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Economy 101: What Is The Rationale Of 51% Share Give Away In Private Companies?

Ala Vaikunthapurramuloo Telugu Share

In the 2020 Telugu movie Ala Vaikunthapurramuloo, the goons will try to force an innocent businessman to sell 50% of his profitable company shares through threats and even attempted murder. A similar plot has been the crux of the story in many Tamil, Telugu and Hindi movies in the past but only in Malaysia, there is the rule to force private companies to sell their shares and lose a controlling stake in their own companies. Image source: Twitter

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Export Logistic Freight Share

The point is we need agents who specialised in logistics to get goods moved from Point A to Point B and handle all the paperwork and payments on behalf of the client. Image source: Drip Capital

Terminology

The global market has many players to play their respective parts to keep goods moving from one destination to another as fast as possible and with the best price possible. Between the factories and farms who produce the final goods and the customers who will need to use them, there are freight forwarders busy at work.

Freight forwarders specialize in getting lower costs without sacrificing the quality of the job. They help with the logistics of moving goods from point A to point B in the most cost-effective manner.

Freight forwarders are the intermediary between the consignor of goods and the point of distribution, such as the destination port. They arrange the inland transport, port and customs documentation, the shipping on board ocean vessels, and other supplementary activities.

Because of their rapport with the government and other service agencies, they are able to get work done smoothly, besides getting favourable rates, schedules, etc.

(Source: Marine Insight)

Recent Ruling

The finance ministry has postponed the enforcement of a 51% Bumiputera ownership requirement for freight forwarding companies to next December.

“The finance minister has agreed to extend the duration for companies which are local Customs agents to comply with the Bumiputera participation (rule) to Dec 31, 2022,” the ministry said in a letter sighted by FMT.

Yesterday, an association of freight forwarders urged the government to clarify its position on Bumiputera equity in logistics companies, with only months left before an end-of-year deadline on Dec 31.

In a letter dated Sept 18 to the government, Federation of Malaysian Freight Forwarders president Alvin Chua said the finance ministry had stated in January that all Customs brokerage licence holders must comply with Bumiputera equity requirements by Dec 31, but did not set any figure.

The expected 51% Bumiputera equity rule will see all such companies being taken over by Bumiputeras.
Those without such licences are not allowed to carry out transactions with the Customs department such as the clearance of goods.

(Source: Free Malaysia Today)

It is one thing to make unfair policies in Government-linked entities but to do the same affecting privately-owned companies is indeed another ball game.

Lim Guan Eng says he rejected the proposal to enforce the 51% Bumiputera ownership requirement for freight forwarding companies when he was the finance minister in the Pakatan Harapan government. The Bagan MP told FMT that the proposal to enforce the requirement had been raised during his tenure, but he did not approve it.

“I rejected the proposal on the basis that it cannot be applied retrospectively.

“That is unconstitutional and unfair to the companies.”

He said should any freight forwarding company owner suffer losses in complying with the new 51% Bumiputera ownership rule, then the government would be liable to compensate them.

“It is unfair to those who have built and invested in the companies over many years based on existing conditions only for them to be abruptly changed without due recourse.”

Lim added the move would also send the wrong signal to investors that government policies can be changed at a whim.

He said investors want policy certainty, consistency and clarity.

“A failure to ensure this will discourage investors and Malaysia will lose out in competitiveness to other countries.

“I hope the finance minister will do the needful.”

(Source: Free Malaysia Today)

The Ruling

In summary, the ruling states:-

Licences registered before 1976 do not have a Bumiputera equity requirement, while a 30% quota was imposed on those registered between 1976 and 1990. A 51% Bumiputera requirement was required for licences registered after 1990.

No Bumiputera equity is required for licences held by integrated international logistics service providers.

Foreign freight companies do not need to meet any Bumiputera shareholding but the local companies must have 51% Bumiputera shareholding whether they like it or not which is not fair and inconsistent.

Then what is the real rationale for the policy to force private freight companies to give up 51% of their shares and thus the controlling stake to complete strangers?

If it is to encourage more Bumiputera participation, then why it cannot be done by other means namely having certain quotas or limiting certain contracts to certain Bumiputera companies? Or even better, organise joint ventures between Bumi & non-Bumi companies so that they can learn from each other and benefit each other. Why the forced takeover of the controlling shares of private companies instead? Or is this another attempt to shore up support from the Malays in the next general elections?

