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Foreign exchange control in Malaysia

Foreign exchange control in Malaysia is governed by the Exchange Control Act, 1953, under which the Controller of Foreign Exchange, who is also the Governor of Bank Negara Malaysia, the central bank, is empowered to regulate foreign exchange dealings in Malaysia.

The Act imposes general restrictions on foreign exchange dealings by residents and non-residents. The Act's basic premise is that no person is allowed, among others, to buy or borrow foreign currency from, or sell or lend foreign currency to, any person; to make any payment in Malaysian ringgit to a non-resident in and outside Malaysia; or to deal in ringgit assets in Malaysia; save with the prior permission of the Controller.

The Controller then publishes Exchange Control Notices of Malaysia (ECMs) from time to time pursuant to which permissions (general and specific), and the rules and parameters under which they apply, are prescribed.

A resident is defined as (i) a Malaysian citizen; (ii) a non-citizen with permanent resident status and ordinarily residing in Malaysia; (iii) a Malaysian-incorporated body corporate; (iv) a Malaysian-registered unincorporated body; and (v) the Malaysian government (federal and state). A "non-resident" is anyone who is not a resident, and includes (i) overseas branches or representative offices of resident companies; (ii) embassies, consulates, high commissions, and international organisations; and (iii) Malaysians who are permanent residents of another country and reside outside Malaysia.

Presently, residents without domestic ringgit borrowings are free to invest any amount outside Malaysia. Resident companies with domestic ringgit borrowings are also not subject to any investment limit, if the investment abroad is funded from its own foreign currency funds, or proceeds from an initial public offering.

But if it is funded through a conversion of ringgit, the Controller's permission is required if the investment exceeds RM50 million ($16.3 million) in aggregate on a corporate group basis per calendar year. However, if the investment is funded through foreign currency borrowings, resident companies may invest abroad up to the full amount of their foreign currency borrowings.

There is no restriction for non-residents to invest in Malaysia to purchase ringgit assets, such as landed property and securities. There is also no restriction for non-residents to transfer abroad, in foreign currency, all profits, returns and divestment proceeds from their investments in Malaysia.

Settlement for investments in ringgit assets by non-residents can, among others, be sourced from their own ringgit funds held in Malaysia; sale of foreign currency with licensed onshore banks or their appointed overseas branches; or borrowings obtained from licensed onshore banks to finance real sector activities in Malaysia. These activities include agriculture, mining, manufacturing, construction, and wholesale and retail trade.

Resident companies are free to borrow any amount in foreign currency from licensed onshore banks, other resident related companies, and their non-resident non-bank related companies. If resident companies borrow from other non-residents, or through the issuance of foreign currency bonds, the permitted limit is RM100 million in aggregate on a corporate group basis. Larger amounts require the Controller's prior permission.

Resident companies are free to issue ordinary shares, irredeemable preference shares, and private debt securities to non-residents. The Controller's prior permission is required for issuances of other forms of securities to non-residents.

Non-resident multilateral development banks and multilateral financial institutions, foreign sovereigns, foreign quasi-sovereign agencies, and foreign multinational companies may issue private debt securities in ringgit or any foreign currency in Malaysia.

Also, residents are allowed to make payments to, and receive payments from, non-residents in ringgit as settlement for goods or services. Residents are also allowed to invoice in ringgit for their exports, or accept invoices in ringgit for their imports, of goods or services with non-residents. Additionally, non-residents are allowed to receive or make payments in ringgit using their ringgit held in Malaysia as settlement for goods or services with residents, if certain prescribed conditions are met.

The rules applicable to Labuan companies incorporated under the Labuan Companies Act, 1990, have also become more liberal. In a 2010 revamp, Labuan companies (which are non-residents) are now allowed to hold shares, debt obligations and securities (including controlling stakes) in Malaysian companies. Hence, residents with foreign assets and non-residents with ringgit assets would now be able to structure and develop their investments in Malaysia via the Labuan International Business and Financial Centre.

Malaysian foreign exchange control regulations today are still subject to relatively detailed conditions and parameters, requiring careful consideration. In our view, the approach to exchange control regulation in Malaysia will, for now, remain cautious, but in support of overall macroeconomic growth objectives, they should over time become more permissive as Malaysia seeks to enhance its competitiveness.

Samuel Hong

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