Transparency of the Regulatory System
In July 2013, the Malaysian government released the National Policy on Development and Implementation of Regulations (NPDIR), a roadmap to achieving Good Regulatory Practice (GRP). Under the NPDIR, the federal government formalized a comprehensive approach to improve the efficiency and transparency of the country’s regulatory framework. The benefits to the private sector have included a streamlining of project approval requirements and fees, a greater role in the lawmaking process, and improved standardization and transparency in all phases of regulatory proceedings.
In July 2021, the Malaysian government released the National Policy on Good Regulatory Practice (NPGRP) to replace the NPDIR. The NPGRP expands the NPDIR’s regulatory scope to include economic, social, and environmental policies. Additionally, the NPGRP codifies best practices from the NPDIR regime, including mandatory five-year reviews of existing regulations and post-implementation reviews of new regulations.
An area of concern is the Malaysian government’s procurement policy, as non-Malaysian companies claim to have lost bids against bumiputera-owned companies despite offering better products at lower costs. Such results are due to the government’s preference policy to facilitate greater bumiputera participation in the private sector. This preference policy is manifested through set-aside contracts for bumiputera suppliers and contractors and through the use of preferential price margins to increase the competitiveness of bumiputera bidders.
The Malaysian government is exploring ways to promote companies’ environmental, social, and governance (ESG) disclosure as part of its efforts to improve transparency and achieve national targets. Such efforts include the Green Technology Application for the Development of Low Carbon Cities (GTALCC); the Joint Committee on Climate Change; the National Energy Efficiency Action Plan (NEEAP); the Green Technology Master Plan (GTMP) 2017-2030; and the Securities Commission’s Sustainable and Responsible Investment (SRI) Roadmap.
Malaysia has a three-tiered system of legislation: federal (parliament), state, and local. Federal- and state-level legislation derive their authority from the Malaysian Constitution; specifically, articles 73-79. Parliament has the exclusive power to make laws over matters including trade, commerce and industry, and financial matters. Parliament can delegate its authority to administrative agencies, states, and local bodies through acts. States have the power to make laws concerning land, local government, and Islamic courts. Local legislative bodies derive their authority from acts promulgated by parliament, most notably the Local Government Act of 1976. Local authorities can issue by-laws concerning local taxation and land use. For foreign investors, parliament is the most relevant legislating body as it governs issues related to trade and, in instances of conflict, article 75 of the Constitution states that federal laws will supersede state laws.
The Malaysian Accounting Standards Board (MASB) introduced the Malaysian Financial Reporting Standards (MFRS) framework in 2012, which is fully compliant with the International Financial Reporting Standards (IFRS) framework. This compliance serves to enhance the credibility and transparency of financial reporting in Malaysia.
The Malaysian Institute of Accountants’ (MIA) Auditing and Assurance Standards Board (AASB) reviews standards and technical pronouncements issued by the International Auditing and Assurance Standards Board (IAASB), which sets International Standards on Auditing (ISAs) that have been adopted in more than 110 jurisdictions.
In theory, pieces of legislation are to be made available for public comment through a multi-stage system of rulemaking. The Malaysia Productivity Corporation (MPC) published the Guideline on Public Consultation Procedures in 2014 (the “Guideline”), which clarifies the roles of government and stakeholders in the consultation process and provides guiding principles for Malaysia’s public consultation approach. As in the case of foreign investment, the consultation procedures usually fall under the purview of the Malaysian Securities Commission (SC), the Bursa Malaysia (Malaysia’s stock exchange), or BNM. The SC, for example, keeps public consultation papers on its website, easily accessible by stakeholders. These papers generally contain the rationale for the proposed regulations, as well as potential impacts, and provide a list of questions for stakeholders to explain their views to regulators.
The public is also engaged in the public consultation process through the increased role of PEMUDAH (the Special Task Force to Facilitate Business), which was founded in 2007 to serve as a bridge between government, businesses, and civil society organizations. PEMUDAH promotes the understanding of regulatory requirements that impact economic activities, by addressing unfair treatment resulting from inconsistencies in enforcement and implementation. It also plays an advocacy role in various points in the regulatory implementation process; provides recommendations from the private sector to regulators before new regulations are implemented, and monitors enactment of existing pieces of regulation.
Despite the Guideline and other steps to reduce the regulatory burden on industry, obstacles remain. There are frequent inconsistencies between different ministries in their implementation of the public consultation procedures, as well as in their respective interpretations of how regulations are to be applied. Adding to this difficulty is the complicated relationship between state-level and federal-level legislation, which can overlap on a range of issues and lead to inefficiencies for investors.
