Liberalisation or Desperate Measure?

Finally, the 30% quota Bumiputera (Native) requirement for new listing of public companies in Malaysia has been abolished by the Government of Malaysia! This is in the wake of the country's diminishing competitiveness and the continued diminishing foreign interest in Malaysia's capital market. The Government labels the move as an economic liberatisation. To me it's more like a desperate measure (against potential political flak) to salvage the alarming situation!

Let's take a closer look at the equity side. The current weightings of 2.2% of foreign funds in Malaysia (as a percentage of their Emerging Asia exposure) pales in comparison to its own historical averages of 3.7% post crisis and 4.0% in the preceding upcycle of 2003-07. The resulting ratios of current exposure to previous historical averages are therefore the lowest ever recorded! (Source: CIMB Research).

Despite the recent 20+% market rally in Malaysia, the support is primarily coming from local funds. This shows that Malaysia market has been ignored by foreign investors thus far in this run up, and the exposure is clearly on a downtrend rather than up!

Nevertheless, with the new measure, what this has done is that it has freed both Malaysian and foreign entrepreneurs from having to worry about obtaining a 30% bumiputra equity participation before they can expand their businesses.

The 30% bumiputra equity requirement thus is no more an administrative micro target. Instead the government will keep that as an overall macro target leaving it to regulators in the respective sectors to decide how to do it.

The significance of this becomes more apparent if one considers the listing process. Previously, one had to get a 30% bumiputra partner and then float at least 25% of the issued capital on the market through an IPO. That effectively meant that a majority of 55% stake had to be given up!

If the bumiputra investors subsequently sold out, the major shareholder will most likely be required to top up the bumiputra equity stake at the next fund-raising exercise.

Now, all it takes is a 25% public float of which half or 12.5% of equity capital will be allocated to bumiputras via a public balloting process. If not enough bumiputra participants have applied, the bumiputra requirement is deemed to have been met.

Also all listed companies do not have to periodically increase their bumiputra stakes to previous levels when these are sold down, thus eliminating a recurrent headache!

A more interesting public statistics shows that of the RM54bil of equity distributed to bumiputras through these means between 1984 and 2005, only RM2bil are still in bumiputras' hands!

On the other hand, all property transactions, except for those involving a dilution of government or bumiputra interests for property valued at RM20mil and above, would no longer require Foreign Investment Committee (FIC) approval.

The role of FIC has also become obsolete...Way overdue!

The world is getting flat....It's time to heed the wake up call or face elimination!