Published February 19, 2009

KL likely to scrap bumiputra share equity condition

It may keep 30% rule only for hypermarts in distributive trade, sources say

By S JAYASANKARAN
IN KUALA LUMPUR

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WITH the exception of hypermarkets, the Malaysian government is likely to scrap guidelines aimed at increasing bumiputra (largely ethnic Malay) participation in the distributive trade sector as part of liberalisation efforts to promote confidence among foreign investors and shore up a rapidly slowing economy.

The guidelines, first proposed by the Ministry of Domestic Trade and Industry to the Cabinet in December 2004, required companies with more than 15 per cent foreign equity to have 30 per cent bumiputra equity participation and a paid-up capital of RM1 million (S$419,000).

Such joint ventures were also required to have boards, management and staff reflecting the demographics of Malaysia. Furthermore, company branches had to be considered separate legal entities, each with a paid-up capital of RM1 million and with separate mandatory auditing.

The regulations were sweeping because they encompassed a wide variety of sectors - from wholesale and retail trade to restaurants, hotels and franchise outlets - and, not surprisingly, ignited a firestorm of protest among local businesses. Even countries jumped on the protest bandwagon. The US, for example, specifically cited the guidelines as an impediment to inking out a free trade agreement with KL. And local and foreign investors said it would drive up costs and deter foreign interest in the country. It isn't clear if the proposals were actually enforced, however, although anecdotal evidence suggests that individual cases cropped up every now and then.

According to executives familiar with the government, only hypermarkets will be required to meet the 30 per cent bumiputra guideline while the requirements for everything else are likely to be scrapped. The reason is rapidly falling foreign investment, increasing employment and faltering growth.

Indeed, the executives said there could be more liberalisations down the road as Malaysia needed to cut the costs of doing business to remain competitive. That was likely to be revealed in March by Deputy PM Najib Razak when he presents a mini-budget to Parliament to stimulate the economy.

Originally, the plans signalled Kuala Lumpur's continuing commitment to a three-decades-old affirmative action policy designed to bring the ethnic Malay community into economic parity with their richer ethnic Chinese countrymen.

The policy was first introduced in 1971 but many of its equity elements were quietly abandoned in the late 1980s after the economy went into a tailspin in 1985. A subsequent boom in the 1990s made it almost irrelevant as privatisation and IPOs amid a booming stock market seemingly slaked bumiputra desire for a larger slice of the Malaysian economic pie.

Even so, the 1998 Asian financial crisis adversely affected a key aim of the policy: that bumiputras get 30 per cent of national wealth. The figure is down to 18 per cent now, which has renewed talk of a reinvigorated policy.

Indeed, calls for a renewed emphasis on affirmative action were boosted in 2005 at the annual meeting of the United Malays National Organisation (Umno), Malaysia's dominant political party. Its junior wing, Umno Youth, demanded what they called a new national agenda - what many analysts took as a euphemism for renewed affirmative action.

The redistributive trade is one sector with insignificant bumiputra participation. But it was always robust, growing by over 13 per cent for nine consecutive years from 1996, which probably made it an attractive target for restructuring.

But affirmative action always presupposed a growing economic cake. With growth shrinking, the government probably felt that it could not be implemented where the redistributive trade sector was concerned, the executives said.