The CLJ Law website has published the full text of Malaysian bills and amendments from 2013 onward: https://www.cljlaw.com/?page=latestmybill&year=2023. In 2019, Malaysia, in association with the World Bank, created a website that contains ongoing pieces of legislation and allows public comment. The website, called the Uniform Public Consultation Portal (https://upc.mpc.gov.my/csp/sys/bi/%25cspapp.bi.index.cls?scnH=907&scnW=1680), does not contain legislation that was completed or implemented before 2019 but is a positive move towards standardizing public consultations. The website is user-friendly and allows searching by due date, implementing agency, and phase of consultation.
Malaysia has a multi-faceted approach to ensuring governmental compliance with regulatory requirements. The most important enforcement mechanism is access to judicial review. The World Economic Forum’s 2019 Global Competitiveness Report ranks Malaysia 12th in efficiency of the legal framework in challenging regulations. Through ease in accessing administrative and judicial courts, aggrieved parties in Malaysia are able to compel action by the regulator.
Besides the legal route, aggrieved parties can also seek recourse through the various agency-led enforcement mechanisms. BNM has a dedicated “Complaints Unit,” which deals with consumer complaints against banking institutions. BNM lists enforcement options as “a public or private reprimand; an order to comply; an administrative and civic penalty; restitution to customer; or prosecution. By contrast, the Inland Revenue Board of Malaysia, a tax agency, has the Special Commissioners of Income Tax, to which taxpayers may file appeals concerning judgments and new regulations. The Malaysian Companies Commission, which regulates laws relating to companies registered in Malaysia, is also engaged in enforcement proceedings, as is the Malaysian Securities Commission. On matters of procurement, aggrieved bidders may complain to the Public Complaints Bureau, the Malaysian Anti-Corruption Commission, the Malaysian Competition Commission, or the National Audit Department.
International Regulatory Considerations
Malaysia is one of ten Member States that constitute the Association of Southeast Asian Nations (ASEAN). ASEAN’s economic policy leaders meet regularly to discuss promoting greater economic integration within the bloc. Although already robust, Member States have prioritized steps to facilitate a greater flow of goods, services, and capital. No regional regulatory system is in place. As a member of the WTO, Malaysia provides notification of all draft technical regulations to the Committee on Technical Barriers to Trade.
Legal System and Judicial Independence
Malaysia’s legal system consists of written laws, such as the federal and state constitutions and laws passed by parliament and state legislatures, and unwritten laws derived from court cases and local customs. The Contract Law of 1950 still guides the enforcement of contracts and resolution of disputes. States generally control property laws for residences but through such programs as the Multimedia Super Corridor, Free Commercial Zones, and Free Industrial Zones, the federal government has substantial reach into a range of geographic areas as a means of encouraging foreign investment and facilitating ownership of commercial and industrial property.
Malaysia has taken measures to increase the efficiency of courts to improve its reputation as an international business hub. Other than the usual criminal and civil branches of the legal system, there are dedicated courts for issues such as intellectual property (IP) and labor.
Certain foreign judgments are enforceable in Malaysia by virtue of the Reciprocal Enforcement of Judgments Act 1958 (REJA). However, before a foreign judgment can be enforceable, it must be registered. The registration of foreign judgments is only possible if the judgment was given by a Superior Court from a country listed in the First Schedule of the REJA: the United Kingdom; Hong Kong Special Administrative Region of the People’s Republic of China; Singapore; New Zealand; Republic of Sri Lanka; India; and Brunei. If the judgment is not from a country listed in the First Schedule to the REJA, the only method of enforcement at common law is by securing a Malaysian judgment. This involves suing on the judgment in the local Courts as an action in debt.
To register a foreign judgment under the REJA, the judgment creditor has to apply for the same within six years after the date of the foreign judgment. Any foreign judgment coming under the REJA shall be registered unless it has been wholly satisfied, or it could not be enforced by execution in the country of the original court.
Post is not aware of instances in which political figures or government authorities have interfered in judiciary proceedings involving commercial matters.
Competition and Antitrust Laws
In April 2010, the Malaysian parliament passed the Competition Commission Act of 2010 and the Competition Act of 2010. The Competition Act prohibits cartels and abuses of a dominant market position but does not create any pre-transaction review of mergers or acquisitions. Violations are punishable by fines or imprisonment. Malaysia’s Competition Commission has responsibility for determining whether a company’s conduct constitutes an abuse of dominant market position or otherwise distorts or restricts competition. As a matter of law, the Competition Commission does not have separate standards for foreign and domestic companies. Commission membership consists of senior officials from MITI, the Ministry of Domestic Trade, Cooperatives, and Consumerism (MDTCC), the Ministry of Finance, and, on a rotating basis, representatives from academia and the private sector.
In addition to the Competition Commission, these acts established a Competition Appeals Tribunal (CAT) to hear all appeals of Commission decisions.
