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LAW KUAN YEW & CO.

BANK NEGARA’S FOREIGN EXCHANGE POLICY IN A CROSS-BORDER SHARE SWAP TRANSACTION

In acquisition of a local company incorporated in Malaysia (“Malaysian Co.”) by a foreign company (“Foreign Purchaser”) where the purchase consideration will be settled by way of issuance of shares in the Foreign Purchaser to the selling shareholder of the Malaysian Co. (“Malaysian Vendor”), Notice 3 (Investment in Foreign Currency Asset) issued by Bank Negara, Malaysia (“Notice 3”) will be relevant.

The manner of satisfaction of the purchase consideration as described above will result in the Malaysian Vendor holding shares in the Foreign Purchaser. Therefore, the transaction falls within the definition of swapping of a financial asset in Malaysia for a financial asset overseas under Notice 3.

Notice 3 sets out the threshold at which the Malaysian Vendor is free to undertake the share swap transaction.

Investment by Malaysian Vendor who is Resident Individual, Sole Proprietorship or General Partnership (under Notice 3, Part A)

A Resident Individual, sole proprietorship or General Partnership without Domestic Ringgit Borrowing is allowed to invest in Foreign Currency Asset up to any amount.

A Resident Individual, sole proprietorship or General Partnership with Domestic Ringgit Borrowing is allowed to invest in Foreign Currency Asset up to RM1 million equivalent per calendar year using funds sourced from swapping of a Ringgit-denominated financial asset in Malaysia for a financial asset in Labuan Entity or outside Malaysia.

Investment by Malaysian Vendor who is Resident Entity (under Notice 3 Part B)

A Resident Entity without Domestic Ringgit Borrowing is allowed to invest in Foreign Currency Asset up to any amount.

A Resident Entity with Domestic Ringgit Borrowing is allowed to invest in Foreign Currency Asset up to RM50 million equivalent* per calendar year using funds sourced from the aggregate of swapping of a Ringgit-denominated financial asset in Malaysia for a financial asset in Labuan Entity or outside Malaysia.

(Note *: Computed in aggregate based on the Resident Entity and other Resident Entity with ParentSubsidiary Relationship’s investment in Foreign Currency Asset.)

Definition

The definition of the relevant terms used above is set out below for reference:

Term Definition
Borrowing (a) any utilised or unutilised credit facility or financing facility; (b) any utilised or unutilised trade financing facility, including but not limited to, trade guarantee or guarantee for payment of goods;

(c) redeemable preference share or Islamic redeemable preference share; or

(d) Corporate Bond or Sukuk.

Notwithstanding the above, the following are excluded from the definition of Borrowing—
(i) a trade credit term extended by a supplier for any goods or services;
(ii) a credit limit that a LOB apportions for its client to undertake a Forward Basis transaction, excluding a transaction that involves—

  (A) exchanging or swapping of Ringgit or Foreign Currency debt for; another Foreign Currency debt; or
  (B) exchanging of Foreign Currency debt for a Ringgit debt;

(iii) a Financial Guarantee or Non-Financial Guarantee;
(iv) an operational leasing facility;
(v) a factoring facility without recourse;
(vi) a credit card or charge card facility obtained by an Individual from a Resident and used for payment for retail goods or services only; or
(vii) a credit facility or financing facility obtained by a Resident Individual from a Resident to purchase one (1) residential property and one (1) vehicle.

Note: For clarity purposes, the transactions in paragraphs (ii)(A) and (ii)(B) shall be considered as Borrowing
Domestic Ringgit Borrowing (a) any Borrowing in Ringgit obtained by a Resident from another Resident; or

(b) any obligation considered or deemed as Domestic Ringgit Borrowing under any of the FE Notices.
Entity (a) any corporation, statutory body, local authority, society, cooperative, limited liability partnership and any other body, organisation, association or group of persons, whether corporate or unincorporate, in or outside Malaysia; or

(b) the Federal Government, any State Government or any other government.
Foreign Currency Asset Offshore (previously referred to as “Investment Abroad”) (a) a financial asset in Malaysia swapped for a financial asset in a Labuan Entity or outside Malaysia;

(b) Foreign Currency Borrowing given to a Non-Resident;

