Federal-Penang Action Council chairperson Zainal Abidin Osman said the state would not be made a federal territory if the Penang government objects to it.

"If the state government disagrees, then it ends there and it will be a no-go," Zainal told reporters in Penang today.

"The federal government did not proceed with the issue at all, we hope the polemics can stop here."

Zainal said since the proposal was made in good faith by Federal Territories Minister Tengku Adnan Tengku Mansor, Penang Umno welcomed the effort to improve the life of Penangites.

Penang Umno had held discussions with Tengku Adnan over the proposal on Monday.

Tengku Adnan told Penang Umno that it was his "hope, dream and vision" to include part of Penang as a financial hub so that the state could enjoy more development.

"He has good intentions and meant well, he wanted to do something good for Penang and there isn't any bad motive. He doesn't want to put us in any harm," Zainal said.

Zainal said Tengku Adnan thought Penang could be a tax haven, but he later realised that the this involved amendments to the Federal Constitution.

"This would be impossible at the moment," he said, as this would require the agreement of two-thirds of MPs.

The Federal-Penang Action Council is under the Prime Minister's Department's Economic Planning Unit. The council is tasked with implementing federal government initiatives in the state.