Malaysia: Liberalisation and growth

Author: | Published: 1 Mar 2011
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On September 22 2010, Senator Datuk Seri Idris Jala, Minister in the Prime Minister's Department, unveiled Malaysia's Economic Transformation Programme (ETP), a 10-year roadmap which is aimed at enabling Malaysia to triple its gross national income from MYR660 billion ($217.1 billion) in 2009 to MYR1.7 trillion in 2020. This translates to an increase of gross national income per capita from MYR20,770 to at least MYR48,000 (US$15,000), thus achieving the World Bank's high-income nation's benchmark.

Accordingly, the government aims to sustain 6% growth between 2011 and 2020. Total funding of over MYR1.4 trillion is required for the duration of this economic exercise, with 92% of the funding expected to come from domestic investments and public funding expected to comprise the remainder. The ETP has identified 131 entry-point projects and 60 business opportunities which are expected to create 3.3 million additional jobs.

The ETP provides strong focus on a few key growth engines for Malaysia, namely the 12 National Key Economic Areas (NKEAs). These NKEAs are expected to make substantial contributions to Malaysia's economic performance, and they will receive prioritised public investment and policy support. The ETP will be led by the private sector, while the Government will primarily play the role of a facilitator.

Most of the funding will come from the private sector (approximately 92%) with public sector investment being used as a catalyst to spark private sector participation. The NKEAs were selected because they are significant engines of future growth and their expected contribution to gross national income in 2020 will help Malaysia achieve high-income status. In addition to the 11 industry sectors, Greater Kuala Lumpur/Klang valley was selected as an NKEA through a separate process. Kuala Lumpur currently accounts for about one-third of Malaysia's gross domestic product. Cities are significant drivers of growth, and a thriving Kuala Lumpur is vitally important to the health and performance of the overall economy.

No matter one's perspective, the ETP is an impressive and ambitious effort. To assist in achieving the objectives of the ETP, the government has announced various incentives and liberalisation measures to boost the economy. Several new guidelines have been introduced, new laws have been passed and rules and regulations have been relaxed or abolished altogether, all in the name of transforming the nation's approach to becoming a fully-developed and high-income nation.

Foreign exchange administration rules

Malaysia continues to maintain a liberal foreign exchange administration policy. The foreign exchange administration rules are mainly prudential measures to support the overall macroeconomic objective of maintaining financial and economic stability.

Since 1998, during the onset of the Asian financial crisis, Malaysia imposed strict currency controls. These have been reviewed and liberalised over the years to continuously promote the competitiveness of the Malaysian economy.

The most recent changes to the foreign exchange administration rules came into effect on August 18 2010 whereby the central bank of Malaysia, Bank Negara Malaysia (BNM), has further liberalised its foreign exchange administrative rules to enhance Malaysia's international bilateral trade and create a more conducive business environment to encourage and spur additional foreign and cross-border activities within the region as well as globally.

The three notable changes recently introduced by BNM in relation to its foreign exchange administrative rules are:

(i) to permit residents to settle trade transactions involving goods and services with non-residents in ringgit (no longer limiting such transactions solely to the utilisation of foreign currencies); however, settlements in ringgit by a non-resident will have to be transacted through the non-resident's account with a licensed onshore bank in Malaysia;

(ii) the previous limits imposed on resident companies in relation to borrowings in foreign currencies from non-resident non-bank related companies has now been lifted; this feature essentially paves the way for more competitive financing from sources other than the corporation's parent companies but, nonetheless, the borrowing amounts from the non-resident non-bank related companies continue to be restricted to the aggregate limit of MYR100 million or its foreign currency equivalent; and

(iii) the abolishment of the perimeters for anticipatory hedging of current account transactions by residents with licensed onshore banks; this is anticipated to result in a substantial increase in the volume of trade flow in ringgit, while supporting a more effective risk management strategy from a regulatory perspective.

