Malaysia: The action plan

Author: | Published: 1 Jun 2009
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Malaysia's growth in 2009 is estimated to be between minus 1% and 1%, down from earlier projection of 3.5% due to the deteriorating global economy. In January 2009, exports fell by 27.8%, and for 2009, foreign direct investment is expected to decline by almost 50% of 2008's investment to RM62.9 billion. Unemployment rate is expected to rise to 4.5% in 2009 from 3.7% in 2008. Prices of Malaysia's main commodities, oil and gas, and palm oil have declined sharply and consumer and investor sentiments have been adversely affected by the fall in the stock market.

As the global economy contracts, the Malaysian government has joined the ranks of countries directly hit by the global turbulence to adopt an aggressive monetary and fiscal stimulus schemes to cushion its domestic economy from collapse. On March 10 2009, the government unveiled a RM60 billion stimulus package (dubbed a mini-budget) which accounts for about 9% of Malaysia's GNP to be implemented over 2009 and 2010. This is in addition to the RM7 billion stimulus package announced on November 4 2008 and the RM206 billion already budgeted for 2009 that primarily provide for infrastructure expansion.

Enhancing the fund raising regime

The government has established a Financial Guarantee Institution with a paid-up capital of RM1 billion (which would be raised to RM2 billion, if necessary) to provide credit enhancement to help companies raise some RM15 billion from the bond market.

The Securities Commission (SC) has taken and will take the following steps to reduce time-to-market to enable companies to raise capital more efficiently and effectively:

  • Listed companies will no longer need the SC's approval before undertaking a rights issue. Companies can now proceed to secure approval from their shareholders via Bursa Securities Malaysia Berhad (Bursa Malaysia), Malaysia's only approved securities exchange, and then register the rights issue prospectus with the SC. Once gazetted, this exemption would reduce the overall timeline for the implementation/completion of a rights issue exercise to about nine weeks (from about 14 weeks currently) and save the company costs in terms of application and advisory fees. However, the SC's approval will still be required for a rights issue proposal which forms part of an initial public offering, a reverse takeover or where the proceeds are being utilised for an acquisition which results in a significant change in the business direction of a listed company.
  • Unlisted public companies will be exempted from the need to seek the SC's approval for the issuance and offerings of equity securities.
  • Private limited companies will not be subject to the current Code of Takeovers and Mergers to provide greater agility for private companies to expand or restructure their businesses more efficiently. Once this change is gazetted, only the acquisition of 33% or more of voting shares in public companies will need to comply with the public disclosure requirements, timelines and other conditions imposed by the SC.
  • Amendments to the terms and conditions of bond and sukuk (Islamic bond) issued in the market, which have already been approved by the bond and sukuk-holders, need only be notified to the SC. However, applications to increase the size of bonds and sukuk and to vary the terms and conditions of bonds and sukuk which have been approved but not been issued do not qualify for this exemption, and would still require the SC's approval. Further, to create a more facilitative environment for the issuance of bonds and sukuk, issuers rated AAA (local currency rating) or a minimum BBB (foreign currency rating) will be deemed to have been given approval upon full submission of their proposals to the SC.
  • Convertible and exchangeable bonds are no longer subject to mandatory rating requirements.

In efforts to enhance the competitiveness and to strengthen the positioning of the Malaysian equity market, the SC and Bursa Malaysia will streamline rules of the current main board and second board on Bursa Malaysia to form a unified board for the listings of established corporations; position the Mesdaq board as a sponsor-driven fund-raising platform for all sectors instead of the current limit to high-growth and technology-based companies; and shift the SC's current assessment and declaratory approaches in approving fund raising proposals to a market-based regulatory approach with a focus on investor protection and confidence to provide a facilitative environment to encourage financing activities.

The SC will also promote private equity activities by allowing the listing of special-purpose acquisition companies (SPACs) on Bursa Malaysia. The SPAC will be a pooled investment vehicle that allows public investors to invest in private-equity type transactions. This is in line with the trend in the US and Europe where a shell company with no operations goes public with the intention of merging with or acquiring operating companies or businesses with the proceeds from its initial offerings.

Meeting financing needs

Bank Negara, the central bank, has since November 2008 cut policy interest rates by a total of 1.5 percentage points to help lower borrowing costs and support domestic demand. If the global economy and domestic demand worsen, it is widely expected that Bank Negara will cut interest rates by another 50 basis points to 1.5%. Bank Negara has also pledged to guarantee all ringgit and foreign currency deposits with commercial, Islamic and investment banks and deposit-taking development financial institutions until December 2010.

