FAQs on Liberalisation of Equity Holdings in Capital Market Intermediaries

Measures announced by the Prime Minister of Malaysia, YAB Dato’ Sri Mohd Najib bin Tun Abdul Razak at Invest Malaysia, 30 June 2009

General

How would the liberalisation of the capital market intermediation industry (broking and fund management) affect our domestic intermediaries?
Our domestic intermediaries have demonstrated the ability to compete effectively with the gradual liberalisation of the capital market over the years. They have now built a strong domestic presence and have been managing the gradual opening up of the capital market well, with several intermediaries successfully venturing abroad. Our intermediaries are now better prepared to compete with the next phase of liberalisation in the capital market based on the strength of their domestic base.The new equity framework for market intermediaries is part of the broader opening up of the financial and services sectors announced by the government earlier this year. Our domestic intermediaries can take advantage of potential opportunities through tie-ups with foreign intermediaries for expansion of their business both domestically and internationally. This liberalisation will enable them to have greater flexibility in re-organising their business model by forming strategic partnerships with foreign companies for international expansion of their operations.The presence of foreign companies will enhance competition and innovation in the Malaysian capital market, benefiting both the industry and investors. These companies are expected to broaden and deepen the range of products and services that are offered in our capital market, and provide a platform for products to be developed and distributed from Malaysia to serve regional and global investment needs. This will ensure that Malaysia continues to appear on the radar screen of the international investment community. Investors are also expected to benefit through the availability of a wider selection of products and services.
Does this mean that any foreign company can apply for a licence?
The new equity framework is only available for foreign companies which have strong value proposition and can demonstrate the ability to add value to the Malaysian capital market. These foreign companies must exhibit a good track record in their international operations including financial position, reputation and expertise, and demonstrate proven competence. They will also need to provide a viable business plan and specific deliverables which will be monitored on a regular basis.
Is SC allowing new companies to enter the Malaysian market?
There will be no new licences issued for stockbroking firms apart from the two new stockbroking licences to be issued for companies that can intermediate transactions from the Middle East. Three licenses were announced last September, of which only one has been approved for Nomura Securities.For fund management companies, new licenses will be issued on a selective basis, to those who have demonstrated strong proposition in their business plans and other areas as stated in Q2. Similar treatment will be applied to new unit trust management companies, where only those who can value add to the growth of the local market such as through lower transaction cost and greater product range will be permitted entry.
Apart from meeting regulatory requirements, will there be other considerations in granting a license to companies seeking to undertake regulated activities in Malaysia?
The liberalisation of equity holdings for capital market intermediaries is intended to enhance the attractiveness of the local market for foreign participants and at the same time provide a platform for greater competition and wider choice of intermediation services. In this regard, in the granting new licenses, the SC will consider various areas, which will include:
The entities must be able to demonstrate a strong value proposition to and a value add to the development of the Malaysian capital market
Companies must exhibit a good track record in its international operations. The track record will include financial position, reputation and expertise
They must demonstrate competence in the area they are seeking a license in;
They must provide a viable business plan and specific deliverables
Apart from the relaxation of the shareholding requirements, will there be changes related to the requirement for Bumiputera employees, licensed representatives and directors?
At this stage, the requirement for companies to have 30% Bumiputra employees, licensed representatives and directors will be maintained to focus on capacity building.
Are current capital market intermediaries allowed to vary their shareholding structure in accordance with the new requirements?
Yes. Capital market intermediaries currently licensed may restructure their shareholding structures subject to the demonstrating the above mentioned criteria. In addition, it should also be noted that a change of the controlling shareholder will also trigger the requirement to make the appropriate applications to the SC, under Section 60(7) of the CMSA. In this regard, if there is a substantial change of shareholding and business direction, the SC may require the applicants to seek prior approval.
Will entities without an international presence be allowed to seek a license to carry out the above regulated activities in Malaysia?
Subject to demonstrating the above criteria, entities with strong value proposition but without international presence may be considered for a license.
Will there be conditions imposed on the license?
Apart from operational conditions related to regulatory requirements imposed on the licenses, the license to entities which are substantially owned by foreign entities will be conditional upon meeting specific measurable deliverables based on representation by the companies within the timelines agreed upon.

Dealing in Securities

What are the specific objectives in liberalizing the equity shareholding for stock broking companies?
The liberalization efforts are intended to encourage more foreign participation and to facilitate strategic partnerships with domestic stockbrokers to enhance their position and to expand their base of operations both domestically and internationally.
To whom do the new shareholding equities requirements apply to?
The new equity requirements apply to entities seeking a license for stock broking business and companies seeking a license for unit trust management companies. The new requirements also apply to existing capital market intermediaries. Existing capital market intermediaries may seek a restructuring of their shareholding structures subject to meeting the criteria above.
Will the shareholding requirements be considered based on direct ownership or based on effective interests?
Generally, foreign ownership will be considered on an effective basis.

Fund Management Companies and Unit Trust Management Companies

What are the specific objectives shareholding requirements for fund management companies?
The liberalization efforts are intended to facilitate growth of private wealth management which will enable Malaysia to achieve its potential to be an international hub for both conventional and Islamic fund management. This is expected to also directly deepen the liquidity in the trading of equity, bond and derivative markets. Apart from this, the liberalisation of the equity holdings is intended to encourage new intermediaries to broaden the range of products they offer, by encouraging product innovation and competitiveness.

There is also an expectation that the direct impact of these measures will be the increase in the pool of product specialists available in Malaysia.
Will there be differentiation factors for the existing special scheme foreign fund management companies and foreign Islamic fund management companies?
Existing special scheme foreign fund management companies and foreign Islamic fund management companies have benefited from the incentives provided under the scheme such as seed funding. New licenses will not have seed funding allocated but can benefit from other incentives such as tax benefit for Islamic fund management companies and regulatory framework to attract syariah compliant investments to be based here.
Are existing fund management companies allowed to restructure their shareholding structures to include greater foreign participation?
Yes, based on their own plans, existing fund management companies can sell up to 70% equity in the company to foreign company if the foreign company is able spur the companyâ€™s growth and development.
Given the relaxation of foreign ownership, can foreign issued products within the group of companies be made available in Malaysia?
Yes, subject to the necessary approvals being received. At present the only jurisdiction that we have reciprocal arrangement for the cross-border marketing and distribution of funds is with the Dubai International Financial Centre.
Will the liberalisation change any other requirement apart from the equity?
The change will only affect the equity requirement. The requirement to have 30% Bumiputra employees, licensed representatives and directors is maintained.
Can the existing Corporate Finance and Financial Planning companies be allowed to restructure their shareholding structures to include foreign participation?
Yes, based on their own plans, existing Corporate Finance and Financial Planning companies can sell up to 100% equity in the company to foreign company if the foreign company is competent and able to demonstrate ability to the companyâ€™s growth and development.
Who will be affected by this announcement?
The announcement of the liberalisation on the equity requirement is for both new and existing companies.

Financial Planning

How would the liberalisation affect the current CUTA status for Financial Planning companies?
At present, CUTA status companies need to have a minimum equity requirement of 30% bumiputera. With the new equity framework, CUTA status companies can be wholly owned by either local or foreign shareholders up to 100%.