Despite the initial reaction from both local and foreign investors that the above liberalisation measures were designed to aid the internationalisation of the ringgit, BNM clarified that these were merely steps towards easing foreign currency transactions and were not designed to impinge on or replace existing capital control measures imposed in the aftermath of the Asian financial crisis. The measures were implemented at an opportune moment as the Malaysia government has been seeking to increase the country's competitiveness on the international front, and they will hopefully result in a more open and dynamic trade regime which will enhance the Malaysian economy.

Malaysia Takeover Code 2010

Another significant legislative milestone in the M&A context has been the recent amendments to the Securities Commission Act 1993 (SCA) and Capital Markets and Services Act 2007 (CMSA). Part IV Division 2 SCA, which sets out the provisions relating to takeovers, mergers and compulsory acquisitions, was repealed on April 1 2010, and Part VI Division 2 CMSA, which is similar to Part IV Division 2 SCA, came into force on the same date. Some of the changes to Part VI Division 2 CMSA (as opposed to the repealed Part IV Division 2 SCA) include the revised definition of "takeover offer" pursuant to Section 216(1) CMSA which is now defined as the following.

An offer made to acquire all or part of the voting shares or voting rights, or any class or classes of voting shares or voting rights, in a company and includes:

  • a takeover or merger transaction howsoever effected which has the effect or potential effect of obtaining or consolidating control in a company;
  • a partial offer as defined in the Code;
  • a takeover offer by a parent company for the voting shares or voting rights in its subsidiary; or
  • an arrangement or reorganisation that involves the voting shares or voting rights of a listed company.

The above definition has been revised to enhance clarification of the situations which would

give rise to a takeover offer regulated by the Code. The regulation of such offers is a requisite step towards ensuring that shareholders are treated equally and that the interests of minority shareholders are protected in the various scenarios in which takeovers and mergers may be effected. Section 216(1) CMSA also introduces additional definitions of share and shareholder. Share now includes "a unit in an entity that is prescribed in the Code", and shareholder includes "a unit holder in an entity that is prescribed in the Code".

Company is defined pursuant to Section 216(1) CMSA to mean "a public company whether or not it is listed on any stock exchange and any other entity as may be prescribed in the Code". This represents a significant change to the definition of Company under the SCA which was applicable to private companies meeting certain conditions imposed by the Securities Commission of Malaysia.

In addition, pursuant to a gazetted order that came into effect on July 16 2009, Practice Note 1.2 of the Code has been deleted. Following this deletion, an acquirer who has obtained control of a private company on or after July 16 2009 will no longer be subject to the takeover provisions of the Code. Accordingly, it would appear that the intention of the revised provisions is to exempt private companies from falling within the definition of Company pursuant to Section 216(1) CMSA.

Further to the above preliminary revisions, with effect from December 15 2010, the existing Malaysian Code on Take-Overs and Mergers 1998 was finally superseded by a new Malaysian Code on Take-Overs and Mergers 2010. Key changes arising from the implementation of the new Code include:

(i) Potential offerors or offerees are required to make an announcement on possible offers which might result in unusual share movements or increase in the volume of share turnover of the offerees. However, a potential offeror is not allowed to undertake a second takeover offer within six months of any announcement that the said offeror is not undertaking a potential take-over offer;

(ii) The following two new categories of "persons acting in concert" have been added to the new Code:

(a) a company, the directors of the company, and shareholders of the company where there is an agreement, arrangement or understanding between the company or directors of the company, and shareholders of the company which restricts the director or the shareholder from offering or accepting a takeover offer, or increasing/reducing his shareholdings in the company; and

(b) a partner who is a partner of a partnership;

(iii) The new Code explicitly allows voluntary offers with a higher acceptance threshold to be undertaken. Pursuant to the old Code, a voluntary offer would normally have been conditional upon the offeror having received acceptances which would result in the offeror holding more than 50% of the voting shares of the offeree. Under the new Code, offerors are entitled to make a voluntary offer conditional upon receiving acceptances which would result in the offeror holding in aggregate more than 90% of the voting shares of the offeree. This change in rule would appear to be significant as it erodes the justification used by parties who prefer to use the less onerous assets and liabilities takeover route on the basis that it offers better certainty that the transaction can be completed. While the higher conditional level was not disallowed previously, it has been used recently in takeovers of Malaysian companies such as M3nergy Bhd, Measat Global Bhd, Astro All Asia Networks and Tanjong plc;