Bank Negara has established a RM2 billion SME Assistance Guarantee Scheme to provide 80% guarantee cover for financing of up to RM50,000 for each eligible small and medium-size enterprise (SME). The guarantee cover will be provided free of charge for new financing with loan tenures of up to five years to be utilised for business purposes such as working capital, project financing and capital expenditure.

To further assist SMEs in meeting their financing needs, the government has established a Working Capital Guarantee Scheme of RM5 billion to guarantee 80% of the loans with the remaining 20% to be guaranteed by financial institutions. This scheme will be available to SMEs with share capital of less than RM20 million for loans ranging from RM50,000 to a maximum of RM10 million with a maximum repayment term of five years.

An Industry Restructuring Guarantee Fund Scheme of RM5 billion has also been established to promote investments by Malaysian-owned companies that increase productivity, involve value-added activities and promote the use of green technology. This scheme will apply to loans ranging from RM50,000 up to an aggregate of RM50 million with a maximum repayment term of 10 years. The amount of guarantee provided will depend on the level of shareholder equity. The government will guarantee 80% for companies with share capital of less than RM20 million and 50% for companies with share capital of more than RM20 million.

Incentives for Foreign Direct Investment

Revising scope of Foreign Investment Committee

The Malaysian government has implemented a policy which seeks to enhance the level of bumiputra (indigenous Malaysian) participation in the economy. This is done through various guidelines that restrict foreign participation as well as require minimum participation by bumiputras in certain companies and businesses.

The Foreign Investment Committee (FIC), a division of the Prime Minister's Department, is charged with the responsibility of monitoring and issuing equity and ownership guidelines. FIC guidelines are a reflection of prevailing government policy but do not have the force of law. FIC guidelines will apply among other things to an acquisition of an interest in a Malaysian company or assets amounting to RM10 million or more or the acquisition of 15% or more voting rights in a company by foreign interests. Generally, the permitted level of foreign interests in Malaysian companies is at a maximum of 70% provided that bumiputra equity participation is no less than 30%.

However, the ceiling of 70% on foreign shareholdings will not be applicable to certain industries which are deemed to be of strategic national interest. On the other hand, the ceiling on foreign shareholdings may be increased beyond 70% or removed altogether for approved companies carrying out promoted activities, such as manufacturing companies licensed by the Ministry of Trade and Industry, companies that are granted the status of international procurement centre, operational headquarters, representative offices, regional offices, Labuan offshore companies and Islamic financial institutions conducting business in international currencies.

It was announced under the mini-budget that the FIC will operate under a revised scope of responsibilities which will focus on more macro areas. New and more liberal FIC guidelines are expected to be issued.

Economic zones

The Iskandar Development Region (IDR) is a special economic zone in the southern state of Johor. Companies undertaking creative industries, educational services, financial advisory and consulting services, healthcare services, logistic services and tourism-related services (known as Qualifying Activities) can apply to the Iskandar Development Region Authority (IDRA) to obtain IDRA status and enjoy a host of incentives for their operations within the IDR. The incentives include:

i) corporate income tax exemption for 10 years upon commencement of operations in respect of income from Qualifying Activities carried out within the approved location for customers located within the approved locality and outside Malaysia, or wholly outside Malaysia provided, that it is before the end of year 2015;

ii) withholding tax exemption on payments for services and royalties to non-residents for 10 years upon commencement of operations;

iii) exemption from FIC guidelines;

iv) freedom to source capital globally;

v) unrestricted employment of foreign employees within the approved zones; and

vi) flexibilities under the foreign exchange administration rules.

There are other economic zones namely the Northern Corridor Economic Zone, Eastern Corridor Economic Zone, the Sabah Development Corridor and the Sarawak Corridor of Renewable Energy that have been launched as part of Malaysia's development planning and various incentives will be given to spur the economic growth in these areas.

Liberalising the services and finance sectors

To spur the growth and competitiveness of the services sector, the government has removed the 30% bumiputra equity condition to allow for 100% foreign ownership in 27 services sub-sectors in the areas of health and social services, tourism services, transport services, business services and computer and related services. As part of the measures to develop Malaysia as an international Islamic financial hub, the legal profession will be liberized to allow up to five top international law firms to practice international Islamic finance in Malaysia. The government will be progressively liberalising the other services sub-sector on an on-going basis to attract investments, technology and to create higher value employment opportunities.