(c) working capital arising from the set up of any business arrangement outside Malaysia (including a joint venture project where no Entity is created or established);

(d) deposit in a Foreign Currency Account maintained with a Labuan Entity or outside Malaysia excluding reasonable amount of deposit for education, employment or migration outside Malaysia; or

(e) Foreign Currency-denominated—

(i) asset (tangible or intangible) offered by a Non-Resident or any person whose residency cannot be determined;

(ii) asset (tangible or intangible) in or maintained with a Labuan Entity, or outside Malaysia;

(iii) Financial Instrument or Islamic Financial Instrument (excluding Exchange Rate Derivatives) without Firm Commitment offered on a Specified Exchange under the CMSA outside Malaysia undertaken by a Resident through a Resident futures broker; or

(iv) Financial Instrument or Islamic Financial Instrument (excluding Exchange Rate Derivatives) without Firm Commitment issued or offered by a Non-Resident.
Holding/Parent Entity an Entity which owns more than 50% of ordinary shares of another Entity.
Individual A natural person
Non-Resident (a) any person other than a resident;

(b) an overseas branch, a subsidiary, regional office, sales office or representative office of a resident company;

(c) Embassies, Consulates, High Commissions, supranational or international organizations; or

(d) a Malaysian citizen who has obtained permanent resident status of a country or territory outside Malaysia and is residing outside Malaysia. For the avoidance of doubt, this includes Malaysian Embassies, Consulates and High Commissions.
Parent-Subsidiary Relationship a relationship between a Resident Entity and its direct or indirect—

(a) Resident Holding/Parent Entity; or

(b) Resident subsidiary.
For the avoidance of doubt, this includes a relationship between a Resident subsidiary of a Non-Resident Holding/Parent Entity with the Resident subsidiary’s ultimate Resident Holding/Parent Entity.
Resident (a) 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;

(b) a non-citizen of Malaysia who has obtained permanent resident status in Malaysia and is ordinarily residing in Malaysia;

(c) a body corporate incorporated or established, or registered with or approved by any authority, in Malaysia;

(d) an unincorporated body registered with or approved by any authority in Malaysia; or

(e) the Government or any State Government.
Notice Rules
Notice 3, Part A 1. A Resident Individual, sole proprietorship or General Partnership without Domestic Ringgit Borrowing is allowed to invest in Foreign Currency Asset up to any amount.

2. A Resident Individual, sole proprietorship or General Partnership with Domestic Ringgit Borrowing is allowed to invest in Foreign Currency Asset up to—

(a) any amount using Foreign Currency funds sourced from—

(i) outside Malaysia except proceeds of Export of Goods; or

(ii) an approved Borrowing in Foreign Currency in accordance with Part A of Notice 2;

(b) any amount where the investment is in real estate outside Malaysia for the purpose of education, employment or migration; or

(c) RM1 million equivalent per calendar year using funds sourced from the aggregate of—

(i) conversion of Ringgit into Foreign Currency;

(ii) Trade FCA; and

(iii) swapping of a Ringgit-denominated financial asset in Malaysia for a financial asset in Labuan Entity or outside Malaysia.
Notice 3, Part B 3. A Resident Entity without Domestic Ringgit Borrowing is allowed to invest in Foreign Currency Asset up to any amount.

4. A Resident Entity with Domestic Ringgit Borrowing is allowed to invest in Foreign Currency Asset up to—

(a) any amount using Foreign Currency funds sourced from—

(i) outside Malaysia except proceeds of Export of Goods; or

(ii) approved Borrowing in Foreign Currency in accordance with Part B of Notice 2;

(b) any amount using Foreign Currency funds sourced from a Borrowing in Foreign Currency from a LOB for Direct Investment Abroad; or

(c) RM50 million equivalent per calendar year using funds sourced from the aggregate of—

(i) conversion of Ringgit into Foreign Currency;

(ii) Trade FCA;

(iii) a Borrowing in Foreign Currency from a LOB for purposes other than Direct Investment Abroad; and

(iv) swapping of a Ringgit-denominated financial asset in Malaysia for a financial asset in Labuan Entity or outside Malaysia.

Reference: Bank Negara Foreign Exchange Notices and Rules