QUESTION: Tan Sri, does the FIC (Foreign Investment Committee) liberalisation measures on equity also apply to unlisted companies?
Tan Sri Nor Mohamed Yakcop: Previously, when a company wants to be listed, the FIC imposed a condition where 30% of the company’s equity has to be given to a bumiputra shareholder. With immediate effect, that condition no longer exists.
Q: In other words, there is no more 30% bumiputra quota for shares?
Nor Mohamed: It never existed for unlisted companies, only for listed, and we removed it today. Previously, there was never a problem for unlisted companies. But now it’s clear that the 30% does not apply at all for any company.
Q: What do you think of these measures in terms of what they could do to the market?
Hagger: I think in the short term it will have no impact whatsoever. But in the medium to long term, it is actually critical for Malaysia’s survival as a competitive capital market. It’s not, however, a silver bullet; it’s just a first step for Malaysia to catch up with the rest of the world.
What happens next enables Malaysia to be on an equal footing compared with other markets. It will be up to the attractiveness of the individual companies for the long term of the market.
Q: What do you think this will do to local entrepreneurship and for the development of industries and so on?
Jawhar: More challenging, and they will have to be competitive. What this FIC guideline does is actually addressing the impediments for foreign investments, so that they will have more opportunities to grow in this economy.
Q: Tan Sri, would you like to address the issue of this underlying move, and what the Government hopes to achieve from this?
Nor Mohamed: As you know, in 1971, we came up with this policy of growth in equity. That policy remains, and much has been achieved over the four decades since it was implemented.
But the world has changed and, to be a developed country, we need high growth. Possibly 7% from now till 2020. But to reach there, we need a number of measures. We have to be investor friendly. China or India is now offering so many incentives to investors. Therefore, removing the FIC is certainly a plus factor for growth. It is a very necessary condition.
We expect growth in the medium term to be stronger because of the removal of this constraint and negative perception. And with higher growth, we can distribute better.
Our policy of growth with equity was that, we are not going to take from Peter to give to Paul. We are giving on the basis of a growing pie.
For us, it is more important because we want to be seen as restructuring and bringing about social justice, so growth is key. And growth is at risk now because of the global changes.
We have to think beyond equity to participation. And removing (the FIC) doesn’t really affect the bumiputra agenda.
In fact, moving towards the other instrument, will result in more active promotion of distributive policies without affecting growth and others who want to invest.
We have to work harder on other factors, like producing right time of skill, moving into services and high-growth sectors, creativity and moving up the curve in manufacturing. Many things. But this is a very important building block in this new economy.
Q: Do you expect any sort of political backlash from a move like this, which more or less gets rid of this 30% which we have been familiar with for the last 40 years?
Nor Mohamed: We have started explaining to all the political constituents that we are removing 30% at the micro level. On a macro level, the bumiputra targeting is still there.
And it is also becoming difficult to find a 30% bumiputra shareholder because he has to borrow the money and who is going to give him a loan when the environment is such where the IPO pricing is lower than the market price?
And even if he holds the 30%, he has no control. And like what the prime minister says, he becomes a sleeping partner. It’s better to free up, and look for other instruments where bumiputras can participate effectively and be in control.
So it’s a win-win situation. It is not a zero-sum game. It is not about the Malays losing and the non-bumiputras win. Everybody wins.
Jawhar: I’d like to add that this measure makes the achievement of the National Economic Policy (NEP) much more efficient and much more doable because the earlier FIC measures were not delivering the goods. In fact there was a negative perception overseas.
So actually it’s gross equity. And this is just equitable growth, which is something that every country should strive for. Rather than laissez faire growth, which is not equitable.
Hagger: If the target was to create a vibrant Malay middle class, I think it’s wholly successful. Just look at the cars and the houses. Obviously you look at the rural areas, and it’s not been so holistic.
It’s also obvious that it has created some obscene wealth in very few hands. And therefore it is necessary, for what is a fairly old model now, to be tweaked.
Q: How drastic do you see this change? How major is it?
Hagger: I think it is absolutely critical for Malaysia to survive as a capital market. When you speak to investors, it (the FIC rules) is their number one turn-off for Malaysia. And the next thing is to take the GLC (government-linked company) reform one step further.
When I look at Malaysia’s greatest asset, it is its diverse people. And looking at many of Malaysia’s greatest companies, they are operated on meritocracy. Examples like CIMB, AirAsia and IOI Corp. There is no racial agenda there, it’s based purely on merit.
