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Basic Concepts Of Malaysian Foreign Exchange Regulations – Financial Services



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1. Introduction

With a more globalized marketplace, more and more investors have
started to aspire to expand their businesses abroad. And in order
to actualize such aspirations, funding into a target country is
necessary. The first set of regulations that a foreign investor
will face will most likely be based on foreign exchange
(“FOREX”). As such, said foreign investor will need to
look into Foreign Exchange Notices (“FE Notices”). We
shall now explore the basic ideas pertaining to the FE Notices.

2. Background of the FE Notices

FE Notices are standards published by Bank Negara Malaysia
(“BNM”) or the “Central Bank of Malaysia” in
English. FE Notices have force of law as they are published under
the BNM’s authority under the Financial Services Act
20131. It allows BNM to specify standards or issue codes
for among others, maintaining orderly conditions or the integrity
of the foreign exchange market.

There are 8 FE Notices, and they are as follows:

  1. Interpretation;

  2. Notice 1: Dealings in Currency, Gold and Other Precious
    Metals;

  3. Notice 2: Borrowing, Lending and Guarantee;

  4. Notice 3: Investment in Foreign Currency Asset;

  5. Notice 4: Payment and Receipt;

  6. Notice 5: Securities and Financial Instruments;

  7. Notice 6: Import and Export of Currency; and

  8. Notice 7: Export of Goods

The Interpretation Notice provides for various definitions of
terms that are vital to the understanding to the FE Notices. As the
regulation for local and foreign individual and entities are
different, it is important to look into how they are classified for
the purposes of the Notices.

Based on the Interpretation Notice, a
“non-resident”2 is among others, defined as
any person other than a resident, an overseas branch, a subsidiary,
regional office, sales office or representative office of a
resident company or, a Malaysian citizen who has obtained permanent
resident status of a country or territory outside Malaysia and is
residing outside Malaysia. The definition of course, has to be read
alongside the definition of a “resident”3,
which provides for the following:

  1. a citizen of Malaysia, excluding a citizen who has obtained
    permanent resident status in a country or a territory outside
    Malaysia and is residing outside Malaysia;

  2. a non-citizen of Malaysia who has obtained permanent resident
    status in Malaysia and is ordinarily residing in Malaysia;

  3. a body corporate incorporated or established, or registered
    with or approved by any authority, in Malaysia;

  4. an unincorporated body registered with or approved by any
    authority in Malaysia; or

  5. the Government or any State Government.

3. The scope for financing of Malaysian subsidiaries.

In an attempt in making this discourse as practical as possible,
we will focus on how foreign funding can be transferred from the
head office from the country of origin of investors into their
subsidiaries in Malaysia as some of the FE Notices. This is the
most likely scenario that will be experienced by foreign companies
as usually a fledging subsidiary will probably need assistance from
the principal. For simplicity and additional context, the head or
principal offices from the country of origin shall be referred to
as “HQ” and the local subsidiary will be referred to as
“Local Office”

In FE Notice 2 on Borrowing, Lending and Guarantee, in
principle, provides that a Local Office can borrow in Malaysian
Ringgit (“Ringgit”) from a Non-Resident within the Local
Office’s Group4 except for a Non-Residential
Financial Institution (“NRFI”) or Non-Resident Special
Purpose Vehicle which is used to obtain borrowing from any person
outside the Local Office’s Group. However, a Local Office is
allowed to borrow in Ringgit up to RM1 million in aggregate, except
from an NRFI5. This borrowing limit, however, is treated
differently to which the borrowing can me made for any
amount6 in the event that the financing is for
“Real Sector Activities”.

In the Preamble and Interpretation Notice “Real Sector
Activity” refers to an activity relating to—

  1. construction or purchase of a residential or commercial
    property, excluding purchase of land which will not be utilized for
    construction or production of goods or services; or

  2. production or consumption of goods or services,
    excluding—

    1. activity in financial services sector, whether Islamic or
      otherwise;

    2. purchase of securities or Islamic securities; or

    3. purchase of Financial Instrument or Islamic Financial
      Instrument.

It should be noted that the FE Notices in general did not define
what “production or consumption” or “good or
services” are. As such, this will probably entail the common
meaning of those words.

However, sometimes it may not be possible for the HQ to be
involved and that the responsibility for financing falls on the
Local Office. Naturally, the said Local Office has the option to
look into either Malaysian Ringgit or other currencies. With regard
to this, reference should be made to FE Notice 2 Item
9
. Here, it states that a Resident Entity is allowed to
borrow in Foreign Currency in any amount—

  1. from a Licensed Onshore Bank;

  2. from an Entity within the Resident Entity’s Group or from
    the Resident Entity’s Direct Shareholder except for an Entity
    stated in paragraph 10(b)or 10(c).

  3. through issuance of Foreign Currency Corporate Bond or Sukuk to
    another Resident. Subscription of the Corporate Bond or Sukuk by
    the latter shall be subject to compliance with Notice 3.

In light of the above, FE Notice 2 Item 10, it
provides that a Resident Entity is allowed to borrow in Foreign
Currency up to RM100 million equivalent in aggregate
from—

  1. a Non-Resident outside the Resident Entity’s Group;

  2. a NRFI; or

  3. a Non-Resident Special Purpose Vehicle which is used to obtain
    Borrowing from any person outside the Resident Entity’s
    Group.

The context pertaining to Malaysian Ringgit has already been
explained above regarding Item 6 and 7 of FE Notice 2.

4. Monetary transfers from HQ

Regarding monetary transfers from HQ to Local Office, reference
must be made to FE Notice 4 on Payment and Receipt. It provides
that in general, a Non-Resident (ie: HQ) is allowed to make or
receive payment in Ringgit7, in Malaysia, to or from
another Resident (ie: Local Office) income earned or expense
incurred in Malaysia8. It should be noted that there is
no limit to such transfers under FE Notice 4. Additionally, a
non-resident investor like the HQ is free to undertake any type of
investment in Ringgit asset or foreign currency asset in Malaysia
without any restriction or repatriate divestment proceeds, profits,
dividends or any income arising from the investments in Malaysia.
Repatriation shall be made in foreign currency9.

5. Conclusion

In a brief glance, the FE Notices can be seen as somewhat
liberal but precise, which enables fluidity in investments but
still allows clear regulation. However, different businesses have
different foreign exchange requirements and may manage their
business differently. As such, in the event you would like to know
more about the FE Notices that were not highlighted, or you would
require a more specific piece of advice, please do not hesitate in
contacting us.

Footnotes

1. Section 140 and 214 of the Financial
Services Act 2013

2. Page 14, Interpretation FE Notice

3. Page 15, Interpretation FE Notice

4. Item 6 and 7, FE Notice 2

5. Item 8, FE Notice 2

6. Item 6, FE Notice 2

7. Item 2(c), FE Notice 4

8. Item 2(b), FE Notice 4

9. https://www.bnm.gov.my/fep

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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