By Lucky Star
Malaysiakini

Part 1: Has 30pct bumi equity target been achieved?

COMMENT At the initial stage of the New Economic Policy, privatised entity and government-linked companies (GLCs) were almost non-existent.

Khazanah Nasional Berhad, the main institution through which the federal government controls GLCs, only came into existence in 1993. Therefore, before 1990, the exclusion of government shareholding owned by Khazanah was a non-issue.

But, when the privatisation policy was vigorously implemented after the publication of the ‘Privatisation Master Plan’ in 1991, the exclusion of government shareholding in privatised entities and GLCs had a significant distorting effect on equity ownership by ethnic group.

Musa Hitam, in an exclusive interview in August 2014 with the Malaysian Insider said, “But the government does not take GLCs into account when they point out that the present bumiputera equity ownership is 24 percent. We are deluding ourselves by continuously pointing a finger at the Chinese.” As a former deputy prime minister and chairperson of a GLC, Musa definitely knew what he was talking about.

For the purpose of showing bumiputera equity ownership, government data are divided into three categories of bumiputera, namely:

1) Bumiputera individuals
2) Bumiputera institutions
3) Bumiputera trust agencies

Bumiputera institutions and bumiputera trust agencies include Permodalan Nasional Berhad, Amanah Saham Mara, Lembaga Tabung Haji, Lembaga Tabung Angkatan Tentera, Koperasi Polis, Bank Pembangunan Malaysia Berhad, Perbadanan Usahawan Nasional Berhad and the various state economic development corporations. (Please refer to various tables in Malaysia Plan documents that show ‘Ownership of Share Capital of Limited Companies’.)

It should be noted that Khazanah Nasional Berhad, Minister of Finance Incorporated, Menteri Besar Incorporated and State Secretary Incorporated were not included in the three categories of bumiputera.

The federal and state governments hold shares in privatised entities through these institutions. (Please refer to Page 190, Eighth Malaysia Plan.) According to the government’s definition, shares of listed and unlisted companies held by these institutions were excluded from the government’s equity computation methodology.

Not all GLCs are listed in Bursa Malaysia. For the listed GLCs, the government’s controlling stake in a GLC is usually more than 30 percent of share ownership. Controlling stake does not necessary mean majority ownership, but the government’s ability to appoint key members to the board of directors, senior management and make strategic decisions.

Some examples of GLCs controlled by Khazanah are privatised companies such as Telekom Malaysia and Tenaga Nasional. Apart from that, Khazanah has substantial stake in GLCs which are not associated with the government’s privatisation policy such as CIMB Group. There are other GLCs controlled by state governments, for example, Kumpulan Darul Ehsan Berhad under the Selangor state government.

Besides GLCs, there are other government-linked entities such as the Malaysia Venture Capital Management Berhad (Mavcap), a wholly-owned subsidiary of MoF Incorporated established in 2001. Mavcap is one of Malaysia’s largest venture capital companies with investments in the information communication and technology sector and other high-growth industries.

As at December 2000, the listing of privatised entities on Bursa Malaysia (known as Kuala Lumpur Stock Exchange, KLSE, before 2005) contributed RM131.1 billion or 30 percent of total market capitalisation (Source: Page 193, Eighth Malaysia Plan) and government’s ownership in privatised entities was 49.5 percent. (Source: Table 7-7, Page 191, Eighth Malaysia Plan). Therefore, it can be seen that the quantity of shares excluded from the government’s computation of equity ownership in 2000 was substantial.

According to a Khazanah press statement dated Nov 4, 2014, market capitalisation of 20 major GLCs tripled from RM140 billion in May 2004 to RM435 billion as at end October 2014. It should be stressed that the abovementioned figures refer to 20 major GLCs only; they did not cover all government shareholding. For instance, Khazanah itself has investments in over 50 major companies, both in Malaysia and abroad.

About one-third of the 20 major GLCs’ shares are held by Khazanah and the like. Thanks to the transparency of Khazanah, it is now known that as at October 2014, the total quantity of government shareholding excluded from the computation of equity ownership was more than RM140 billion. The amount excluded from the government’s computation methodology is substantial indeed.

Based on Khazanah’s data, the 20 major GLCs collectively accounted for almost 25 percent of the total market capitalisation of Bursa Malaysia in October 2014. (RM435 billion / RM1,770 billion x 100 percent = 24.6 percent)

In line with our conservative approach, we assumed that GLCs collectively accounted for only 20 percent of total market capitalisation of KLSE in 2000. Another conservative assumption was that government shareholding in listed GLCs averaged 30 percent, although in reality it was more than 30 percent.

We maintain that as the government holds the shares on behalf of the people, the government shareholding should be distributed to all Malaysians. To those bumiputeras who believe that the 30 percent target has not been achieved, some of them may feel a sense of deprivation if less than 100 percent of the government shareholding is allocated to bumiputeras.

Nevertheless, as we were conservative in making our estimates, we allocated 65 percent of the government shareholding to bumiputeras, reflecting their share in the population.

With the above assumptions, we estimated the additional bumiputera equity for year 2000 if the previously excluded government shareholding were now included in the computation. Consistent with the government’s methodology of including all companies registered with the Companies Commission of Malaysia, we included both listed and unlisted companies in the denominator. The details are given below.

