COMMENT At the outset, we wish to make it abundantly clear that we fully support the New Economic Policy (NEP) objective of eradicating poverty irrespective of race and we completely agree with the 30 percent bumiputera equity ownership target.
In a multiracial country, social engineering using affirmative action to uplift the economic status of a lagging community is necessary. We do not doubt the noble intention of the founding fathers of NEP and we believe the objectives can be achieved if right policies are formulated and implemented.
Government in any part of the world is usually quick to claim credit for any success. However, in the case of Malaysia, with regard to the achievement of 30 percent bumiputera equity ownership target, the government seemed to be more inclined to declare "failure".
Was it an honest admission of failure or just a convenient pretext to justify the continued implementation of programmes to benefit certain well-connected elites?
The overriding objective of the NEP is national unity. However, after so many years of NEP, it is unfortunate and saddening that some influential figures in the three major ethnic groups are unhappy with the results of NEP. The reasons for their dissatisfaction can be directly opposite to one another, something like below:
- Unsuspecting Malays who take the government's official data on equity ownership as the whole truth and are thus dissatisfied that bumiputeras who constitute 65 percent of the population own only 24 percent of share capital of limited companies in the country whereas the minority groups (and foreigners) own 76 percent.
The government's data on equity ownership cover all limited companies in the country, including companies listed in Bursa Malaysia (known as Kuala Lumpur Stock Exchange, KLSE, before 2005) as well as private limited companies (“Sendirian Berhads”) which are not listed. This article examines the same companies as the government did.
Our basic approach is to rely on official sources available in the public domain, in particular the various Malaysia Plan documents. Particular attention is given to 2000 because of data availability in the Eighth Malaysia Plan document. For the sake of transparency and to facilitate the readers' convenient verification, details of the official sources are provided wherever relevant.
When new estimates are made, they are basically derived from or guided by official data and reliable sources and we always have a fundamental principle in mind: be prudent and use conservative assumptions.
As our estimates are derived directly from government data, anybody who challenges our estimates is actually challenging the government data. On the other hand, if our estimates are criticised because of our conservative assumptions, we would like to point out that more liberal assumptions will support our conclusion even more strongly.
The government is in the midst of preparing the 11th Malaysia Plan (11MP) scheduled to be released mid-2015. We are hopeful that the minister in the Prime Minister's Department responsible for the preparation of 11MP, Abdul Wahid Omar, who was a former CEO of several government-linked companies and a distinguished banker and accountant, will understand our points of view, prepare to consider and accept constructive suggestions.
Two fundamental flaws
The various tables in Malaysia Plan documents that show ‘Ownership of Share Capital of Limited Companies’ categorically state:
1. "Par value" was the basis of valuation of share capital; and
2. They "exclude shares held by federal and state governments"
While the government’s transparency in this regard should be applauded, these two aspects cannot be treated lightly. The use of par value, instead of market price, and the exclusion of government shareholding from the computation of equity ownership make the government's methodology irrational and incomplete.
These two flaws create serious doubt as to whether the official data really reflect a true and fair picture of equity ownership among the various ethnic groups in the country. The government's methodology and estimates are not sacred cows and should be subject to scrutiny. Hopefully, when the two flaws are brought to the attention of key decision-makers, they will respond positively and will change the methodology in due course.
We concur with the government that all companies registered with the Companies Commission of Malaysia (CCM) should be included in the computation of equity ownership and not just confined to listed companies. This is because there is a big difference in the number of listed companies and number of unlisted companies; for instance, as at end 2005 there were about 720,000 companies registered with CCM, of which only about 1,000 were listed in Bursa Malaysia. About 719,000 of them were unlisted.
For unlisted companies ("Sendirian Berhads"), we agree with the government that par value should be used as the basis because their shares are not traded in the open market and, therefore, their market prices cannot be determined. But for listed companies, we are of the opinion that the valuation should be based on market price which is a better indicator of the true value of shares.
Many listed stocks have low par values but their market values can be higher by many times because of their good business performance; on the other hand, there are stocks which have market price below par value. It is nonsensical to argue that for the sake of consistency, the valuation of both listed and unlisted companies should be based on par value.
The government may argue that the use of par value in the computation of equity ownership started in the 1970s. During that time, there was hardly any computerisation in the country, valuation of equity ownership and monitoring changes in share ownership based on market price was extremely difficult. The use of par value instead of market price for listed companies at the initial stage of the NEP should only be regarded as a stopgap measure.
The government gave another reason why market price was not used to compute equity ownership. On Nov 7, 2006, in a winding-up speech at the committee stage of Budget 2007 in Parliament, Deputy Minister in the Prime Minister's Department Abdul Raman Suliman said it was because market prices were always changing and influenced by factors such as window dressing and speculation activities in the share market.
Such argument is far from convincing because the so-called problem can be easily overcome or minimised by using a nine-month average market price, excluding the three months of November, December and January during which window-dressing activities are usually performed.
To illustrate the irrationality of using par value for listed companies, let us compare Malayan Banking Berhad (Maybank), a listed company, with a small unlisted company XYX Sdn Bhd; both companies have a par value of RM1.00 per share.
On Nov 17, 2014, the closing market price of Maybank was RM9.55 per share. Definitely, any rational person will not think that since both companies have the same total par value of RM10,000, he or she will happily exchange his or her 10,000 shares of Maybank (market value of RM95,500) with 10,000 shares of the unlisted XYZ Sdn Bhd with unknown market value.
To further illustrate the irrationality and possible distortion caused by using par value, let us take a look at the case where both companies are listed in the stock exchange: Tenaga Nasional Berhad (a government-linked company) and Berjaya Corporation Berhad (a company controlled by well-known tycoon Vincent Tan).
The par value of both companies is the same, RM1.00 per share, but their closing market prices on Nov 17, 2014 were RM13.50 and RM0.475 per share, respectively. Tenaga's market price is 13.5 times higher than its par value, but that of Berjaya is below its par value.
According to the government's methodology, ownership of 10,000 shares of Tenaga and 10,000 shares of Berjaya is the same because they have the same par value of RM10,000. Any investor in his right mind will not exchange his 10,000 Tenaga shares which have a total market value of RM135,000 with 10,000 Berjaya shares which worth only RM4,750!
Privatised vs non-privatised companies
We now move on to illustrate the irrationality of using par value to compute equity ownership for all companies listed in Bursa Malaysia. For most listed stocks, generally their market values are several times higher than their par values. This fact is convincingly reflected in official data as shown in Table 1 (below).
As at December 2000, on the average for all listed companies, their market price was three times higher than their par value. More revealing was the fact that for privatised entities, their market price was 7.2 times higher than their par value; but for other listed companies not associated with the government's privatisation policy, the differential was only 2.4 times.
The distortion in share ownership caused by the use of par value in the government's methodology can be significant if the investment portfolio (basket of shares in privatised and non-privatised companies) of the various communities differ substantially.
As shown in Table 2, for privatised entities, the share owned by government was almost 50 percent. The share of bumiputeras (25.6 percent, in terms of par value) was higher than that of non-bumiputeras (14.0 percent). Coupled with the fact that the differential between par value and market value for privatised companies is substantially higher than that of ‘Other Listed Companies’ (7.2 times versus 2.4 times, as shown in Table 1), the overall equity ownership by ethnicity measured in terms of market price and par value will differ significantly.
The above examples and explanations clearly show that valuation methodology based on par value is totally unacceptable. Since par value neither reflects the true value of shares nor the companies' performance, it is a fundamental flaw in the government's methodology to use it to compute share ownership.
LITTLE STARS is pseudonym of a group of professionals.