Published November 14, 2008

Mixed reactions greet relaxing of bumi equity rule

Some say it's a moot point, others look forward to more easing off

By S JAYASANKARAN
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MALAYSIA'S decision to relax the 30 per cent bumiputra equity requirement for public companies has met with mixed reactions, with most analysts seeing it as a non-event.

Win some, lose some: Bursa Malaysia has submitted three proposals to remove conditions that are said to be stifling the market. Mr Najib's decision implies that the government has agreed with only one of them

On Wednesday, Deputy Prime Minister and Finance Minister Najib Razak announced that companies that try but fail to get bumiputra takers for shares are free to sell them to anyone, regardless of race. But most analysts are underwhelmed.

'Most companies are trading below their initial public offer prices anyway,' a Kuala Lumpur-based foreign analyst said on condition of anonymity and in what seemed to be a typical reaction. 'What is surprising is that it took the authorities so long to make what is essentially a moot point.'

Chris Oh of JPMorgan is more charitable. 'It is a step in the right direction,' he told BT. 'Now companies can get on with their business instead of worrying about the law. We hope this is just the first of other relaxations.'

Mr Najib's decision implies that the government has agreed with only one of three proposals submitted to it three months ago by Bursa Malaysia, the former Kuala Lumpur Stock Exchange.

Industry insiders say that the proposals were an attempt to do away with conditions revolving around a decades-old affirmative action policy that were said to be stifling the market. Companies with overseas assets were said to be increasingly reluctant to list locally, and a growing number were going private or seeking to list overseas.

Since 1973, there has been a requirement that 30 per cent of a listed firm's equity be set aside for bumiputra, or ethnic Malay, shareholders. That condition has not really been contested. But problems arise over 'top-up' requirements if a company tries any sort of restructuring, such as a rights issue. Regulators can demand that bumiputra equity be restored to 30 per cent if sold down, as is usually the case. This has always been contentious because company owners rightfully complain about earnings dilutions.

Bursa is said to have suggested that once a company is listed and the 30 per cent bumiputra shareholding spread satisfied, it should no longer be subject to top-up conditions. But Mr Najib seemingly did not agree to this.

According to industry insiders, Bursa also suggested that all sale moratoriums be abolished. Currently, bumiputra shareholders are not allowed to sell their shares until a certain time has elapsed. This disadvantages them in bear market conditions, whereas their non-bumiputra peers are under no such inhibition. Mr Najib also did not countenance this idea.

The Bursa proposal that Mr Najib endorsed is that of insufficient take-up. Currently, shares not taken up are placed in escrow, but this ignores the reality of the current bear market, in which less than 17 per cent of the past 12 listings have traded above their listing price.

The 30 per cent condition originated with the New Economic Policy (NEP), Malaysia's overriding economic ideology over 35 years. The policy, originally slated to expire in 1990, has been extended to 2020, and seeks to bridge economic disparities between ethnic Malays and their richer non-Malay countrymen by using affirmative action to favour the majority Malays.

The original aim of the NEP, which was promulgated after race riots in 1969, have never been disputed - the elimination of poverty irrespective of race and the restructuring of society so that no race is identified with a specific economic function.

This was to be achieved was through targets - specifically the 30 per cent mark that bumiputras would attain in every sphere of society from employment and occupation to house ownership and corporate equity.

According to officials, Bursa is still pushing for the other two proposals, which apparently, will again be up for discussion at meeting early next week.