A step in the right direction

MY SAY by MARCUS VAN GEYZEL

The major talking point of the past week was the announcement by Prime Minister Datuk Seri Najib Razak of several measures to promote foreign direct investment (FDI) in Malaysia. These included a liberalisation of foreign ownership of fund management, unit trust management and stockbroking companies as well as the establishment of Ekuiti Nasional Bhd (Ekuinas), a private equity fund aimed at involving bumiputera participation in commercial activities. The big news, however, was the disbanding of the Foreign Investment Committee (FIC), the immediate repeal of its guidelines related to the acquisition of equity stakes, mergers and takeovers (M&A) and the removal of the requirement for 30% bumiputera equity ownership in public-listed companies (PLCs).

As the dust settles on that 46-paragraph speech, the question is: What is the real, practical, commercial effect of this slew of changes? This article will focus on the main changes involving the FIC, the acquisition of equity, M&A, initial public offerings (IPOs) and the acquisition of properties.

The FIC was introduced in 1971 to help push the New Economic Policy (NEP) agenda of regaining control of Malaysia’s economy from foreigners. The FIC was charged with supervising foreign interests in corporate equity and properties and imposed guidelines to ensure bumiputera participation.

In recent years, however, it became obvious that the restrictions imposed by the FIC were a major hindrance to the development of business and the capital markets. The government realised that the FIC’s focus on imposing equity percentage requirements had not produced the desired effect of increased bumiputera participation in the economy, with the equity numbers often being met by allocations to passive or institutional investors. To illustrate this, Tan Sri Nor Mohamed Yakcop, Minister in the Prime Minister’s Department in charge of the Economic Planning Unit (EPU), pointed out that from 1984 to 2005, only RM2 billion of the RM54 billion worth of equity that was allocated to bumiputeras continued to be held by them.

As Malaysia comes to terms with its first economic contraction of the century, the government decided that changes had to be made to create greater economic growth momentum and market vibrancy.

The FIC’s guidelines in respect of the acquisition of equity and M&A have been immediately repealed. It has also been announced that PLCs will no longer be subject to post-IPO equity conditions and outstanding equity conditions previously imposed on PLCs will be removed immediately.

In relation to IPOs, companies previously needed to meet the equity conditions of both a 25% public spread and a 30% bumiputera shareholding imposed by the Securities Commission (SC) and the FIC respectively. Following the liberalisation, the FIC requirement has been removed and companies intending to list are only required by the SC to offer half of the required public spread — 12.5% — to bumiputeras. Nor Mohamed has also stated that in the event there are insufficient bumiputera investors to purchase the shares, this requirement will be waived.

These changes are significant, enabling Malaysian and foreign businesses to focus on building a successful business rather than having to worry about ensuring continuous bumiputera participation. Under previous administrations, the FIC requirements placed a heavy burden on companies, not just at the IPO stage, but also at the post-IPO stage.

At the listing stage, a company was required to account for the allocation of at least a 55% stake (25% public shareholding spread and 30% bumiputera equity). This resulted in Malaysia being perceived — both locally and internationally — as a comparatively troublesome listing destination. This perception manifested itself in recent years in a significant reduction in FDI and an increase in Malaysian companies seeking foreign exchange listings.

Under the FIC, the obligations of companies did not end with a successful listing, but also affected post-listing fund-raising opportunities. If a bumiputera investor at the listing stage later decided to sell down, the PLC had to make up for it by increasing the bumiputera stake within a certain time frame or when implementing future fund-raising exercises. This gave PLCs a major headache in the past as they had to effect private placements to new bumiputera investors or continuously seek waivers or deadline extensions from the FIC, incurring additional costs and time that could have been better used to drive the business forward.

Of course, the government is not casting aside the importance of bumiputera participation in business, but that is being maintained as a macro-objective, to be implemented in a more market-friendly manner and monitored by sector regulators. The prime minister underlined the importance of ensuring effective and meaningful economic participation by bumiputeras, not just maintaining equity ownership numbers. The introduction of Ekuinas is seen as an avenue for bumiputeras to move from being merely passive investors to playing more participatory roles.

In relation to property transactions, a new department under the EPU has been set up and a guideline on the acquisition of properties has been issued, effective immediately. EPU approval will only be required for transactions involving the sale of property by bumiputeras to non-bumiputeras or by government interests for more than RM20 million.

These changes are expected to entice local and foreign investors to purchase commercial and residential properties. Regional property players or real estate funds can build up their landbank in the country without having to worry about clearing the FIC hurdle. Overall, the decrease in red tape should rejuvenate a sluggish property market and enhance Malaysia’s attractiveness, not only as an investment destination, but also a location for multinational corporations to set up regional hubs.

However, while welcoming the announcement, the industry remains cautious, wondering whether the move will achieve its desired effect. State land authorities retain their powers over land matters and nothing has been said about a removal or relaxation of the requirement to obtain state authority approval under the National Land Code for the purchase of properties by foreigners. Realistically, this should not be a major stumbling block for foreign investment as the approval of state authorities is often a matter of course and just adds a few months to the transaction’s completion period.

However, the initial cheer that greeted the liberalisation measures has been toned down by pessimism about their implementation. In relation to IPOs, there has been some confusion as to how the equity requirements will be calculated and regulated. The SC published some clarification on its website that will hopefully help clear up some of the major questions.

According to the SC, companies with Malaysia-based operations seeking to list on the Main Board have to allocate 50% of the public spread requirement (25%) to bumiputera investors. The shares made available for subscription via balloting are also included in this figure and 50% of those shares must be made available to retail bumiputera investors. In practice, the 25% public spread is met by making up to 5% available to the general public via balloting and the balance 20% is placed to non-substantial shareholders.

Under the new regime, 2.5% of the former and 10% of the latter must be made available to bumiputeras. In respect of the 10%, companies must apply to the Ministry of International Trade and Industry or — for licensed financial institutions — the Ministry of Finance for the shares to be allocated to bumiputera investors recognised by both ministries. Where these approved investors do not take up the full 10% offered, the balance will be offered to the bumiputera general public in addition to the 2.5% mentioned earlier. Once this process has been completed, the bumiputera equity requirement is deemed to have been fulfilled. It should be noted that the above figures are minimums and there are no restrictions on potential equity holdings.

Looking at the above, there is obviously still room for confusion and the full impact of the measures will only be determinable once they have been put into practice. As mentioned earlier, the changes in the property sector may also need to be implemented at state level to see a major impact on the industry. However, it is difficult to perceive the new measures as anything but positive.

The liberalisation measures will not immediately open the FDI floodgates and revive the economy. Further changes are needed and it is hoped that the measures are an indication of more to come. However, it is certainly a step in the right direction and, taking into account the potential sensitivities that come from making wholesale changes to a regime that came about as part of the NEP, the government should be deservedly lauded for these measures.

Marcus van Geyzel is a senior associate in the corporate and commercial division at Mah-Kamariyah & Philip Koh, Advocates & Solicitors

This article appeared in The Edge Malaysia, Issue 762, July 6-12, 2009 [Link]

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