It would appear that with the GLCs, which are a major part of listed Malaysia, that a social agenda is at work there. That needs to be undone, because it traps talent and because of its very feudal structure. If merit could be encouraged, that will be a great step forward.
And the politically expedient way of doing it would be the Government selling off those companies. Get a regulator to make sure the social agenda is met, and free up shareholders to appoint the board of directors and managers.
If these people make mistakes, then find new directors and managers. Ultimately it will be a win-win situation. For politicians, it will be seen to be giving Malaysia better service, thanks to all that competition. And it will be very vibrant for the economy because it will create globally competitive companies.
Nor Mohamed: This concept of growth in equity has been there since 1971, and I think it is still relevant today. The regime of laissez faire, as in the market knows best, inevitably creates injustice. We know this didn’t work between 1957 and 1970.
So I believe we still need the policy of growth and distribution. The NEP has been successful. For example, bumiputra professionals were just 4.9% in 1970 and, today, there are 37.6% and bumiputras form 60% of the population.
So there needs to be some redistribution, some assistance in terms of scholarships, and sending the best bumiputras to study and come back and contribute to the country. So there is a need to assist the poorest society irrespective of race.
But we have only been looking at equity, and as you said, that is debatable. But that is only one form of wealth. The bumiputras, in terms of property ownership, it is only 15%. So there is a need for NEP.
But the point that the prime minister made is that, there are ways to bring about these equity justice through policies which are market friendly. Policies which are not market friendly do not help the bumiputras either.
When you open up the system and allow the best to survive and prosper, the bumiputras will benefit. But I don’t think the time is right for us to move away concertedly from this model of growth in equity and to just hope that growth itself will create enough trickle-down effect.
Q: In terms of implementation, do you have any problems with that?
Nor Mohamed: Implementation is an issue. One of the first things the prime minister did was to force upon ministers the concept of KPIs (key performance indicators).
So in the last few weeks, we have really been looking at KPIs, where the prime minister wants to hold every minister to what he has promised. And so I think implementation will improve by leaps and bounds with the KPIs.
Q: As a matter of curiousity, what kind of KPIs will a minister have?
Nor Mohamed: There is no free lunch. You say you want to be a minister, then serve the people and dedicate your time to the masses, so you really have to prove that you are worth being appointed.
I think the KPIs will work. That is the way to move forward. To make sure that everyone delivers, and is accountable for what he is delivering.
Hagger: Tan Sri, one question I will be immediately asked when I speak to the investors is that as far as the lifting of the FIC guidelines, for those companies that are pending to fulfil their bumi quota, will they therefore be forgiven overnight?
Nor Mohamed: Not only will they be forgiven, we will write to them tomorrow, and in the next few days, to say that they don’t need this requirement.
Hagger: I think that will aid the general restructuring. Tan Sri, can I ask another question? For Malay reserve land, does that remain as such?
Nor Mohamed: Land is a state matter. And Malay reserve land cannot be sold to non-Malays.
Jawhar: And the state can impose their own conditions.
Q: Effectively for the sale of property, the state authorities have to come into the approval process?
Nor Mohamed: If the state imposes conditions, it is up to them. The Federal Government is saying there are no restrictions unless above RM20mil and involves dilution of bumiputra interests. For residential properties, foreigners cannot buy anything below RM250,000 and for commercial, they have to come back to us.
Now we are saying for commercial property, they cannot buy any commercial property below RM500,000 from Jan 1 next year. For residential property, we are maintaining the limit.
Q: What about when a bumiputra owner sells to a non-bumiputra?
Nor Mohamed: We will form a coordinating unit in the Economic Planning Unit to deal with that matter. We are setting up the guidelines to take over that function.
Q: I am assuming that the FIC measures will shorten the time to market?
Nor Mohamed: Absolutely.
Jawhar: Sometimes when the FIC makes a decision, they don’t even give their reasons. That is not transparent.
Nor Mohamed: It is now faster and more transparent.
Q: Any idea of what legislative measures will take place?
Nor Mohamed: These do with the powers of the Securities Commission (SC). The SC is one part of the process of monitoring and enforcing laws with respect to companies. There is also the Registrar of Companies.
There is a need to make sure the SC has enough powers to ensure the system is truly transparent and avoid mismanaging in the system. The powers will be enhanced.
Q: Will this give the SC the right to pursue a company if it breaks any laws?
Nor Mohamed: That may eventually come about but, at this point of time, it is to give them more power based on their own laws.
Q: In the previous budgets, there were proposals to merge the SC with the Companies Commission of Malaysia. Why has this not taken off?
