Controlling Bumiputera Equity Has Unforeseen Effects

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This is because the legislation will result in the establishment of a two-tiered pricing structure in the market, with bumiputera and non-bumiputera stocks being priced differently. Additionally, there is fear that the move may erode investor trust in Malaysia’s market.

“This type of approach is detrimental on several levels. This is the sort of policy that undermines investor confidence in Malaysia, affecting not only FDI (foreign direct investment), but also foreign inflows into the equities and debt markets. It will also have a negative effect on local investment, according to economist Dr Nungsari Radhi.

According to Nungsari, this establishes a two-tier pricing structure for the same asset, which is distorting and will have negative consequences. He continues by stating that the strategy will turn the bumiputera investor into a “toxic investor,” since his ownership of any firm will influence its share price.

It will also have an effect on how bumiputera funds — such as those managed by Permodalan Nasional Bhd (PNB) — are treated, according to Nungsari. PNB invests in a diverse range of firms, including industry leaders, that are listed on Bursa Malaysia.

The companies include Malayan Banking Bhd, Sime Darby Bhd, Sime Darby Plantation Bhd, Sime Darby Property Bhd, S P Setia Bhd, UMW Holdings Bhd, Velesto Energy Bhd, Duopharma Biotech Bhd, MNRB Holdings Bhd and Sapura Energy Bhd.

“Worse still, this programme will benefit just a small percentage of bumiputeras. Wealthy individuals will profit from acquiring these assets. And, more importantly, it penalises viable firms and investors,” he argues.

Prime Minister Datuk Seri Ismail Sabri Yaakob stated on Monday that in order to maintain sustainable bumiputera equity ownership, the government would create a bumiputera equity framework in which bumiputera stocks will only be marketed and sold to fellow bumiputeras.

The sale of bumiputera stocks would be supervised by the appropriate ministries and authorities, he stated. According to Sabri, a Bumiputera Prosperity Department would be established with a defined purpose and role to lead and simplify this programme.

There is no indication of what the framework comprises or how the process functions. The prime minister stated that the government took this move because bumiputera equity ownership remains below the 30% target set out in the New Economic Policy.

He said that as of the end of 2019, bumiputera stocks accounted for just 17.2 percent of the market value of Malaysian corporations. Meanwhile, non-Bumiputera stocks accounted for 25% of the market, while foreign ownership accounted for 45.5 percent.

The remaining positions were held by nominations. Due to the fact that these shares are owned by investment banks and other financial organisations, it is unclear who the real owners are.

Other concerns include the methodology used to obtain these valuations and the definition of a bumiputera investor.

If adopted, the policy will also jeopardise the growth of bumiputera businesses by limiting their access to technology and global markets, according to Dr Afzanizam Abdul Rashid, head economist of Bank Islam Malaysia Sdn Bhd.

“While the aspect of control is necessary to maintain order, we must recognise that the business scene is quickly changing and very competitive.

“At times, enterprises, whether bumi or non-bumi, are forced to make economic decisions in order to remain competitive, which may involve collaborating with non-bumi firms.

“Such decisions can be critical since they allow for the most efficient transfer of technology while also potentially opening up access to international markets. As a result, perhaps there should be greater clarification on this,” he suggests.

Meanwhile, according to Dr Zokhri Idris, head of external relations at the Institute for Democracy and Economic Affairs (IDEAS), the control mechanism would increase bureaucratic interference in the economy through the establishment of the Bumiputera Prosperity Department.

This might result in a conflict between FDI interests and the bumiputera agenda, he adds. While the method may benefit bumiputeras in the near term, it is not sustainable since foreign investors would view it as a risk of doing business in Malaysia, he adds.

“While projections are premature, we cannot rule out the potential that foreign businesses may run away as a result of this mechanism — particularly if bumiputera managements face competency and productivity difficulties. Finally, bumiputera stocks will become unappealing,” Zokhri asserts.

The regulatory mechanism may also have an effect on bumiputeras’ productivity and competitiveness, he says, because bumiputera businesses will compete on a different level than the rest of the market due to the additional protection they receive.

This may also result in structural isolation from market operations, which would be counterproductive in the long term to bumiputeras’ industrial and entrepreneurial skills and capacities, he adds.

Additionally, there are fears that the control system would make Malaysia even less appealing to international investors. This is because more protectionist measures against bumiputera businesses and investors risk making them even more uncompetitive.

Additionally, there is worry that the measure may require bumiputera agencies such as PNB, Ekuiti Nasional Bhd, and, to a lesser extent, Majlis Amanah Rakyat to take up the slack in terms of purchasing bumiputera equity.

If the businesses or assets are profitable and have enormous potential, they would make excellent investments for bumiputera agencies.

Zokhri further warns that if bumiputera-specific government-linked investment firms (GLICs) are enlisted to buy distressed assets in order to comply with control measures, GLICs may be utilised to rescue particular businesses.

“It would be interesting to observe how bumiputera-specific trust funds and private equity companies compete for additional bumiputera stocks. The immediate issue would be if the share transfer was below market value, which would result in these corporations purchasing less productive enterprises.

“In the long term, we should bear in mind that these businesses are GLICs, with government-dominated boards of directors. We have seen how Lembaga Tabung Angkatan Tentera, Lembaga Tabung Haji, and KWAP have been implicated in mega-scandals involving government investments both domestically and internationally in the past,” he argues.

While it is unclear if the government would enlist bumiputera-centric GLICs to buy bumiputera shares in the absence of other community investors, Nungsari believes that if they do, the GLICs will become toxic investors. “And, as a result, Malaysia will deteriorate into a poisonous market. “Who wishes to visit this market?” he inquires.

Published by Zack Baharum

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