Regulating the Unregulated? Regulating the Malaysian Unregulated Services Sector
09 March 2022
How does one regulate the unregulated? As odd as it sounds, the Ministry of Domestic Trade and Consumer Affairs (“MDTCA”) has taken it upon themselves to regulate certain “unregulated services sectors” in Malaysia.
In Malaysia, approval of the MDTCA is required for foreign participation in specific unregulated services sectors. How does one fall under the unregulated services sector and how does one obtain this MDTCA approval?
Background
The MDTCA is the ministry in charge of distributive trade in Malaysia. The MDTCA has issued a set of guidelines known as the “Guidelines on Foreign Participation in Distributive Trade Services in Malaysia” which was first introduced in 2004 (following the Guidelines on Foreign Participation in Wholesale and Retail Trade (1995) and the Guidelines on Hypermarket Opening (2002)), and subsequently revised in 2010 and 2020. The Guidelines on Foreign Participation in Distributive Trade Services in Malaysia 2020 are the current guidelines in force (the “Guidelines”).
“Distributive trade” under the Guidelines has a wide all-encompassing definition to mean “trade which comprises all linkage activities that channel goods and services from the supply chains to intermediaries for the purpose of resale or to the final buyers. This includes, among others, direct or indirect linkages between two or more parties or levels within the chain, and also includes real physical processes or electronic transactions”.
The broad definition of “distributive trade” seems to give the Guidelines jurisdiction over all types of trade and services in Malaysia. However, the Guidelines only specify the following sectors requiring approval of the MDTCA:
- hypermarkets;
- departmental stores;
- superstores;
- specialty stores;
- convenience stores;
- distribution centres; and
- various other distribution formats.
Section 12 of the Guidelines (Various Other Distribution Formats) further includes one mention of an “unregulated sector” – said definition being “other types of distributive formats and
unregulated sector, include (
sic) e-commerce”.
Interestingly, that is the only mention of the “unregulated sector” under the Guidelines.
What are the Unregulated Services?
Although the Guidelines barely mention the unregulated sector, the MDTCA’s website fortunately offers us some guidance on this. The MDTCA has made available a list of sub sectors on unregulated services under its purview. A PDF copy of this “List of Unregulated Service Sub Sectors” (“
USS List”) is downloadable from the MDTCA’s website.
1 This USS List sets out 18 Major Services under the sub sectors, which are further divided in 71 different services.
The 18 Major Services are as follows:
- other land transport services;
- transport services via pipeline;
- supporting services for road transport;
- real estate services involving own or leased property;
- leasing or rental services concerning machinery and equipment without operator;
- leasing or rental services concerning personal and household goods;
- research and experimental development services on social sciences and humanities;
- market research and public opinion polling services;
- management consulting services;
- services related to management consulting;
- building-cleaning services;
- photographic services;
- packaging services;
- other business services;
- services incidental to manufacturing, except to the manufacture of metal products, machinery and equipment;
- repair services incidental to metal products, machinery and equipment;
- services of membership organisations; and
- other services.
Examples of some of the 71 services include freight transportation by man- or animal-drawn vehicles, parking services, public relations services, janitorial services, advertising and related photography services, collection agency services, translation and interpretation services, publishing and printing services, laundry collection services, cosmetic treatment, manicuring and pedicuring services.
As the USS List is quite wide, parties need to check the USS List to ensure whether or not their business falls under the USS List, and accordingly the Guidelines.
Foreign Participation
The Guidelines only apply where there is “foreign participation” in distributive trade, and in this case, the unregulated services sector. If a business falls under the USS List and it has foreign participation, MDTCA approval under the Guidelines will be required.
The glossary of the Guidelines clarifies the meaning of “foreign participation” or “foreign business operator”:
“Foreign participation or foreign business operator means any interest, associated group of interests or parties acting in concert which comprises the following:
- individual (including permanent resident) who is not a Malaysian citizen;
- foreign company or institutions; or
- local company or local institution whereby the parties as stated in item (i) and/or (ii) hold more than 50 percent of the voting rights in the company or institution.”
What if your business has foreign participation and falls under the USS List?
Section 3 of the Guidelines states that all foreign business operators engaged in distributive trade services in Malaysia are encouraged and recommended to obtain approval from the MDTCA (“MDTCA Approval”) prior to commencing operations.
An interesting point to note about the 2020 Guidelines is that while the previous 2010 Guidelines provided that foreign involvement in distributive trade shall obtain the approval of the MDTCA, the 2020 Guidelines use the words “encouraged and recommended” instead.
These Guidelines do not have the force of law and there are no official sanctions, fines or penalties for failure of foreign business operators to obtain MDTCA Approval. Nonetheless, we are aware that there may be certain administrative penalties arising from failure to obtain MDTCA Approval, such as difficulties in applying for certain licences, approvals or passes from Malaysian regulatory authorities such as expatriate passes. Conversely, having such MDTCA Approval may aid to strengthen applications to such regulatory authorities. As such, it is strongly recommended for foreign business operators to obtain this MDTCA Approval prior to commencing business operations, to ensure smooth administrative processes and to avoid any reputational risk.
In order to be eligible for MDTCA Approval, the following conditions are applicable to applicants under the unregulated services sector:
- Local Incorporation – all various other distribution format businesses with foreign equity must be incorporated locally under the Companies Act 2016. This condition applies also to existing businesses operating under foreign branches;
- Minimum Capital Requirement – the recommended minimum capital investment in terms of a company’s shareholders funds, which include paid-up capital is RM1 million; and
- Operational Conditions – (i) application for additional branches is subject to approval by the Distributive Trade Committee of MDTCA; and (ii) feasibility and impact studies on existing local retailers and residents are to be carried out if the sales floor is more than 5,000 square meters.
In addition to the abovementioned conditions applicable to the unregulated services sector, Section 5.4 of the Guidelines states that all distributive trade companies with foreign involvement are recommended to adhere to the following recommendations:
- to appoint Bumiputera or Malay director/directors;
- to hire local (Malaysian) personnel at all levels particularly for the management positions and above;
- to have only 15 percent of the total workforce of low skilled foreign workers;
- to develop and provide transparent standard operating procedures for local suppliers to market their goods;
- to encourage Bumiputera or Malay participation in the distributive trade sector;
- to hire at least 1 percent of the total workforce of persons with disabilities in large formats;
- to increase the utilisation of local airports and ports in the export and import of goods;
- to encourage utilisation of local professional services which are available in Malaysia;
- to submit audited annual financial reports to MDTCA;
- to support the initiatives and the agenda for sustainable development as provided under the Sustainable Development Goals by the Government of Malaysia; and
- to comply with all the by-laws and regulations of the local authorities.
Duration of MDTCA Approval
While the Guidelines provide that any MDTCA approval is valid for a period of three years at the maximum, our recent experience indicates that the MDTCA approval is usually granted for a duration of one year. Any application for renewal should be made three months before the expiry of the MDTCA approval. Failure to do so will result in the application being treated as a new application.
Conclusion
Foreign investors and companies with more than 50% foreign equity ownership should make an assessment of whether their business activities fall under any of the unregulated services under the purview of the MDTCA and consider applying for MDTCA Approval if not already obtained.
Although the MDTCA Approval is only recommended and does not have force of law, it may be worthwhile obtaining MDTCA Approval to ensure smooth administrative processes and to avoid any reputational risk.
Article by Sheba Gumis (Partner) and Faith Chan (Associate) of the Corporate Practice of Skrine.
This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.