The Dialogue on "Malaysia as a Regional Capital Market Centre," Kuala Lumpur, 22 June 1995
For the last week or so, the market has been abuzz with speculation and predictions about an announcement of major proportions that would unleash the bulls on a stampede. Journalists, research analysts, fund managers as well as corporate players became overnight crystal-ball gazers. In fact, there has been so much hype about our meeting here today that I am afraid many of you might be left high and dry because what I have to say may not live up to your great expectations.
But let me assure you that there is absolutely no ground for alarm. The Malaysian economy is in fine shape. In the first quarter of this year, growth was 9.9 percent, surpassing the 7.5 percent target we forecasted. With greater incomes and ample employment opportunities, the incidence of poverty declined to 8.8 percent last year. As our society becomes more affluent, there is a greater urgency to inculcate the savings habit among the general population lest we fall into extravagance. This would provide a greater pool to meet the nation's financing requirements as well as help attain zero inflation. At 34 percent, our savings rate is relatively high but it still falls short of the our investment requirements. Thus, it is imperative that the capital and financial markets develop sufficient depth and breadth to fund the country's development.
Malaysia's economic achievements stand out when compared with that of other countries in the region. We have come to a stage where we can take a leading role and develop as a regional capital market centre. We should go beyond just meeting Malaysia's financing needs and use our resources and expertise to serve the region. We have an established stock market, the largest in Asean, fifth largest in the Asia-Pacific and the 15th largest in the world, in terms of market capitalization. We also have an established Malaysian Government Securities (MGS) market, a mortgage-backed securities market and a Private Debt Securities (PDS) market. The options and futures exchanges will be operational at the end of the year, and we will see stock index futures and interest rate futures contracts being traded, together with stock options. Already, call warrants are being traded on the KLSE. Parallel to this development, we have also spearheaded moves to make Malaysia the premier international Islamic capital market centre.
What we have to do now is to take steps for further development. This requires greater diversification of capital market instruments, wider participation by institutions, both foreign and local, in the capital market, and a higher level of professionalism among market practitioners. The role of the government is to be facilitative of orderly market development, but the industry must take the lead.
The government is committed to developing the capital and financial markets to enable Malaysia to play a more active and dominant role in the region. Towards this end we intend to further liberalize our regulatory framework. We will also provide a competitive environment that will attract foreign financial institutions to pick Malaysia as their regional base.
As a first step to bolster the development of Malaysia as a regional fund management centre, I would like to announce that the government will allow the establishment of 100 percent foreign ownership of fund management companies that are prepared to conduct their non-Malaysian activities in Malaysia. The income derived from such activities will only incur a 10 percent tax. However, companies that are allowed to source funds locally will be required to reduce their foreign equity to 70 percent. Foreign companies prepared to manage global or regional funds from Malaysia will be considered favourably for the management of funds such as the Employees' Provident Fund and other major trust funds.
The development of the Malaysian capital market requires the development of expertise and skills among local professionals. To encourage the transfer of technology, we will facilitate the recruitment of expatriates by relaxing work permit requirements.
In respect of the stockbroking industry, I wish to announce two measures which will contribute towards strengthening the industry. Firstly, the ceiling which only allows ten stockbroking companies to be listed on the KLSE will now be lifted. Any firm which fulfills the requirements will receive listing approval. Secondly, suitably qualified stockbroking companies will be allowed to operate unit trusts in addition to their current activities. In order to facilitate the orderly development of the unit trust industry, a single regulatory body will be responsible for overseeing its growth.
Investors will always seek the lowest transaction costs, and in this respect, Malaysia must be competitive. I wish to announce the following:
Firstly, we will introduce a system of graduated commissions on the KLSE to reduce transaction costs, with effect from July 1, 1995. The new rates will be one percent commission on the first RM500,000 per transaction value, 0.75 percent for transactions valued from RM500,001 to RM2 million, and 0.5 percent per transaction for transactions exceeding RM2 million in value.
Secondly, as a move towards creating a level playing field, the government is reducing the stamp duty charges to 0.1 percent, applicable to all firms in the industry. At present, foreign stockbrokers are exempted from incurring any cost on stamp duty when acting on behalf of their clients while local firms have to bear a 0.15 percent charge on stamp duty on their transactions.