(iv) If material changes occur after the dispatch of documents, such as a circular to shareholders, the Securities Commission must be notified immediately. For instance, during a takeover or privatisation exercise, if the promoters are undertaking other negotiations pertaining to the asset that is to be privatised, they have to inform the Commission. This is to ensure shareholders are well informed of any developments. An example of this was when a large telecommunications company was privatised by its promoters in 2007. Less than two months after the company was privatised, the promoters finalised a very substantial financing initiative with a Middle Eastern telecommunications company which took a substantial stake in the Malaysian company; certain parties suggested that the promoters would have negotiated with the new shareholders during the takeover period. Under the new Code, the promoters must inform the Securities Commission if they are in negotiations with external parties during the takeover period.

(v) Companies that are incorporated outside Malaysia but listed on Bursa Malaysia Securities Berhad and real estate investment trusts that are listed on Bursa Malaysia Securities Berhad are now subject to the new Code;

(vi) The new Code has reduced the payment period in a takeover offer from 21 days to 10 days for payment of cash consideration. In cases where the consideration involves only securities or a combination of cash and securities, the payment period has been reduced from 21 days to 14 days;

(vii) The new Code would apply to any person who undertakes a takeover offer, howsoever effected, by way of a scheme of arrangement, compromise, amalgamation or selective capital reduction; and

(viii) The conduct of all parties – namely offerors, advisers and the boards of offerees – is codified. These parties, especially the independent directors of the board are required to give timely disclosure to shareholders and are prohibited from undertaking actions that could frustrate an offer. This effectively means that independent directors are required to ensure that any offer for the company should be put before shareholders to decide on.

In light of the above changes, the new Code highlights the Securities Commission's continuous efforts to enhance investor' protection and transparency and to establish higher standards of governance in take-over and merger activities in Malaysia.

Following public response to their joint consultation paper released on March 19 2010, the Securities Commission and Bursa Malaysia jointly announced on January 28 2011 that the threshold for shareholder approval relating to a listed company disposing of all, or substantially all, of its assets resulting in it being no longer suitable for continued listing on Bursa Malaysia is raised to 75%. This will apply to all new asset disposals announced on or after January 28 2011 and will ensure that shareholders of listed companies will receive the same degree of protection regardless of the route that is chosen to privatise the company.

Previous asset disposal exercises only required a simple majority approval from shareholders of the listed company. In addition, companies undertaking an asset disposal are now required to provide their shareholders with independent advice and detailed disclosure on the utilisation of proceeds from the asset disposal. This will increase transparency and ensure shareholders are equipped with adequate information for decision making.

Furthermore, the Securities Commission is of the view that the appointment of an independent adviser would not undermine the main adviser's role, as the independent adviser's role would focus exclusively on the fairness and reasonableness of the asset disposal and whether or not shareholders should vote in favour of the said proposal. The role of the main adviser would be in relation to advising on the transaction as a whole. In this regard, the independent adviser's opinion would set out the reasons for the key assumptions made and factors taken into consideration in forming the opinion.

The Securities Commission has also proposed that the standards of "fair" and "reasonable" be interpreted as two distinct terms, as opposed to an interpretation as a composite term. This is to ensure that the independent advisers examine both quantitative (or valuation) aspects as well as other matters in providing their advice. The decoupling of the terms will ensure that the independent advice circular can be easily understood, is transparent and provides a clear basis to justify the independent advisers' recommendation. Accordingly, the Commission will also provide guidance on the interpretation of the standards of fair and reasonable that are applied by independent advisers in assessing takeover offers.