Freight Forwarder Share Economy Shipping Cargo Port

The top logistics companies in Malaysia are foreign-based companies due to their wider network and assets to move goods around faster globally. Image source: QAFila

The Implications

Until the Government is able to explain how forcing private fright forwarding companies to sell 51% of their shares to Bumiputera improves the national economy and promotes the competitiveness of all local players, it does not make sense for this policy. It is unfair, racial and threads along the lines of sheer oppression.

Fire Sale of Shares

Question: Who will be buying the 51% shares and at what price?

Dr Raman Letchumanan: The reason is the catch-all New Economic Policy (NEP). It says 30 per cent should be controlled by Bumiputera.

But our clever politicians/bureaucrats made it almost 100 per cent for all government or government-owned entities. But still, they cannot rest in peace, looking at the private sector thriving despite all the handicaps.

So, a novel idea. Impose 51 per cent shareholding and implement it during a time of grave pandemic and economic crisis. Most companies are making losses, therefore their valuation is at rock bottom – it’s time for a forced fire sale.

By the way, how do the Bumi masses benefit from it? Do they get to buy these companies? Or do they have to pay for substandard services at exorbitant prices? It reminds me of the ‘highly successful’ Low Yat II venture.

The pundits have all got it wrong. We are not failing. Money literally grows on land and on trees. We just need to harvest it as much as we want. A country of endless wealth for the gifted people of the lands.

(Source: Malaysiakini)

Frankly speaking, it is going to be underpriced shares at the end of the day.

Given the number of non-Malay freight forwarding companies in the country and there is a deadline for them to offload 51% of the shares forcibly and there are only a few Malays who have the capability, interest and finance who can afford to buy these shares, what do you think that the share prices will not be discounted substantially?

In the end, these new shareholders will be paying cheap for a substantial stake in the company causing a huge loss to the existing shareholders who have put in their money, sweat and hard work into the company. What happened to free enterprise and open market in this country?

FDI Foreign Investment Share Malaysia DOSM

Foreign investors look for policies that are conducive to do business in the country. Oppressing regulations will only make them flee the country and look for investment in our neighbouring countries. With the pandemic all over the world, it will make a good business environment to attract foreign investments. The last thing we need is race-based policies overriding sound business needs. Image source: Department of Statistics Malaysia

Impression on Foreign Investors

Question: If the non-Malay Malaysian companies are forced to sell off their controlling shares in their own company, would not this be sending the wrong message to foreign investors and international companies doing business in the country?

Ex-Wfw: It certainly looks like they are not aware of the fact that other international players are also eyeing this issue with concern. If the government can take such action against their local players, what is there to stop them from doing it against foreign players?

They seem to be oblivious to the fact that the international logistics industry is being gobbled up by the huge mega-players across the world and those 1,500 members of the Federation of Malaysian Freight Forwarders (FMFF) are struggling to compete against these foreign players even without the additional pressure against them.

Should they fail in this struggle, it is assured that the mega-international foreign players will take over this industry and the local shippers will encounter even more serious challenges, especially in rates.

Some players informed that the Customs Department had issued some 5,000 permits. Who are the 3,500 permit holders who are not members of FMFF? Are there still in operation? Or merely permit holders seeking rental? Can the department publish the list of all permit holders?

Unless the government take positive steps to resolve this problem, our local logistics industry will encounter serious challenges, given the fact that we have agreed to liberalise the logistics industry within ASEAN.

(Source: Malaysiakini)

If foreigners think that the existing rules will not change and affect them considerably, well they need to think again. We already see the changes in Malaysia My Second Home (MM2H) programme which now comes with tougher criteria that will only discourage retired skilled foreigners from making Malaysia their home and continue to contribute to the country. This is tragic considering that we have not done anything comprehensive on the illegal immigrants in the country especially the Rohingyas.

Same case with the new rule on the 51% Bumiputera shares requirement. If this can be done on Malaysians themselves, what is there to stop the Government from forcing all foreign-run private companies to sell off their controlling stake if they want to do business in the country?

Killing Local Businesses

Question: Why stop at 51% Bumiputera shareholding? Why stop at freight forwarding companies? The same was asked by Zaid Ibrahim in his tweet.

OCT: In the 80s, investors are required to give 30 per cent to the Bumiputera as a joint venture. Yes, the government can do that in the 80s as the neighbouring countries are still backward. Now, the neighbouring countries are opening up to attract foreign investors.

With such outdated rules, no foreign investors will come to invest anymore. The government is killing the hardworking entrepreneurs as they either close shop or go and invest overseas.

This is not the right way to bring up the wealth of the Malays. By having a 51 per cent Bumiputera majority, the Bumiputera have the final say and operate it as if they own the company without any value-added expertise.