Nor Mohamed: This has not taken off and it involves many complicated processes and did not move as quickly as we thought.
Q: What about the liberalisation of fund management?
Nor Mohamed: That as a measure allows for more foreign ownership either from 49% to 70% and some cases to 100%. We have to create more competitive products and have to make the system more competitive. We have to make sure the consumers in Malaysia get the best possible products.
But this is not a zero-sum game where the locals will lose out. The locals will face this competition by merging among themselves perhaps and take action to innovate. The system itself will become more competitive and more innovative.
Enough time has been given to the local players to strengthen and build up their capacity and now is the time to open up the system and allow for fresh ideas and products to come into the system.
Q: One of your jobs is to transform the Malaysian economy and I presume this is an anchor part of that. When will there be more announcements?
Nor Mohamed: The PM will announce his new economic model. That is work in progress and the outline features are coming out quite well. Minister in the Prime Minister’s Department Tan Sri Amirsham A. Aziz has been appointed chairman of the council of economic advisors to focus on the new economic model.
The new economic model has various building blocks and today’s announcement is a major building block. The whole objective is to look at our model over the last 40 to 50 years, especially from 1970.
We have done very well based on the economic model we had. The model emphasised on the low-cost regime. This attracted investors and manufacturers to come and that created jobs, which was plenty for rural people.
That was good and helped to get ourselves out of poverty. This reduced poverty from 49% in 1970 to less than 4% now and created a group of professionals.
At the same time, we became a major exporter of not just commodities. But is that the right model, moving forward? Certainly not. We are living in a world where it is knowledge economy.
Being the assembly plant for the world does not help. We need more Malaysians having a larger income with high productivity and less dependent on exports. Domestic consumption has to become a major source of economic growth.
We must have a knowledge economy with more creativity. This is work in progress. There is a whole menu involved and need to implement them over a period of time.
Hagger: The market was expecting something big and expecting liberalisation. I don’t think the market will be disappointed.
Q: As a broker, after seeing these measures, what sector will you be recommending to your clients?
Hagger: The obvious beneficiary is the capital market. In that you look at the main player and that remains Bumiputra-Commerce Holdings Bhd.
Q: Do you see an influx of foreigners investing on the back of these measures?
Hagger: Not overnight but these are important building blocks for the future.
Q: Will you be “overweight” on Malaysia at this moment?
Hagger: As a house, Credit Suisse remains “underweight” on Malaysia due to valuations. Malaysia outperformed most markets last year and, starting from a high base, it is only natural for Malaysia to underperform this year.
Q: With these new measures, do you see more foreigners buying our property?
Hagger: Malaysia needs to make proper friends with Singapore. Once you have free flow of goods and people, that will really help.
Q: What about job creation from these liberalisation measures?
Nor Mohamed: Unemployment has never been a major problem for us. What is needed is the quality of employment and we need to move people from simple assembly line work to higher quality knowledge workers. And this is a challenge. This move is seen as upgrading jobs in terms of quality.
Q: Can you elaborate on Ekuiti Nasional Bhd (Ekuinas) and its purpose?
Nor Mohamed: We look at the various instruments we have as a distributive policy and found PNB (Permodalan Nasional Bhd) has done a very good job, concentrating on listed vehicles and somewhat playing a passive role.
We found there is a space outside PNB’s focus, that is the unlisted companies which are larger in numbers and value than listed firms.
In that area, the bumiputras are weak where bumiputra participation is 8% and non-bumiputras 92%. We felt this is one area we should really help and this will be good for the country and also to get bumiputras based on meritocracy to work in these companies.
The Government, through Ekuinas, will help them. This will be owned by the Government but run professionally.
Jawhar: It is also different from PNB where the strategy of PNB was to take stakes in companies. Here, there is an element of control.
Q: What type of companies will Ekuinas look at?
Nor Mohamed: They will include medical, education, tourism as well as information and communication technology (ICT) – high growth and creative industries.
Q: There has been criticism of GLCs crowding out the private sector. Do you think there will be changes made in respect to GLCs?
Nor Mohamed: I believe the GLCs have not in a major way crowded out the private sector. That is not the intention. The PM made a point in saying the non-core areas of GLCs will be disposed of so that the private sector can do it.
The Government wants to make sure the GLCs run their companies well and not give them help with competition. They have to earn their own lunch. For latest Bursa Malaysia indices, charts and other information click here
For latest Bursa Malaysia indices, charts and other information click here
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