Thirdly, I have decided to remove one basis point from the levy imposed by the SC on the commission earned by stockbroking firms.
To encourage wider local participation in the financial market and to further develop Malaysia's fund management industry, I wish to announce the following measures:
Presently the EPF invests only about nine percent of its funds, around RM9 billion, in the stock market. We have now agreed to allow the EPF to invest up to 15 percent. Other trust agencies are also encouraged to take a more active role in the local capital market.
Secondly, contributors to the EPF will be allowed to withdraw from their retirement account to invest in funds managed by approved fund management institutions. They can withdraw up to a maximum of 20 percent on balances exceeding RM50,000.
Thirdly, major companies that meet certain requirements are allowed to manage their own provident funds. However, the procedures for approval will now be simplified.
Fourthly, as part of the national strategy to mobilize savings, we are embarking on a major unit trust fund open to all Malaysians, called the Vision 2020 Fund. The establishment of the fund is a reflection of the growing confidence and unity among Malaysians.
As part of the measures to provide the necessary framework to promote development of the capital market and to improve the flexibility of the operating environment of the banking system, the banking institutions are allowed, with immediate effect, to extend loans secured by shares up to 15 percent of total loans for commercial banks and financial companies. This raises the current 10 percent ceiling. This move is to alleviate the constraint faced by some banking institutions in granting loans for productive and viable projects. This is not expected to affect the prudential stance of the banking institutions as the current limit has not been breached by the banking industry as a whole. In fact, loans by the banking sector against shares represent less than 4 percent of the total market capitalization.
In line with further liberalisation of the capital market, I would like to announce that in respect of the acquisition of foreign assets and the attendant foreign exchange control safeguard, the Malaysian acquirer company will now need only inform Bank Negara for sums not exceeding RM10 million. The previous limit was RM50,000.
Such foreign acquisitions will generally be treated the same way as those involving domestic acquisitions, subject to additional disclosure requirements. This move must not be interpreted as a licence for companies to mislead bona fide domestic investors into putting money in dubious overseas ventures. We will not tolerate any abdication of the fiduciary duties of company directors.
Major infrastructure projects have long gestation periods and would not qualify under the normal listing requirements which, among others, require a 5-year track record. Recognising this, I have agreed to allow companies involved in such projects to apply for listing on the KLSE, but only if they can display strong cashflow and project viability. At the same time, investment companies will also be allowed listing on the KLSE provided they meet the necessary conditions.
The present system is a drag on the efforts to speed up the processing of applications, and the development of new products and instruments. Efforts will be made to streamline the regulation and administration of the industry. In this regard, I wish to announce the following:
Firstly, the SC will now take a maximum of four months upon receipt of complete submissions to process new listing applications and corporate restructuring proposals, two months for rights issue applications, and one month for bonus issue applications.
Secondly, in order to address current inefficiencies in share registration, custodial arrangements and delivery and settlement, the implementation of the Central Depository System must be accelerated and completed by the end of 1996. In addition, the feedback that we have obtained arising from the recent ruling by the KLSE as regards the non-acceptance of odd lots has been largely negative. Thus we have decided that the KLSE should keep to the previous arrangement so as not to inconvenience small investors.
Thirdly, approvals for applications for dealers representative licences will be speeded. I am pleased to inform you that the previous backlog has been cleared.
And fourthly, whilst we acknowledge the positive and significant contribution of the Rating Agency of Malaysia (RAM) in having spearheaded the development of private debt securities, the growing demand for PDS warrants the establishment of another rating agency in the country. Applications for PDS now take up to nine months to be processed and it is necessary to ensure that such applications are processed within a maximum period of four months. The shareholders of this new agency will comprise stockbroking firms and insurance companies. At the same time, money brokers will now be allowed to deal in PDS where previously only principal dealers are allowed to do so.
We are confident the measures announced today will contribute to the development of Malaysia as a premier regional capital market centre. We will continue to stress the need for integrity among market players and credibility of the system. Our efforts should not only benefit the nation but the region as a whole. We look forward to your support in making this a reality.