule is that equity conditions will not be imposed on fund raising exercises by listed companies involving the placement of shares (and any outstanding Bumiputera equity requirements previously imposed on companies will be removed), however:
- although the 12.5% Bumiputera equity requirement imposed by the SC will not generally apply, any applicable sector specific equity conditions will still need to be observed;
- if the proposed placement results in the creation of one or more new controlling shareholders2 of the company, the revised Bumiputera 12.5% free float equity condition will be imposed; and
- in the case of a reverse take-over, a listed company must comply with the 12.5% Bumiputera equity requirement on the third anniversary of the implementation of the proposal.
Acquisition of real estate
The scope of the FIC's authority in relation to property transactions has also been substantially reduced with immediate effect. This deregulation is expected to facilitate greater property transactions and investments by foreign interests. FIC approval shall now only be required where it involves:
- a direct acquisition of property owned by Bumiputera or a Malaysian governmental agency which is valued at RM20 million or above; or
- an acquisition by an entity other than Bumiputera of a controlling interest in a company which: (i) is owned by Bumiputera or a Malaysian government agency; and (ii) has property valued at more than RM20 million which compromises more than 50% of its assets.
Further, if FIC approval is required, an acquiring company will need to satisfy the following equity and paid-up share capital conditions:
- Bumiputera must hold at least 30% of the company's issued share capital;
- if it is a Malaysian-owned Malaysian registered company it must have paid up share capital of at least RM100,000; and
- if it is a foreign-owned Malaysian registered company it must have paid-up share capital of at least RM250,000.
For a direct acquisition of property that requires FIC approval, the above conditions must be complied with before the transfer of the property's ownership. In the case of an indirect acquisition (i.e. an acquisition, as above, of a significant stake in a company that holds Bumiputera or government property), these conditions must be complied with within one year of the issuance of written approval by the FIC.
All other property transactions, including those between foreigners and non-Bumiputera, will no longer require FIC approval.
However, whilst FIC approval might no longer be required for a significant number of property acquisitions, it should be noted that certain acquisitions, including the purchase of the following property interests by a foreign party, will require the authorisation of certain Malaysian government ministries and/or government departments:
- commercial units or industrial units valued at RM500,000 and above;
- agricultural land used for certain purposes which is valued at RM500,000 and above; and
- residential units valued at RM250,000 and above (this threshold will rise to RM500,000 on 1 January 2010).
Acquisitions of commercial, industrial or agricultural land/units in the categories listed above will need to be registered under a Malaysian incorporated company.
It should also be noted that the foreign acquisition of certain specific types of property including residential units valued at less than RM250,000 and non-residential properties valued at less than RM500,000 is not permitted.
Capital market intermediaries
The liberalisation provisions announced by the Malaysian Prime Minister also include a package of measures designed to encourage more foreign participation in the Malaysian stock broking, fund management and unit trust industries and to facilitate strategic partnerships between foreign entities and domestic Malaysian companies in this sector. The reforms are intended to increase liquidity in the trading of equity, bonds and derivatives in Malaysia and to expand the pool of products available to investors.
Foreign shareholding limits
Foreign shareholding limits for both funds and stock broking companies have been relaxed. Specifically:
- qualified and leading fund management companies in the wholesale fund management industry will be allowed to establish 100% foreign owned operations in Malaysia;
- foreign shareholding limits for unit trust management companies in the retail sector will be raised to 70% from the current level of 49%;
- foreign ownership limits for stock broking firms will be raised to 70% from 49%; and
- provided that they satisfy certain criteria, existing licensed funds and stock broking firms may restructure their shareholdings in accordance with the above revised limits. It should be noted that foreign ownership levels will be calculated on the basis of both direct and indirect interests in the relevant company. It should also be noted that a change of a controlling shareholder2 of a capital market intermediary may also trigger the requirement to make the appropriate applications to, and potentially seek approval from, the SC.
Applications for licences by foreign companies
Other than two licences to be issued to firms that can intermediate in Middle Eastern transactions, no new licences will presently be issued to stock broking firms.
New licences may be issued on a selective basis to fund management companies and unit trust management companies. Aside from meeting the relevant regulatory requirements, foreign companies will only be granted a licence if the SC considers that the applicant:
- has a strong value proposition;
- can demonstrate the ability to add value to the development of the Malaysian capital markets industry;
- can exhibit a good track record in its international operations (including with regard to its financial position, reputation and expertise);
- demonstrates competence in the area it is seeking a licence in; and
- provides a viable business plan incorporating specific deliverables (which will be monitored on a regular basis).
It should be noted that the existing requirement for 30% of the employees, licensed representatives and directors of a capital market intermediary company to be Bumiputera, will remain.
Other related measures
Capital Market Services Act
The Malaysian Prime Minister also announced a set of amendments to the Capital Market Services Act, which governs the capital markets framework in Malaysia. The aim of these amendments is to strengthen the enforcement powers of the SC on corporate governance issues.
The new amendments, to be tabled in Parliament, will:
empower the SC to take action against a director or officer who causes wrongful loss to a listed company or its subsidiary, which causes detriment to the shareholders of the listed company; and allow the SC to prevent the wrongful dissipation of the assets of a listed company by those managing it.
A new offence of influencing, coercing or misleading any person engaged in the preparation or audit of financial statements of a listed company is also to be incorporated into the Capital Market Services Act. To complement this new offence, an independent Auditor Oversight Board will be established under the Securities Commission Act 1993.
EKUINAS - New private equity fund
The Malaysian Government has now established a new investment institution, Ekuiti Nasional Berhad (EKUINAS), which has an initial capital totalling RM500 million, although the target is for the fund's capital to be increased to RM10 billion over time.
EKUINAS is wholly owned by the Malaysian government but managed by Bumiputera professionals rather than government representatives. The new fund will focus on companies with high growth potential and will invest jointly with private sector funds. Specifically, EKUINAS will focus on strategic sectors such as medical tourism, education, ICT and oil and gas.