Malaysia in hot seat again over CLOB

Malaysia in hot seat again over CLOB

By Nelson Graves

KUALA LUMPUR (Reuters): Malaysia has stirred new doubts about its commitment to market transparency with its handling of a plan to buy up billions of dollars worth of shares formerly traded in Singapore.

The government on Monday distanced itself from the proposal by a new company to pay an estimated US$1.5 billion to buy shares in Malaysian companies which had been traded on Singapore's over-the-counter market but have been frozen for seven months.

However, Kuala Lumpur's implicit initial support for the plan has incensed many Singapore investors unhappy with its terms, and triggered fresh criticism of the Malaysian government's involvement with the market.

"Everything about this proposal smells," said an executive with a Malaysian bank.

Even so, bankers and stockmarket analysts said the plan by Effective Capital Sdn Bhd could end up being a useful step towards a resolution of the dispute over the shares, which has contributed to a souring of Malaysia-Singapore ties.

Trading of Malaysian shares on Singapore's Central Limit Order Book (CLOB) market ended abruptly last September after Kuala Lumpur imposed capital controls.

The Malaysian government, keen to avoid undermining a six-week stock market rally, has been seeking a means of unfreezing the shares without having them dumped on the market.

Effective Capital, controlled by little known businessman Akbar Khan, pledged not to unload the shares.

The firm, formed in February, received approval from Malaysia's Foreign Investment Committee and a waiver from the country's Securities Commission freeing it from takeover obligations in the event its stake in a company rose above one third.

Those approvals sent out a signal that the government at least initially backed Akbar Khan's plan, analysts said.

They said the government appears keen to settle the issue before Morgan Stanley Capital International (MSCI) decides whether to reinstate Malaysia in its emerging markets indices.

Malaysia was removed from the indices after it imposed capital controls. MSCI was expected to review Malaysia's status in mid- May, analysts said.

Japan, which has agreed to lend Malaysia billions of dollars to help it recover from its first recession in 13 years, was also pressing Kuala Lumpur to resolve the issue, analysts said.

Effective Capital's plan won the backing of several leading Malaysian banks, although one large institution stayed out on the grounds it had a major presence in Singapore, bankers said.

Malaysian officials put distance between themselves and the proposal only after it came under blistering criticism by Singapore investors.

They were upset that while Akbar's offer would pay investors an average 45 percent premium on pre-capital control prices of the securities involved, it equated to an average 50 percent discount from present price levels.

"There are several proposals, some of which might be acceptable, some might not," Prime Minister Mahathir Mohamad said late on Monday. "We are still studying how to solve this matter without damage to our stock exchange."

The plain-speaking Mahathir could not resist taking a shot at Singapore investors, saying they deserved to be paid a discount.

"They did nothing to bring up the value of the shares," he said. "I don't think it is morally right for them to gain benefit from something they did not help achieving."

On the plus side for Singapore investors, the Akbar controversy seems to have been a catalyst for bringing other plans to light and putting Malaysia under further pressure to move forward on a solution, analysts said.

Malaysia has received seven proposals to resolve the CLOB issue, Channel News Asia said on Monday, citing plans by investment houses Goldman Sachs and Jardine Fleming.

Jardine Fleming declined to comment on the report. Goldman Sachs executives were not immediately available for comment.

But whatever the outcome, the controversy over Akbar Khan's proposal has dealt another blow to Malaysia's image among overseas investors, bankers and analysts said.

"There's no credibility," a local banker said. "Where's he getting the money? Where is it going?"

The Kuala Lumpur Stock Exchange kept a studied silence over the entire issue.

The secrecy shrouding the proposal and Akbar Khan's mysterious appearance with significant financial backing and regulatory approval raised questions about the government's involvement, bankers and analysts said.

"There's no transparency here," a stockbroker with a local firm said.