Expropriation and Compensation
Post is not aware of any cases of uncompensated expropriation of U.S.-held assets or confiscatory tax collection practices by the Malaysian government. The government’s stated policy is that all investors, foreign and domestic, are entitled to fair compensation in the event that their private property is required for public purposes. Should the investor and the government disagree on the amount of compensation, the issue is then referred to the Malaysian judicial system.
ICSID Convention and New York Convention
Malaysia signed the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) on October 22, 1965, which entered into force on October 14, 1966. In addition, it is a contracting state of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards since November 5, 1985.
Malaysia adopted the following measures to make the two conventions effective in its territory:
The Convention on the Settlement of Investment Disputes Act, 1966 (Act of Parliament 14 of 1966); the Notification on entry into force of the Convention on the Settlement of Investment Disputes Act, 1966 (Notification No. 96 of March 10, 1966); and the Arbitration (Amendment) Act, 1980 (Act A 478 of 1980).
Although the domestic legal system is accessible to foreign investors, filing a case generally requires any non-Malaysian citizen to make a large deposit before pursuing a case in the Malaysian courts. Post is unaware of any recent complaints by U.S. investors of political interference in judicial proceedings.
Investor-State Dispute Settlement
Malaysia’s investment agreements contain provisions allowing for international arbitration of investment disputes. Malaysia does not have a Bilateral Investment Treaty with the United States.
Post has little data concerning the Malaysian government’s general handling of investment disputes.
The Malaysian government has been involved in three ICSID cases: in 1994, 1999, and 2005. The first case was settled out of court. The second, filed under the Malaysia-Belgo-Luxembourg Investment Guarantee Agreement (IGA), was concluded in 2000 in Malaysia’s favor. The 2005 case, filed under the Malaysia-UK Bilateral Investment Treaty, was concluded in 2007 in favor of the investor. However, the judgment against Malaysia was ultimately dismissed on jurisdictional grounds, namely that ICSID was not the appropriate forum to settle the dispute because the transaction in question was not deemed an investment since it did not materially contribute to Malaysia’s development. Nevertheless, Malaysian courts recognize arbitral awards issued against the government. There is no history of extrajudicial action against foreign investors.
International Commercial Arbitration and Foreign Courts
Malaysia’s Arbitration Act of 2005 applies to both international and domestic arbitration. Although its provisions largely reflect those of the UN Commission on International Trade Law (UNCITRAL) Model Law, there are some notable differences, including the requirement that parties in domestic arbitration must choose Malaysian law as the applicable law. Although an arbitration agreement may be concluded by email or fax, it must be in writing: Malaysia does not recognize oral agreements or conduct as constituting binding arbitration agreements.
Many firms choose to include mandatory arbitration clauses in their contracts. The government actively promotes use of the Kuala Lumpur Regional Center for Arbitration ( http://www.rcakl.org.my ), established under the auspices of the Asian-African Legal Consultative Committee to offer international arbitration, mediation, and conciliation for trade disputes. The KLRCA is the only recognized center for arbitration in Malaysia. Arbitration held in a foreign jurisdiction under the rules of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States 1965 or under the United Nations Commission on International trade Law Arbitration Rules 1976 and the Rules of the Regional Centre for Arbitration at Kuala Lumpur can be enforceable in Malaysia.
Malaysia’s Department of Insolvency (MDI) is the lead agency implementing the Insolvency Act of 1967, previously known as the Bankruptcy Act of 1967. On October 6, 2017, the Bankruptcy Bill 2016 came into force, changing the name of the previous Act, and amending certain terms and conditions. The most significant changes in the amendment include: (1) a social guarantor can no longer be made bankrupt; (2) a stricter requirement for personal service for bankruptcy notice and petition; (3) introduction of the voluntary arrangement as an alternative to bankruptcy; (4) a higher bankruptcy threshold from RM 30,000 to RM 50,000; (5) introduction of the automatic discharge of bankruptcy; (6) no objection to four categories of bankruptcy for applying a discharge under section 33A (discharge of bankrupt by Certificate of Director General of Insolvency); (7) introduction of single bankruptcy order as a result of the abolishment of the current two-tier order system, i.e. receiving and adjudication orders; and (8) creation of the Insolvency Assistance Fund.
The distribution of proceeds from the liquidation of a bankrupt company’s assets generally adheres to the “priority matters and persons” identified by the Companies Act of 2016. After the bankruptcy process legal costs are covered, recipients of proceeds are employees, secured creditors (i.e., creditors of real assets), unsecured creditors (i.e., creditors of financial instruments), and shareholders. Bankruptcy is not criminalized in Malaysia. The country ranks 40th on the World Bank Group’s Doing Business 2020 Rankings for Ease of Resolving Insolvency.