A RM100 million Services Sector Capacity Development Fund which is part of Malaysia's first stimulus package has been set up to assist companies (except those in the financial, utilities and construction sectors) strengthen their capacity to become more competitive with the liberalisation of the services sector. Half of the fund is to be given out as matching grants by the Malaysian Industrial Development Authority, while the balance is to be disbursed as soft loans by the Malaysian Industrial Development Finance Bhd to local services providers for capacity-building which includes upgrading equipment, undertaking expansion via mergers and acquisitions and providing staff training.

To position the financial sector to facilitate and catalyze economic growth, the following liberalisation measures will be implemented over 2009 to 2012:

i) issuance of up to:

  • two new Islamic banking licences to foreign players to establish new Islamic banks with paid-up capital of at least RM1 billion in 2009;
  • two new commercial banking licences to foreign players that will bring in specialized expertise in 2009;
  • three new commercial banking licences to world class banks that can offer significant value propositions to Malaysia in 2011; and
  • two new family takaful (Islamic insurance) licences in 2009.

ii) liberalising the foreign equity limits from 49% to 70% for investment banks, Islamic banks, insurance companies and takaful operators;

iii) allowing locally incorporated foreign commercial banks to establish four new full-fledged branches in 2010 and 10 microfinance branches in 2009;

iv) flexibility to Labuan holding companies incorporated under the Offshore Companies Act 1990 to establish an operational and management office in Kuala Lumpur to enhance their operating and business efficiency with effect from June 1 2009;

v) flexibility for offshore bankig institutions and offshore insurance companies licensed by the Labuan Offshore Financial Services Authority that meet the predetermined criteria to have a physical presence onshore from 2010 and from 2011, respectively; and

vi) greater flexibility for employment of expatriates in specialist areas that can contribute to the development of the financial sector.

Biofuel economy

The government has been promoting the potential benefits of renewable energy both as an export commodity and as a means to strengthen the domestic economy.

Since 1999, a so-called five fuels policy has been adopted to complement the more traditional fossil fuels and hydroelectricity with renewable energy sources such as biomass, solar, wind, biodiesel and hydrogen. In order to move beyond being a mere provider of raw materials and become a regional leader in biofuels, the government has been supporting the use of biodiesel, a mixture of 5% processed palm oil and 95% diesel. The blended biodiesel programme, also called B5, targets to switch all vehicles running on diesel to biofuel by 2010, starting with government vehicles, followed by vehicles in the industrial and transport sectors.

The Ministry of International Trade and Industries is preparing a package of incentives to attract foreign direct investments of RM8.1 billion in the renewable energy sector over the next two years. Under the package set to be activated by the middle of the year, eligible companies would enjoy extended periods of tax exemption, assistance in finding land on which to set up business and state support for infrastructure.

Attracting professionals

To attract high-net worth and skilled individuals to Malaysia, permanent resident status will be considered for those who bring more than RM2 million into Malaysia for investments or savings as well as highly skilled foreign professionals.

The conditions attached to the Malaysia My Second Home Programme (MM2H Programme), which allow foreigners who fulfill certain financial criteria to stay in the country on a social visit pass with multiple-entry visa for 10 years, renewable indefinitely have also been relaxed. Qualified MM2H participants aged 50 years and above with specialised skills and expertise that are required in critical sectors of the economy can now work for up to 20 hours with the approval of the MM2H Special Committee. MM2H participants are now allowed to invest and actively participate in business subject to existing government allowed to invest and actively participate in business subject to existing government policies, regulations and guidelines which are in force for the relevant sectors. The age limit of unmarried dependent children has been raised from 18 years to 21 years.

Easing financial burden

Loss carry back

There is currently no provision which allows the carry back of tax losses. Current year business losses are allowed to be carried forward until fully absorbed.

Under the mini-budget, it has been proposed that current year losses of up to RM100,000 per year will be allowed to be carried back to the immediately preceding year. This tax treatment will be available for the 2009 and 2010 years of assessment to all businesses, including partnerships and sole proprietors by way of an irrevocable election.

In this regard, the maximum benefit to be enjoyed by the taxpayer is a refund of RM26,000 or RM25,000, ie 26% (corporate tax rate for YA 2008) or 25% (corporate tax rate for YA 2009). The ability to carry back current year losses will ease the financial burden of qualifying taxpayers and put money back into the hands of such taxpayers.

The carry back of tax losses would not be applicable where:

i) certain tax incentives are being claimed by the taxpayer;

ii) the taxpayer is a listed investment holding company or insurance company;

iii) the taxpayer is a takaful company; or

iv) the taxpayer is an individual with no business source.