The government has forced the non-Malays to give up plantations, banks, bus routes, tenders and anything that needs a permit.

Soon there will be no business sectors in which the non-Malays can operate without a Bumi partnership. The government is giving the Malays fish but not teaching them how to fish.

Malaysia is one of the few countries where discrimination is practised legally by the government. In most countries, the majority looks after the minority to ensure their welfare is well taken care of.

However, in Malaysia, it is the reverse. The minority has to sacrifice more and more to support the majority. Where is the Malaysian Family spirit where there shouldn’t be any discrimination of the minority?

(Source: Malaysiakini)

If there are genuine Bumiputera entrepreneurs and businesses who can bring value to the company, it makes sense from a business strategy point of view to merging or partner with them for the growth of the company.

If there are none and you are forced to take just anyone for the sake of showing 51% Bumiputera equity holding, it does not add any value. Worst, sound business decisions may not be executed as the controlling stake is no longer with the founders of the company. This in the end kills the vibrant well run local company and reduces the local players in the industry.

Slaying The Golden Goose

Whilst some are wondering why such a ridiculous 51% shareholding regulation is put in place, here is an interesting video that was posted on Siti Kasim’s Facebook page that seems to be explaining the rationale and it is nothing but greed and a sneaky way to make a lot of money.

The video is in Bahasa Malaysia and this guy makes a lot of sense. His argument on the implications is almost the same as the implication mentioned above. It is just that obvious.

However, he explains WHY this unreasonable 51% shareholding regulation was imposed – due to the pandemic, online purchases increased and thus delivery had increased. This is an industry that is making billions of money. So the cronies who had lost money in other sectors during the pandemic seeing this as the cash cow that they can easily milk money without doing any hard work.

He also emphasises that the argument that this is for the benefit of Bumiputera is a scam as ordinary Bumiputera will not have enough cash to buy these shares. Who will have the money to buy the shares? It will be the top cream cronies who already made a lot of easy money in the past. It will not be trickled down to the ones that actually need the benefit.

He sees this 51% shareholding regulation (he calls it stupid regulation) as akin to slaying the golden goose which is already helping the country and employ Malaysians but now needs to shut down due to the regulation. He also explains why the Government can’t just help Bumiputeras to open their own freight forwarding companies. It is because it is hard work that cronies does not have the patience or skills to do it. They have to compete fairly and it takes time.

A very interesting and valid argument from this guy.

Final Say

With the forced 51% Bumiputera shareholding for freight forwarding companies, don’t be surprised if the one with 49% of shares does all the hard work and the other 51% just sits back and gets easy money. That is why the rationale for this policy of 51% Bumiputera equity must be explained and clarified as on the surface, it seems like a very unfair, racial and bigotry ruling.

Further, it affects private companies which are akin to having a stranger walking into your private house and claiming a large portion of it as their own. They may just throw a couple of cents on properly worth millions. In some places, this is called daylight robbery.

The other factor is how good and value that is brought by these new Bumiputera shareholders. In any business, there must be added value when companies merge or when the company gets a new substantial shareholder.

In reality, it is tragic that after 64 years of independence, the Government have not put forward policies and regulations that make Bumiputera companies be more resilient and robust in the open market. But instead, they just lower the entrance level for the Bumiputera companies compared to non-Bumiputera companies, failing to take into consideration that both are Malaysian companies.

In some cases involving Government contracts, only Bumiputera companies are allowed to participate but they do not bring any value to the contract and instead sub-contract the work to the more capable non-Bumiputera companies. In the end, the cost of the project goes up with taxpayers have to bear the hiked cost and the quality of work suffers. As one commenter rightfully said, the Government has only been giving the Bumiputera fish but they did not teach the same on how to fish.

The other tragic that non-Bumiputera companies are still regarded as outsiders despite being wholly owned by Malaysians who employ other Malaysians, pay taxes to the Government and plays a major role in the country’s economic sector. Will one day, all the non-Bumiputera companies be considered outsiders and thus have to surrender their control to Bumiputera owners? Is the majority still treating the minorities as the bogeyman of the country? Aren’t we all in the boat with the same destination?

The 51% shareholding requirement is now been postponed to the end of 2022 but this is just delaying the inevitable. In actual fact, it should be scrapped. Hopefully, those in charge of policy-making think outside the box and come up with a solution that improves the local enterprises without killing the existing ones with short-sighted objectives.

Never forget history – the same was tried in Zimbabwe and it failed miserably.

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