In what must be seen as a victory for old school stock brokers, the Malaysian government yesterday awarded CLSA, CSFB, JPMorgan, Macquarie Securities and UBS the five licenses for international financial firms to set up domestic stock broking businesses.
The news came in a speech from Prime Minister Abdullah Badawi and was later confirmed by the five firms involved and the Malaysian Securities Commission (SC).
The 'famous' five were part of a field of 12 firms that are thought to have submitted bids. The not so secret seven, whose applications for licenses were rejected, are reported to be ABN AMRO, BNP Paribas Peregrine, Citigroup, DBS, HSBC, Kim Eng and Nomura.
According to a spokesman for the SC the selection of the foreign stock broking companies was made on an assessment of:
- The commitment of these firms to growing their operations in Malaysia and their value proposition to the Malaysian capital market;
- The benefits of the proposed business models in terms of their impact on the Malaysian capital market;
- Ensuring there was sufficient diversity in terms of participants' capabilities and overall contribution to the capital market.
- The firms' regional franchise they would be developing for Malaysia.
While announcing the licenses for these foreign firms, the SC as well as the Prime Minister have been at pains to point out that this will assist the development of the Malaysian capital markets as a whole.
Since the plan was outlined in September 2004, the government has felt the full lobbying power of the domestic securities industry waged against it. It is testament to the strength of Badawi's political power that he has been able to withstand this pressure from such a well-connected group and has gone ahead with the plan.
Even so, the government has gone out of its way to try to pour some oil on the troubled waters. The SC spokesman comments that, "domestic stockbrokers will benefit from enhanced order-flow, increased liquidity, an expansion in product range, as well as opportunities for collaboration. The move will also contribute towards enhancing the overall pool of skilled professionals within the capital market including providing additional avenue for Malaysian to be employed in the capital market sector."
As things stand now, the five foreign firms have two options. They can either apply for a new dealer's license, or they can acquire one of the local stockbrokers that have completed a merger of their own. This is clearly aimed at encouraging a further round of consolidation, although as the SC spokesman says, "this is a commercial decision to be made by the relevant foreign [stock brokers]."
However, none of the five foreigners has yet announced whether they intend to acquire an existing domestic brokerage or just grow organically, although all have said they will be taking on new office space and are looking forward to staffing up, suggesting that organic growth might the preferred path.
For those firms that missed out on the licenses this time, the door is not completely shut. According to the SC spokesman, "any additional foreign stock broking companies can acquire a local stock broking company, but they will be subjected to current ownership limit of up to 49%. The scope of activities allowed for the foreign stock broking companies will be similar to those allowed for the normal broking licence (non-Universal Broker) in Malaysia."
The move is the latest in a series of market liberalization actions that Prime Minister Abdullah Badawi has undertaken, both as Prime Minister and as Deputy Prime Minister. So far the moves have focused on getting Malaysia back on the map for international investors and all the signs are that this is working. Foreign ownership levels of the 10 biggest stocks in the country are at all time highs, even without the foreign stock broking presence and very limited presence of foreign fund management houses on the ground in Malaysia (see next story).
What remains elusive are the local retail investors, who have stayed away from the market since the Asian financial crisis. Until the retail bid comes roaring back, the market will still feel slightly disconnected. Efforts are underway at the regulatory and stock exchange level to attract these retail investors back. But this time more effort is being put on getting them to invest through professional managers, which in the process will develop the local fund management business.
