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The Investment Regime in ASEAN Countries

Dr. Lawan Thanadsillapakul


The Malaysian government has launched the Second Outline Perspective Plan (1991-2000) and the Seventh Malaysia Five-Year Economic Development Plan (1995-2000)(19). These plans have one goal to make Malaysia a fully developed and industrialised nation by the year 2010. Toward this end, the manufacturing sector will assume the lead role in the nation's economic growth and in this respect, private sector investment will be strongly encouraged(20). A number of industrial policies have been introduced to promote rapid growth in manufacturing sector. These were mainly aimed at attracting foreign investments especially from the multinational corporations of developed countries. A Capital Issues Committee and the Foreign Investment Committee were established in 1968 and 1974 respectively, to co-ordinate local and foreign investment and facilitate the equal treatment of FDI. However, foreign investors have to undergo the process of registering their firms in accordance with the Malaysian laws.

In Malaysia, a foreign-owned company has to register as "a foreign company" under the Companies Act 1965 with the Registrar of Companies (ROC), and thereby establish a branch in Malaysia(21). The registration of a branch is at the discretion of the ROC(22). A wholly-owned subsidiary may be approved(23) subject to a condition of future partial divestment of equity to Malaysian shareholders(24). It is the policy of the Malaysian government to structure the ownership and control of companies and business in Malaysia to ensure a balanced participation by Malaysians, in particular by bumiputras(25) (ethnic Malay). This policy was enunciated in the New Economic Policy (NEP) and the National Development Policy (NDP). The proportion of equity permitted to be held by foreigners may vary depending on several factors. Among the most important are whether the industry is of a type encouraged under Malaysian economic policy, and the proportion of products to be exported. Under the Industrial Co-ordination Act 1975 (ICA), all manufacturing companies with shareholders' funds of RM 2.5 million and above or engaging 75 or more full-time employees need to apply for a manufacturing license. And all foreign investment proposals, irrespective of value of investment and sector, would therefore need to be licensed(26). Any issue of a licence must be consistent with the national economic and social objectives, promoting the orderly development of manufacturing activities of Malaysia.

Particular business sectors will also be regulated by relevant Acts of Parliament or subsidiary legislation. For example, the telecommunications and power generation industries are regulated by the Telecommunications Act and Electricity Supply Act respectively, together with their subsidiary regulations. Foreign companies can establish a business presence in Malaysia either by acquiring control of a Malaysian company under the Companies Act 1965, or by incorporating such a company and carrying on business through such a company.

A separate regime applies to foreign companies who wish to use the Federal Territory of Labuan(27) as an offshore base: by incorporating an offshore company in the Federal Territory of Labuan under the Offshore Companies Act 1990 and carrying on business through such company; or by registering itself under the Offshore Companies Act 1990 as a foreign offshore company. In most cases, foreign investors may form a subsidiary company under such companies. If it is envisaged that the only activities carried out will be those of a regional operational headquarters, the establishment of an overseas headquarters company could also be considered.

Under Malaysian law, a foreign company is required to lodge with the Registrar the balance sheet and other documents, in such form and containing such particulars and accompanied by copies of such documents as the company is required to lodge in its place of incorporation or origin. Where the foreign company is not required by the laws of its country of origin to hold an annual general meeting or prepare a balance sheet, the company is required to file a balance sheet in the form required by a public company incorporated under the Companies Act 1965.

Every foreign company also has to lodge with the Registrar a prescribed document appointing one or more persons resident in Malaysia, not including a foreign company, authorised to accept on its behalf service of process and any notices required to be served on the company. It may also be possible to appoint agents in Malaysia to carry out the activities intended. As the Malaysian government has a policy to ensure the participation of indigenous people, there are also criteria to control a Bumiputra company and requiring the disclosure of non-resident shareholdings of the foreign company(28).

Generally, foreign companies would be under the control and supervision of the FIC to ensure that foreign investors comply with the National Development Policy (NDP) and the New Economic Policy (NEP)(29), and that foreign companies contribute to the improvement and enhancement of the Malaysian economy as well as to further stimulate trade and investment for Malaysia. FIC also administers the "Guidelines for the Regulation of Acquisition of Assets, Mergers and Takeovers, 1974". These seek to ensure that proposed acquisitions of assets, interests or mergers result directly or indirectly in a more balanced Malaysian participation in ownership and control.

