Introduction
In Malaysia, there is no overarching regulatory body or set of laws governing all foreign investments. Instead, laws regarding foreign investment in Malaysia are specific to each sector and overseen by relevant regulatory bodies.
Generally, these laws take the form of limitations on foreign ownership or representation on boards of directors. Typically, foreign investment in various sectors is subject to typical local participation requirements, including:
Mandating a minimum or majority equity ownership by locals (bumiputera), the indigenous ethnic group.
Requiring the appointment of a local Malaysian or bumiputera individual to the board of directors;
The allowable percentage of equity ownership for foreign investors varies across different sectors. The Malaysian government implements local participation requirements as part of its nation-building strategy, aiming to facilitate the transfer of knowledge, expertise, and technology from established foreign entities to local Malaysians and bumiputera businesses.
Despite Malaysia's generally favorable stance towards foreign investors, there are specific restrictions and prohibitions on engaging in business with investors from certain countries. For instance, pursuant to the Direction on Dealings with Specified Persons and in Restricted Currency issued in accordance with the Financial Services Act 2013, Malaysia maintains a trade embargo against Israel, prohibiting any resident or non-resident in Malaysia from conducting transactions with Israel, its residents, or any entity directly or indirectly affiliated with Israel or its residents.
Definition of ‘foreign investor’ or ‘foreign investment’
In Malaysia, there are no universal definitions for terms like "foreign investor" or "foreign investment." Generally, individuals holding non-Malaysian citizenship and companies where a majority of voting shares are owned by foreigners or foreign entities are considered foreign investors. However, the specific criteria for "majority ownership" can vary across sectors. Typically, it denotes ownership of over 50% of the total issued and paid-up voting shares in a company, including indirect ownership of such shares.
Key laws that directly and indirectly regulate foreign investments in Malaysia.
In Malaysia, there is no comprehensive legislation specifically governing acquisitions and investments by foreign nationals and investors based on national interest. Instead, such activities are subject to sector-specific requirements outlined in subsidiary legislation and guidelines issued by relevant regulatory bodies. These requirements often mandate obtaining prior approval from regulatory authorities before completing an acquisition or obtaining operational licenses before commencing business operations. Additionally, foreign nationals and investors may be expected to comply with local participation requirements as a condition for approval or licensing, failure of which may lead to rejection by regulatory authorities.
As of January 2023, Malaysia lacks an overarching merger control regime, except for the aviation and telecommunications sectors regulated by the Malaysian Aviation Commission (MAVCOM) and the Malaysian Communications and Multimedia Commission (MCMC) respectively. This relatively lenient regulatory environment facilitates acquisitions and investments by foreign nationals and investors, except in certain specified sectors. However, there are indications that the Malaysia Competition Commission plans to introduce amendments to the Competition Act 2010 soon, potentially establishing a comprehensive merger control regime.
The application scope of these laws varies across sectors, with local participation requirements being central to considerations for foreign investors. These requirements are enforced through regulatory approvals, operational licenses, employment passes, or real estate transactions.
For instance:
Logistics sector
Transportation firms are mandated to possess a minimum of 51% Malaysian equity, with 30% specifically set aside for bumiputera, in order to secure the Carrier Licence A issued by the Land Public Transport Commission (APAD). Consequently, foreign investors aiming to purchase shares or invest in such enterprises must comply with these equity stipulations.;
(Malaysian Investment Development Authority’s Booklet No.4 – Logistics Services)
Oil & Gas
The requirement for Bumiputera ownership in obtaining a Petronas license for upstream activities varies, ranging from 30 percent to 51 percent up to 100 percent, contingent upon the nature of services to be rendered (according to Petronas Guidelines for License and Registration Applications – SWEC Guidelines).
In the marketing and distribution of petroleum products in Malaysia, excluding wholesale liquefied petroleum gas, a maximum of 30 percent foreign equity is permissible, with a mandated minimum of 30 percent Bumiputera equity ownership.
For the marketing and distribution of wholesale liquefied petroleum gas in Malaysia, no foreign equity participation is permitted, and a minimum of 51 percent Bumiputera equity ownership is required;
(Ministry of Domestic Trade and Consumer Affair’s (MDTCA) Guidelines on Permission under the Petroleum Development Act 1974)
Distributive Trade Services
Hypermarket operators may have a maximum of 70 percent foreign ownership, with a minimum requirement of 30 percent ownership by Bumiputera individuals.
Departmental stores, as outlined in the guidelines, may be fully owned by foreign entities, up to 100 percent ownership.
Convenience stores, as defined in the guidelines, are permitted to have up to 30 percent foreign ownership, with a stipulated minimum of 30 percent ownership by Bumiputera individuals
(MDTCA’s Guidelines on Foreign Participation in Distributive Trade Services in Malaysia 2020)
Furthermore, regulatory authorities may impose additional administrative conditions, such as incorporation of a company under the Companies Act 2016, minimum capital investment, and local hiring quotas, which differ across sectors. Compliance with these requirements may also be necessary for participation in government tenders, particularly in sectors like construction.
Certain sectors may outright prohibit asset acquisitions by foreign investors, as seen in property acquisition guidelines issued by the Economic Planning Unit, which restrict foreign ownership of properties valued below a certain threshold (typically RM1,000,000.00 in all States save for Johore, Selangor and Sarawak), properties on Malay reserved land, and properties allocated to bumiputera interest.
Attempts to bypass local participation requirements through nominee arrangements have been deemed unenforceable by Malaysian courts due to illegality concerns, as illustrated in Hj Afifi bin Hj Hassan v Norman Disney & Young Sdn Bhd & Ors 2014 7 MLJ 738.
Which regulatory body(ies) are in charge with reviewing mergers and acquisitions?
As requirements for foreign investment participation vary by sector, regulatory bodies overseeing those sectors are tasked with assessing mergers or acquisitions by foreign investors and enforcing any relevant local participation requirements. For instance, Petronas is authorized under the Petroleum Development Act 1974 to regulate the oil and gas industry, while BNM's authority under the Central Bank of Malaysia Act 2009 extends to supervising the financial services sector.
In sectors like aviation and communications and multimedia, which have their own merger control regimes, MAVCOM and the MCMC have the authority to scrutinize mergers, acquisitions, or joint ventures to prevent any significant reduction of competition in the respective markets.
Despite the absence of a centralized regulatory authority, the Malaysian Investment Development Authority (MIDA) plays a significant role in promoting the manufacturing and services sectors. Foreign investors seeking to invest in Malaysia can access MIDA's website at https://www.mida.gov.my/ for comprehensive information on sector-specific requirements, as well as available incentives
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