Malaysia Introducing Harsh New Equity Restrictions – Analysis


Lacklustre assistance for the business sector under 12th Malaysia Plan

Malaysian prime minister Ismail Sabri Yaakob announced in parliament, while launching of the 12th Malaysia Plan (MP12), that measures will be put in place to restrict the sale of sales in Bumiputera companies only to Bumiputeras. This effectively reduces the ability of Bumiputera shareholders to make potential capital gains on the sales of shares in their companies, due to the inability to make equity sales to non-Bumiputeras and foreign entities. Bumiputra companies will also be seriously hampered in raising capital through equity sales, due to the restricted market they can sell equity. If implemented, Bumiputra entrepreneurs will also find it difficult to sell their businesses, due to the new equity restrictions. 

According to former Pakatan Harapan health minister Dzuilefly Ahmad, who is the MP for Kuala Selangor, many Malay business people are angry over this measure, describing it as “suicidal”, which will  kill off the Bumi economy. This latest equity announcement potentially risks creating a two-tiered economy, where Bumiputera companies have draconian equity restrictions placed upon them by the government. 

There is no other economy in the world that has such provisions in company law. 

There was even more startling news the week before the launch of MP12, where the Ministry of Finance (MOF) announced local freight forwarding firms will be required to have 51 Bumiputra percent equity to renew their customs licenses from the end of next year. This will force many family-built freight forwarding companies to sell out control of their firms, or shut down, draining the international freight forwarding industry of experienced players. This announcement has caused deep rumblings and protests within non-Bumiputra business communities. Those who can exit and relocate, are considering pursuing business opportunities elsewhere. Singapore and Jakarta, as well as foreign companies that are exempted will be the beneficiaries of these racially restrictive measures. 

These disruptive government equity announcements come at a time when the economy is on the decline due to the Covid-19 pandemic and corresponding public health restrictions. There have been more than 10,000 bankruptcies to date, since the start of the pandemic. This is on the rise. Both official and informal sector unemployment is increasing. Many SMEs are voluntarily closing, even though the government introduced a debt moratorium. According to World Bank Figures, GDP has declined 4.9 percent over the last 12 months. Pain and suffering is evident across the community, with volunteer food kitchens feeding people without income, and many now relying on charity to survive. 

Is the government trying to pick winners again?

There was some expectation the MP12 would address the plight of businesses due to the Covid-19 pandemic. In contrast, the document was full of Industry 4.0 rhetoric, digital solutions, picking industry winners, and expanding government influence over the business sector. The policies espoused within the MP12 document are totally oblivious to the effect of the pandemic on business, only mentioning the devastation in passing. There is little acknowledgement of the desperation many firms face during this time. The plan provides no recovery strategies for the crippled ones. 

Chapter three of MP12 is dedicated to industry, micro, small and medium industry (MSMEs), and entrepreneurship. Once again, the government has selected specific industries it considers will be the growth drivers of the economy. These are the electrical and electronics industry, global services, the aerospace industry, creative industries, tourism, the halal industry, smart farming and biomass products. 

Historically, the government has been very poor at selecting industry winners. Malaysia’s biotechnology push during the Badawi administration only led to a number of government corporations that did nothing, except spent money with little value-added return to the economy.

Looking at the latest list, the electrical and electronics industry is primarily made of up big corporations which make their location decisions based upon strategic issues like country cost base, employee pool and quality, supplier availability, and logistics issues. These are variables that take a long time to change. The issues are similar with global services. Multinational corporations will domicile their research, logistics, production, and regional offices based upon similar factors. Increasing the number of global services corporations in Malaysia by 10 percent, based on the statistical figures provided by MP12, would only add RM 2 billion in domestic business spending. It just too difficult to see a four-fold increase in domiciled multinationals over the next four years, as MP12 forecasted. 

The aerospace industry is already facing tough times from the pandemic and has been in decline. Forecasts indicate that passenger traffic is not likely to go back to 2019 levels until 2024. Air fleets have been mothballed in storage, and existing players in the industry have drastically cut down their costs to survive financially. It is difficult to see how the Malaysian industry can achieve a three-fold increase over the next five years. Only the air-cargo sub-sector is growing, which was not even mentioned in MP12. The cost, resources to be allocated, and effort needed to create an aerospace cluster, might best be focused upon another industry, until the aerospace industry shows signs of recovery.

The measures the MP12 outlines for the creative industry maybe too little to assist the industry to grow, especially with the long-term effects of the pandemic still unknown. The creative industry, as defined in the MP12 is very fragmented and different sub-segments will require specific measures, rather than the generic range of measures the report suggests. The feature film market is completely depressed, due to restricted audiences in public venues, and the whole entertainment business model is currently undergoing flux and transformation into something no one is as yet too sure of. The growing importance of platforms and distribution channels like Netflix and Peacock were not mentioned. Even if growth takes place, the multiplier effects will be limited as compared to the recovery of the SME sector. 

The MP12 prescription for the tourism industry, in almost total collapse with the pandemic restrictions, needs much more than a generic revitalization of branding. There is no mention about assisting SMEs that are totally dependent on tourism to survive, and those made unemployed. More than 120 hotels have shut their doors permanently due to the pandemic. There is no assistance offered to these businesses in dire straits from the pandemic, and finding alternative means of income for those directly affected by the drastic decline in tourism. This omission in the MP12 plan will place a major additional burden on the nation’s economic recovery. 