Despite the regulatory control on FDI (screening and approval process due to the economic development and planing policies), the Malaysian government continues to promote foreign investment, and aims to be flexible and more pragmatic in the implementation of its policies and programmes so as to create a favourable climate for private investment. They introduced the "one-stop" facility for interested investors that provide information on investment opportunities and procedures and assists in the review/notification and operational aspects of investing. The Malaysian Industrial Development Authority (MIDA) was designated as the Co-ordinating Centre on Investment. Investors only need to approach MIDA to obtain most of the approvals required at the Federal level in respect of manufacturing and granting of tax incentives. MIDA's present role is more encompassing, thus reducing the number of agencies and departments that investors have to approach and the time taken to get the relevant approvals(30). MIDA claimed that the greatest advantages to investing in Malaysia are the political stable climate, the solid infrastructure network, the high-skilled labour force and the availability of raw materials.

Part 4


(19) Malaysia, Ministry of International Trade and Industry (MITI) (1999) Information on Investment in Malaysia, government announcement, as of December 1999.

(20) APEC (1998) Guide to the Investment Regime of the APEC Member Economies. Singapore: APEC.

(21) Before filing the application, the company must obtain the approval of the Industries Development Division of the Ministry of International Trade and Industry (MITI). Generally, MITI rapidly approves projects of foreign companies that follow on the branch's first approved project.

(22) Previously, branches of foreign companies were rarely registered because the Registrar of Companies (ROC) required a letter of support from Ministry of International Trade and Industry (MITI) which was only given if the foreign company was awarded a contract with a government body. In 1993, the ROC began to allow the registration of branches without such letters of support, but it was announced at the end of 1995 that branches for the purpose of wholesale or retail trade would not be registered. Moreover, the immigration department still generally requires a letter of support from MITI for employment passes for expatriate employees of a branch. Doing Business in Asia: Malaysia, 1998.

(23) For instance, to promote the hotel and tourism industry, 100% ownership is allowed for five years after which the company is required to restructure with at least 49% ownership held by Malaysians including 30% reserved for Bumiputras.

(24) Malaysia has a very strong policy to ensure that indigenous Malay citizens (Bumiputras) are well protected, not just from the competition of foreigners but also even from their own citizens who are non-Malay. And this is the main objective of Malaysian government in approving and controlling foreign investment based mainly on the prescribed ratio of Malay citizen participation in Malaysian economy, either the ratio of Malay equity, shareholder, employment, control of business and administration. Foreign ownership is regulated not only by laws but also through extensive bureaucratic guidelines. Local and foreign equity ratios vary according to industry, technological level, export proportion and location of business. Ratios change according to the prevailing economic climate and government policy.

(25) A company has to have a Bumiputra equity participation generally at 51% or more, unless the foreign company has been granted MITI's approval. Moreover, all firms in Malaysia have to employ and train Malaysian personnel so that employment at all levels reflects the ethnic composition of the country.

(26) Applications for manufacturing licenses are submitted in prescribed form to the Malaysian Industrial development Authority (MIDA) for screening and evaluation. The agencies and ministries involved are MIDA and MITI and under the ICA, notification to screening authorities is mandatory. If the company undertakes manufacturing activities then it requires a manufacturing licence from MITI. Licences issued by MITI are inevitably accompanied by conditions. These conditions will usually specify the foreign ownership restrictions and may require that the approval of MITI be obtained before any transfer of share held by foreign parties may be affected. If the company is not a manufacturing one, then it will have to comply with the guidelines laid down by the Foreign Investment Committee (FIC). And in certain case of a joint venture, it may require the approval of both MITI and FIC.

(27) Labuan is an island located off the state of Sabah in Northern Borneo, a federal territory of Malaysia. It became a special international offshore financial centre in 1990. The relevant legislation contains provisions for offshore companies, banking, insurance and trust companies, and special tax rules for qualifying companies engaged in qualifying offshore activities.

(28) The Company Act 1965 compels disclosure of substantial shareholding by all natural person and bodies corporate. The annual return of the company must include a list containing the names and addresses of all members of the company showing the number of shares held by each member, ratio of non-Malay citizen shareholders.

(29) NEC's declared two-pronged objective is to (i) reduce and eradicate poverty by raising income levels and increasing employment opportunities and (ii) accelerate the process of restructuring Malaysian society so as to correct the economic imbalance and to eliminate the identification of race with economic functions.

(30) Malaysian Industrial Development Authority, Trade Commission (Investment) (1999) Investment Policies. Malaysia: MIDA.