As shown in the last row of the table above, our conservative estimate of bumiputera shareholding in listed GLCs as a percentage of total share capital of all limited companies (listed and unlisted) in year 2000 was 2.7 percent.

Conclusion and recommendation

It is undeniable that the present methodology of equity computation used by the government contains fundamental flaws. Official data stated that for year 2000, bumiputeras’ shareholding was 18.9 percent. But, as it was based on par value and excluded government shareholding, the validity of 18.9 percent was questionable.

In order to have a better appreciation of the question “Has the 30% bumiputera equity ownership target been achieved?” and consistent with remedying the two fundamental flaws in the government’s present methodology, the following points should be noted:

1. Bumiputera institutions and bumiputera trust agencies are institutional investors.

According to official data, together they held 4.7 percent in 2000. Compared with non-institutional investors, the investment portfolio of institutional investors has a stronger preference for blue chips. As market prices of blue chips are generally higher than those of non-blue chips, when par value is replaced by market price, the equity percentage held by bumiputera institutions and trust agencies will certainly go up.

2. Foreigners and nominees are basically institutional investors too. Their shareholdings in 2000, according to government data, were 31.3 percent and 8.5 percent, respectively. Likewise, when par value is replaced by market price, the equity percentage held by foreigners and nominees will go up, affecting equity ownership by ethnicity.

3. The equity ownership tables in Malaysia Plan documents put nominees as a separate category. However, the implicit assumption in the government’s methodology, or at least the interpretation, that none of the nominees’ shareholding belonged to bumiputeras was far-fetched.

4. Government’s own data acknowledged that bumiputera equity ownership for all limited (listed and unlisted) companies improved by 3 percentage points between 2004 and 2008 (from 19 percent to 22 percent) and in recent years by another 2 percentage points to 24 percent. The total increase of 5 percentage points was on the basis of par value.

Due to improvement in investment portfolio during the 2000s, if the valuation is based on market price, the increase in bumiputera equity ownership would logically be higher than 5 percentage points.

5. Government shareholding in unlisted “Sendirian Berhads” held through Khazanah, MoF Incorporated, Menteri Besar Incorporated and State Secretary Incorporated should also be included. Their quantity is not as large as government shareholding in listed companies, but it has to be accounted for.

6. Additional bumiputera equity resulting from allocation of government shareholding in listed GLCs in proportion to population. A conservative estimate for this additional equity for year 2000 was almost 3 percentage points. Khazanah stated that between 2004 and 2014, market capitalisation of 20 major GLCs tripled. Thus, the additional equity for bumiputeras during the period 2004-2014 would be higher than 3 percentage points.

The government acknowledged bumiputera equity ownership figure now is 24 percent (par value). A correction of 1 percentage point here and 2 percentage points there will easily push the figure of 24 percent to above 30 percent.

Considering the various factors above, therefore, with a new methodology using market price and including government shareholding, a highly logical inference is that, to date, the bumiputera equity ownership target of 30 percent has been achieved.

The above inference, strong and logical it may be, stands to be corrected. Similarly the government’s methodology and conclusion that the bumiputera equity ownership target of 30 percent has not been achieved should not be regarded as sacrosanct and indisputable.

To get to the bottom of the big question “Has the 30 percent bumiputera equity ownership target been achieved?” we recommend the following:

1. A special task force headed by the well-respected Securities Commission (SC) should be set up to do a professional valuation for all listed companies for 2013/2014.

2. Other members of the task force should consist of representatives from relevant and competent organisations such as Bursa Malaysia, Malaysian Institute of Certified Public Accountants and Malaysian Institute of Accountants.

3. The valuation must include government shareholding and be based on market price, if necessary 12-month or nine-month average market price.

4. For the unlisted “Sendirian Berhads”, the Companies Commission of Malaysia (CCM) should be entrusted to do an updated computation.

5. Since the Eleventh Malaysia Plan is scheduled to be published mid-2015, for the results to be incorporated into the preparation process of the 11MP, the task force and CCM should complete their valuation as soon as possible.

6. The results of the valuation should be announced by the SC and CCM directly without interference from any quarter.

In order to uplift the bumiputeras’ equity position to 30 percent, the government should transfer 65 percent of shares held by GLCs to bumiputeras. However, in no way this implies that bumiputeras’ ownership in limited companies should be increased to 65 percent or more.

In the future, bumiputeras’ share ownership may be 65 percent or higher, but, it must be achieved through fair competition and not through a quota system or preferential treatment.

It will be totally unwise for the government to increase the bumiputeras’ equity target to 70 percent just because by the year 2020 bumiputeras will constitute 70 percent of the population. The big question is what will be the implications of such a new policy on the economy?

Likewise, it is irresponsible to shift the goal posts established by the founding fathers by attempting to introduce new terms such as “effective control of equity” or “effective equity ownership”.

We must always remember the wisdom of our founding fathers that Malaysia being an open economy could not practice xenophobia or chauvinism.

Part 1: Has 30pct bumi equity target been achieved?

__
LITTLE STARS is pseudonym of a group of professionals.