Malaysia's stockmarket tangle

Daylight clobbery
B A N G K O K 
 

PERHAPS the people of Singapore have been conspiring with western
governments. How else to explain their treatment at the hands of
Mahathir Mohamad, prime minister of neighbouring Malaysia? When
Malaysia imposed capital controls last year, it informed foreign
investors that they would be unable to redeem their local shares for a
year - a rule that was replaced this February by a graduated exit tax.
But investors in Singapore's Central Limit Order Book, an offshore
market for Malaysian shares, were not so fortunate. Their accounts
were frozen altogether, and their claims declared invalid.

Most investors in the CLOB reckon that they will find a way to get
some of their money back. But a series of recent proposals by
Malaysian businessmen has failed to break the impasse. A counter-offer
this week by Singapore just might. 

The most recent Malaysian offers come from a pair of listed companies:
Telekom Malaysia, in which the government has a controlling stake, and
United Engineers Malaysia, which has close ties to Dr Mahathir's
party. Last week the two firms made a joint bid for the 14.5 billion
ringgit ($3.7 billion) in frozen CLOB shares, offering to exchange
them - at a discount, of course - for shares in their own companies.
The plan was supposed to be an improvement on previous offers by Akbar
Khan, a local businessman, and Abdullah Rahman, a prince. Each of
these had offered to buy the shares at steep discounts, in exchange
for units in newly established closed-end mutual funds. Mr Akbar also
offered cash. But neither offer impressed the CLOB's investors; and
the new proposals are, in fact, little better. The two firms propose
to buy the CLOB shares at a 25% discount. Since the payment would take
the form of shares in the two corporations, valued at a 30% premium to
their current market price, the discount to CLOB investors is, in
effect, about 42%. Worse, the shares issued to CLOB investors would
carry no voting rights, and could not be cashed in for five years. It
is easy to see why the Singaporeans were unimpressed.

Hence the counter-offer made on July 7th by the Singapore stock
exchange.The exchange would like the CLOB to begin transferring the
shares into individual accounts with Malaysian brokers. This was part
of a plan already agreed with the Kuala Lumpur stock exchange in
December. Such a move would kill the offshore market for good, and
would allow Malaysian brokers to capture the income from commissions
paid by Singaporean investors.

Since Malaysia has so far refused to honour that agreement, the
Singapore exchange this week added a sweetener. It offered to subject
the new accounts to selling restrictions. These would guarantee that
the shares would be sold only gradually, thereby addressing one
Malaysian fear: that a sudden deluge of unfrozen CLOB shares might
drench the whole market.

This means a great deal to Dr Mahathir, who is expected to call
elections in the next few months. The prime minister continues to
blast foreign investors, governments and journalists for the region's
troubles. His defiant stance and its apparent success - as shown by a
rising stockmarket - will be central to his campaign. 

The Kuala Lumpur stock index has risen sharply since the controls were
imposed, and it matters little to Dr Mahathir and his party that this
is closely linked to a regional rebound (see chart). A CLOB-induced
decline, however, would make Malaysia an unpleasant sort of regional
exception. That helps explain why Dr Mahathir has hinted that he is
open to some form of staggered release of the shares. But, suggesting
a continued hard line, Dr Mahathir maintains the CLOB, and the shares
acquired on it, to be illegal. That is not a claim he made in the
eight years before capital controls, when piles of offshore money
reached Malaysian shares through the CLOB.

His stance is also hard to square with the December agreement - a
contract between the Kuala Lumpur and Singapore exchanges. Indeed, the
Singapore government says it is taking legal advice. And even if
Malaysia does accept Singapore's proposal, the outlook for the
stockmarket will remain cloudy for the next few months. Besides the
other risks buffeting the region, investors in Malaysia will have to
cope with a complicated unwinding of positions as a result of the
capital controls. The remaining 10% exit tax on the proceeds of share
sales expires at the end of August. That will prompt some investors to
cash in. But it has been succeeded by a capital-gains tax on new
investments - a stiff 30% for investments of less than a year, and 10%
for all others. That will encourage many investors to leave their
shares alone. 

If Malaysia returns to the Morgan Stanley international stockmarkets'
index - it was booted out after imposing the controls - that will also
bring back some foreign mutual funds that have been forbidden from
investing by their own rules. Morgan Stanley is due to review the
exclusion in August. Many people thought it would readmit Malaysia
after its last review, in May, and it is expected to do so this time.
But after seeing the country's disregard for Singaporean investors'
property rights, other foreign investors may still think carefully
before taking the plunge. 
 
 

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