The halal industry is rapidly growing internationally and Malaysia isn’t getting a big enough share of this growth. The growth of the halal industry in Malaysia will be directly related to market development, which has been ignored by MP12. Smart farming and biomass industries are very specialized and those companies that are already involved or are likely to enter, are technology-based and highly capitalized companies that don’t need government assistance. The effort could be put into existing farmers who urgently need assistance to survive. They need assistance in production and market development, where more extension is needed and the role of FAMA expanded. 

Little to assist ailing small business

MP12 has little to assist the hundred of thousands of existing SMEs, financially stressed from the pandemic. Most of what MP12 lays out for the sector has already been done over a number of years, by multiple agencies. There are numerous mentions of the triple helix, collaboration between institutions of higher education, government and business, without explaining how this concept will be used to assist existing and new businesses. Incubator programs already exist around the country at universities, technical colleges, ministries, and other government agencies. Expanding them will require not just the physical infrastructure, more building, but experienced entrepreneurship teachers and mentors, who are already in drastic short supply. Nothing has been mentioned about how the trainers can be trained.

MP12 calls for encouraging SMEs to adopt innovation. However, it doesn’t explain how. The recommendation that more entrepreneurs should take up research from public universities and research institutes opens up a pandoras box of issues that aren’t easy to resolve. For example, university and research institute intellectual property (IP) policies are restrictive and bureaucracy currently not SME friendly. Secondly, the actual researchers are usually full-time lecturers who have little time to assist SMEs take any piece of research from the R&D stage to the prototype and commercialization stage. In addition, getting funding to do this type of scaling up is extremely limited through agencies like the Malaysian Technology and Development Corporation (MTDC), which is already working at capacity. Finally, although most universities now have an extensive range of registered patents with the Malaysian Intellectual Property Organization (MIPO), not many patents solve real commercial problems. 

MP12 talks about widening market access for entrepreneurs, but is silent on how this is to be undertaken. These are the important issues for SMEs that have not been addressed in any detail. The same thing has been said in previous Malaysian Plans, only to be resaid in the next plan. 

One has to wonder how much artificial intelligence (AI) and Industry 4.0 are really going to assist under-capitalized SMEs, which can’t make ends meet financially. The majority of Malaysia’s 900,000 SMEs are finding it difficult to pay salaries, let along invest in the future. Perhaps more short-term initiatives like salary assistance to keep people employed would spur more immediate economy activity at present. Most business activities that Malaysia’s set of SMEs undertake at present are not suitable for such concepts as AI and Industry 4.0. The majority of Malaysian SMEs are focused on service, small manufacturing, repair and maintenance, and the food and beverage industries. 

Using local materials is a great ideal set out by MP12. Most SMEs already buy local is material quality is suitable, price is competitive and there is a stable supply. To buy raw materials locally, the industries that create them must be set up locally first. This should be market rather than government driven.

MP12 within the industry section talks about negotiating to reduce barriers for cross border trade. This is confusing, as MP12 states in the introduction that the ASEAN Economic Community (AEC) environment is already operating and a series of new Free Trade Agreements (FTA) have already been negotiated. Here it appears the authors of the chapter on industry haven’t read the introduction to the report, making the whole document disjointed. 

MP12 is extremely disappointing for SMEs. Not only have restrictive new equity laws been introduced, but MP12 is advocating a massive increase of government influence through increased bureaucracy in the economy. This is likely to lead to higher costs of doing business. This will further hinder a market-friendly environment business needs to operate within. Many sunrise industries like smart farming and downstream biomass product production just don’t need government assistance. The wisdom of setting up an aerospace cluster, runs the risk of having the same fate as Malaysia’s steel, automotive, and biotechnology clusters. Billions spent and nothing to show. 

MP12 is not Rakyat or people centric, its bureaucratic-centric, bringing more government interference into the business-environment. Bumiputera businesses are now seriously hampered in their ability to raise capital through equity sales. This will weaken them and put them at a disadvantage to SMEs in other ASEAN countries. Non-Malays now have a disincentive to build companies that they will be forced to sell off at some future date, with retrospective regulation threatening ownership and control. This could potentially cause another bout of brain drain and capital flight. Finally, the government has abandoned Malaysia’s 900,000 SMEs to fend for themselves in an economic crisis much worse than the Asian Financial crisis back in 1997.

Originally Published in the Asia Sentinel 

Murray Hunter’s blog can be accessed here 

Murray Hunter

Murray Hunter has been involved in Asia-Pacific business for the last 30 years as an entrepreneur, consultant, academic, and researcher. As an entrepreneur he was involved in numerous start-ups, developing a lot of patented technology, where one of his enterprises was listed in 1992 as the 5th fastest going company on the BRW/Price Waterhouse Fast100 list in Australia. Murray is now an associate professor at the University Malaysia Perlis, spending a lot of time consulting to Asian governments on community development and village biotechnology, both at the strategic level and “on the ground”. He is also a visiting professor at a number of universities and regular speaker at conferences and workshops in the region. Murray is the author of a number of books, numerous research and conceptual papers in referred journals, and commentator on the issues of entrepreneurship, development, and politics in a number of magazines and online news sites around the world. Murray takes a trans-disciplinary view of issues and events, trying to relate this to the enrichment and empowerment of people in the region.

One thought on “Malaysia Introducing Harsh New Equity Restrictions – Analysis

  • October 5, 2021 at 6:33 am

    It looks like MP12 is just blowing their horn (making big noises) without looking carefully internally the pitfalls of the manufacturing sector, SMEs, the pandemic and most of the the market demand. It there a demand for Malaysia’s manufactured goods. MP12
    failed to look at its competitors. Is Malaysia’s manufactured good enough to compete? What MP12 hope to achieve is to have a 51% share of successful businesses that is already in existence. As one MP has already declared this MP12 is suicidal.


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