|September 2, 2000||atimes.com|
A new era in Asian shipping
CHAPTER 5: INVESTMENT IN MALAYSIA
Malaysian investment decline
Investment in Malaysia's manufacturing sector fell by 26 percent in 1999, with investment applications by foreign investors falling by 28 percent. Local investment applications fell 20.7 percent. The decline has been attributed by some to the government's decision to impose capital controls in September 1998, a move that restricted the flow of money in and out of the country.
The decline in investments is despite Malaysia's economy staging a dramatic turnaround in 1999, growing about four percent after shrinking 7.5 percent in 1998. Manufacturing production increased, inflation remained low and the Kuala Lumpur Stock Exchange began a recovery that has made it one of the world's best performers so far in 2000. From a low of 261 in September 1998, it was trading around the 810 mark in late August 2000.
However, the continuing decline in local and foreign investment does not augur well for the longer term as foreign direct investment is one of the most important drivers of the economy, last year accounting for 64 percent of total investment applications. New investment by companies wanting to expand existing operations fell 56.3 percent in 1999 as many companies are still using up capacity left over from the recession. The United States remained Malaysia's top foreign investor in 1999, but US investments fell 61 percent, to US$657.9 million.
The Malaysian government encourages direct foreign investment, particularly in export-oriented manufacturing and high-tech industries, but it has discretionary authority over individual investments. This is especially so in the case of investments aimed at the domestic market, where its authority is used to restrict foreign equity and to require foreign firms to enter into joint ventures with local partners. Malaysia has a stated policy of not promoting low value-added and labor-intensive industries, preferring "quality" investments.
Investors seeking a manufacturing license, either foreign or local, are screened by the Malaysian Industrial Development Authority (MIDA) to determine whether they are consistent with the Second Industrial Master Plan (1996-2005) and government strategic and social policies. MIDA is the government's principal agency for the promotion and co-ordination of industrial development in the country, including foreign investments and especially those in the manufacturing sectors.
Applications for investment in other sectors are handled by relevant regulators. For example, a multinational seeking a representative office in the banking sector must apply to Bank Negara Malaysia (the central bank). The acquisition of assets or any interests, mergers or take-overs of companies and businesses are governed by the Foreign Investment Committee (FIC).
Investment regulations are specified in the Promotion of Investments Act 1986 and the Industrial Coordination Act 1975. On acquisitions, mergers and takeovers, the Securities Commission and the Foreign Investment Committee implement the regulations specified in the Malaysian Code on Take-overs and Mergers. The Foreign Investment Committee also formulates policy guidelines for foreign participation in the non-manufacturing sector.
Types of business organizations
A foreign company or a multinational company can conduct business in Malaysia through any one of the following ways:
General policy limits foreign equity to a minority 30 percent share, but 100 percent foreign ownership in manufacturing is permitted in certain instances for export-oriented industries. Malaysia also promotes the holding of economic assets by Bumiputera (ethnic Malays) and usually requires foreign and domestic firms to take on Bumiputera partners (usually 30 percent) and to have a workforce which reflects Malaysia's ethnic composition.
Malaysia offers a number of fiscal incentives to foreign manufacturing investors, which may be linked to performance requirements. Foreign direct investors established in Malaysia are generally accorded national treatment in all but equity limits. Foreign portfolio investors are permitted to trade freely in both equity and debt on the local exchanges and to purchase available stock in newly privatized firms during an initial public offering. An exception is made for commercial banks, though, where foreign equity is limited to 30 percent in aggregate.
For virtually all publicly listed companies, only a minority portion of stock are available for trading; the majority are often held by the principal shareholders. Malaysia has a policy of privatization and foreign participation is generally welcome at all stages.
Capital controls were introduced on September 1, 1998, when the government pegged the ringgit at 3.80 per US dollar. Amid much criticism from the financial community, plus the resignation of the governor of the Malaysian Central Bank, the government blocked the removal of foreign currency from the nation. This immediately halted currency speculation by outside hedge funds, which many Malaysians blamed for starting their economic crisis.
Restrictions were eased in February 1999 when a two-tier system was introduced under which funds that came in on or after February 15, 1999, were subjected to a 30 percent levy on profit made and repatriated within one year. Profits repatriated after one year attracted a levy of 10 percent. In September 1999 Bank Negara announced a relaxation of capital controls by introducing a single 10 percent levy on all profits from foreign portfolio investments, replacing the two-tier system.
PTP plans Singapore offering
Port of Tanjung Pelepas (PTP) has indicated it will launch its initial public offering on the Stock Exchange of Singapore (SES) within eight months from August 2000. The listing will be important for PTP to raise capital for expansion. It has so far relied on 10-year syndicated loans and borrowings from the Employees Provident Fund.to finance the first stage.
The choice of the SES for the listing rather than the home Kuala Lumpur Stock Exchange (KLSE) could be the result of a long-standing problem between Malaysia and Singapore over Malaysian stocks traded in Singapore through the Central Limit Order Book (Clob). Further, capital controls have also dampened the enthusiasm of foreign investors in the Malaysian market.
The Central Limit Order Book (Clob)
Clob was set up in Singapore to trade Malaysian companies over-the-counter in Singapore after the Malaysian and Singaporean exchanges separated in 1990. In 1998, when Malaysia imposed controls on its currency at the height of the Asian economic crisis, about 172,000 Clob investors - as many as 95 percent of them Singaporeans - had their shares frozen. The total shares had a value of approximately US$4.47 billion.
On February 25, 2000, the Kuala Lumpur Stock Exchange and the SES issued a joint statement announcing a "comprehensive solution" for repatriating the shares to Malaysia. The exchanges signed two agreements, allowing investors to mix and match two separate schemes for freeing up their accounts.
Scheme A provides for Clob shares to be released on a staggered basis over 13 months (which is down from 18 months in a previous, scrapped proposal), which began in July. Each holder receives only 50 shares per week - meaning that to reach a single lot of 1,000 shares, one must wait 20 weeks before selling. Investors have to pay a transfer fee of 1.5 percent (down from two percent), based on the February 15 closing price of their repatriated shares. Investors had until March 31 to accept this option.
Scheme B provides for the shares to be released for trading on the KLSE over nine months, beginning in January 2003. There will be an administrative fee of one percent, based on the average share prices over the last five trading days of October 2002, to be paid to a KLSE affiliate. Investors can sign up for Scheme B anytime within 32 months of March 31.
Brokers said in early July that investors were largely reluctant to take the second option, although they were concerned about the transfer fees involved in the faster scheme, which have to be paid to Effective Capital, the Malaysian company designated to handle the matter.
A number of shareholders have also said that they had yet to receive their share release schedule from Effective Capital. The company is controlled by Singapore businessman Akbar Khan, who has close ties with Malaysia's Finance Minister Daim Zainuddin. Effective Capital's CEO is Akbar's nephew, Mohamed Moiz Ali Moiz.
Market-watchers believe Clob shareholders are likely to wait until they have accumulated a single lot before selling them. Although odd-lot trading is possible, observers said investors are likely to be put off by the fact that their shares will fetch a lower price if sold in odd lots. Several Malaysian businessmen have already bought out the positions of some Clob shares at a discount.
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