Accelerated capital allowances

In an effort to encourage businesses to increase investment, qualifying expenditure incurred on plant and machinery between March 10 2009 and December 31 2010 will be given accelerated capital allowances (ACAs). The ACAs will result in the assets being written down for tax purposes over two years. Additionally, expenses incurred on renovation and refurbishment of business premises which are currently not deductible or eligible for capital allowances will be given ACAs which can be claimed over two years.

Prior to this proposal, the total capital allowances on qualifying capital expenditure are given over four to eight years depending on the nature of the assets purchased.

Recognition of interest income for financial institutions

To ease the financial burden, especially for those that have been retrenched, financial institutions will allow retrenched workers who have been retrenched from July 2008 to defer repayment of their housing loans granted prior to their retrenchment for a period of one year.

To support licensed financial institutions in this regard, the interest income of the financial institutions, relating to the housing loans for which repayment has been deferred for one year, will not be subject to tax during the moratorium period. Such interest will however be subject to tax when received. This is a departure from the general scheme of Malaysian income tax where income is subject to tax on an accruals basis. This proposal is effective from the year of assessment 2009 in respect of deferred housing loans from March 10 2009 to March 9 2010.

Tax relief for interest on housing loans

To stimulate the housing sector, tax relief will be given to individuals for interest costs on housing loans in respect of sale and purchase agreements executed between March 10 2009 and December 31 2010. The relief will be for up to RM10,000 per year for three years. The relief is only available to Malaysian resident citizens in respect of one residential property only.

Currently, interest expense incurred by an individual on a housing loan is not allowed as a tax deduction unless the property for which the loan was obtained is let out and the individual derives rental income from that property.

Windfall profit levy

The threshold for the windfall profit levy on palm oil imposed since the beginning of 2008 will be increased to RM2,500 per tonne for Peninsular Malaysia and to RM3,000 per tonne for Sabah and Sarawak.

Reducing costs of doing business

In an effort to encourage the establishment and expansion of new businesses, the Companies Commission of Malaysia has reduced the prescribed fees for the incorporation of new companies, increase of paid-up capital of companies, and registration and renewal of registration of businesses by 10% to 15%. The subscription fee for e-lodgement service has also been waived.

Although the Malaysian government has taken measures to boost investments and credit flows, reduce the cost of doing business and also encourage spending to spur economic activity, the benefits of these measures may not be immediately felt. Given the uncertainties in the global economic climate and sluggish equities market, investment sentiment is expected to be subdued. Cash strapped companies will no doubt lay low. However for companies with cash pile, the global market turmoil provides a once in a lifetime opportunity to acquire undervalued assets and to expand in the local and international markets. For instance, this is a good opportunity for cash-rich planters to take over smaller firms that mushroomed in recent years as commodities boomed, but which are now struggling to survive. Companies with eroding profit margins may also merge in order to remain competitive. With the liberalisation of the services and finance sectors, a greater inflow of foreign direct investments is also expected. Hence, despite the global economic gloom, there are still opportunities for merger and acquisition activities.

Author biography

Loong Caesar

Raslan Loong

Caesar is a senior corporate and commercial practitioner with extensive experience in all areas of corporate and commercial law including mergers and acquisitions, investment funds, capital markets, securities, listings, public offerings, corporate banking, structured finance, power, and corporate restructuring.

He was trained at Raffles Institution, Singapore, the London School of Economics and Political Science and Caius College, Cambridge University. He was admitted as a Barrister of the Middle Temple, London, in 1983 and as an Advocate and Solicitor of the High Court of Malaya in 1985. In 1994 he was admitted as an Advocate and Solicitor of the Supreme Court of Singapore.

He is a board member of the EU-Malaysia Chamber of Commerce and Industry (EUMCCI), the Kuala Lumpur Business Club (KLBC) and the Pacific Basin Economic Council (PBEC). He is a trustee and legal adviser to the Worldwide Fund for Nature (WWF), and the legal adviser to the Bond Dealers Association Malaysia, the Association of Independent Power Producers of Malaysia, the Malaysian Youth Orchestra Foundation and the Malaysian AIDS Foundation. In addition, he is a member of the Washington-based Entrepreneurs Organisation (EO), the Malaysian-German Chamber of Commerce (MGCC), the British Malaysia Chamber of Commerce (BMCC) and the American-Malaysian Chamber of Commerce (AMCHAM).




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