The Securities Commission will also be providing guidance on matters that need to be analysed and synthesised, as a minimum, by independent advisers in making a recommendation in relation to a takeover offer. In line with this, the Securities Commission will issue a revision to Chapter 12 of the Guidelines on Contents of Applications relating to Take-Overs and Mergers on Independent Adviser's Recommendation in due course. These enhancements will provide investors with clearer and more comprehensive advice to help them make a decision.

In addition, due to the growing maturity of the Malaysian bond market, the regulators are considering the option of providing infrastructure which can facilitate the direct participation of retail investors in new issuance of bonds. As outlined in the Economic Transformation Programme, the Malaysian economy would benefit by having a portion of its large but mostly untapped savings in the banking system utilised for longer-term investments that promote economic growth. Investing in corporate bonds would provide an opportunity for retail investors to seek a higher rate of returns with the relevant exposures to credit and market risks.

Malaysia's economic transformation also provides opportunities for the unit trust industry, as the capital market is an important avenue for fundraising for projects identified pursuant to the National Key Economic Areas as set out under the ETP. Therefore, unit trust funds and their investors would benefit from these investment opportunities. To facilitate the growth in the unit trust industry, the Securities Commission has initiate a number of changes such as removing restrictions on unit trust funds' participation in exchange traded derivatives, allowing greater international diversification and allowing foreign majority ownership of unit trust management companies.

It has been reported that Malaysia was the fastest growing market for mergers and acquisitions in the Asia-Pacific region in 2010 as companies seized on record valuations and relaxed takeover rules to catch up with rivals in India and Singapore. Acquisitions of Malaysian companies almost tripled in 2010 compared with all of 2009 according to data compiled by Bloomberg.

It should be noted that the deals rebound came after Malaysia eased its rules governing takeovers, initial public offerings and property purchases while Malaysia faced its first economic contraction in a decade. Malaysian mergers have outpaced investment in the Asia-Pacific region, where the deals announced in 2010 mark a 7% gain from last year, according to Bloomberg data.

Domestic consolidation has also powered Malaysian deals this year, with mergers between local companies accounting for about three-quarters of total acquisitions. These data augur well for the Malaysian government and also the ETP as it seeks to boost the economy to become a high-income nation.

About the author

Khairul Ismail was called to the Malaysian Bar in September 2000. He holds a LLB (2nd Class Upper Division) from King’s College, London and a Certificate in Legal Practice (CLP) from the Legal Profession Qualifying Board of Malaysia.

Khairul comes with a wealth of experience from his past practice in Messrs David Chong & Co and subsequently as a senior executive in the Corporate Secretarial and Legal Department of MMC Corporation Berhad (MMC). Whilst in MMC, Khairul was instrumental in handling various projects, joint ventures, restructuring, privatisation contracts, intellectual property and industrial relations matters.

Khairul is also a licensed company secretary and therefore also brings with him extensive knowledge on corporate governance and various other company related issues such as conduct of meetings, code of ethics, document retention policies, corporate disclosure policies and related party transactions.

Contact information

Khairul Ismail
Naqiz & Partners

42A, Lorong Dungun
Damansara Heights
50490 Kuala Lumpur

Tel: +603 2095 1188
Fax: +603 2095 1186

About the author

Prior to entering active legal practice, Lim Wei Chien was attached to the business development department of Hwang-DBS Investment Bank where he was involved in the advising of various share financing transactions. In 2006, he joined Shook Lin & Bok and was part of the Corporate, Banking, Finance and Conveyancing Departments.

Wei Chien has advised clients on a wide range of issues relating to corporate and commercial law, conveyancing matters, banking and finance law as well as acquisitions and listing exercises. He also has extensive experience in conducting due diligence exercises in connection with mergers & acquisitions and listing exercises.

Contact information

Lim Wei Chien
Naqiz & Partners

42A, Lorong Dungun
Damansara Heights
50490 Kuala Lumpur

Tel: +603 2095 1188
Fax: +603 2095 1186