Regulating NRCCs

The rules that apply to the Non-Resident Control Companies (NRCCs) have seen some major changes in the last decade. We can see that before the year 2000, there was no limit to short term loans where else long term loans were subjected to a 10 million limit and require approval. Also take note that there a NRCC must obtain 60% of its credit facilities from a local bank and a 3:1 ratio for financing NRCCs. As the years go by, the 60% credit facility clause was changed to 50%. During year 2003, as mentioned in “Malaysia’s entry into the World Trade Organization”, the NRCC rules were further liberalized by removing the 50% credit facility clause and only borrowings that exceeded 50 million would require approval. In 2005, the rules regarding NRCCs were fully liberalized by removing the 50 million limits and the 3:1 ratio requirement.

            Why is this so? Why is there a growing trend in the liberalization of rules applying to the NRCCs? To further understand the reasons, we must first go back in time to before the year 2000. As we all remember, financial institutions and local companies were relatively young, raw, untried, and lacking in experience. Furthermore, the economy was badly hit by the 1997 financial crisis. This explains why the rules applying to the NRCCs were quite strict to help in protecting and building up of local companies and financial institutions. This is to ensure that local companies and financial institutions maintain a competitive advantage and edge against global and firmly established foreign companies.

            After the year 2000, the whole world experienced what people now call the information revolution and movements of economies towards a more knowledge centered society instead of the traditional agriculture and manufacturing economy. Both the information revolution and knowledge economy was steam-rolled and propelled into the world by the advancements in technology of telecommunications. Most notable of all is the internet. This in turn brought forth the era of globalization which ‘Thomas L. Friedman’ mentioned in his book as the flattening process of the world. As the globalization brought the world closer together, competition between companies increased.

            As a result, Malaysian policy makers decided to further liberalize the rules applying to the NRCCs in 2003 to encourage more foreign investment into the country to increase the country’s growth and development. Besides that, this move also allowed further competition between local and foreign companies thereby encouraging and challenging the local companies to be more productive and efficient in their respective industry and at the same time preparing them for international competition abroad. The change from the 60% credit facility clause to the 50% further shows country’s confidence in the local financial institution.

            In year 2005, both the 50% credit facility clause and the 3:1 financing ratio was removed. One of the main factors that seem to prompt this move is the increasing trend of outsourcing. Due to the continuing advancement in technology of telecommunication, bigger companies begin to move part of their company’s operation to countries that can offer the same services at a lower cost. Countries ideal for outsourcing are developing third world with massive manpower reserves like China and India. Soon, major departments including human resource, customer helpline, and information departments were being moved to other countries. This followed by entire factories moving to China and India. Policy makers in Malaysia realized that unless Malaysia works hard to attract foreign companies, it would soon lose out to other countries in the region. This explains the removal of the 50% credit facility and 3:1 financing ratio in 2005.

            Other reasons that brought this change in the rules applying to NRCCs might be due to the drop in foreign investment in Malaysia from 4.6 billion in 2004 to 4 billion in 2005, and to 3.9 billion in 2006 (figures taken from data of the United Nations Conference on Trade and Development). Further liberalizing the rules applied to the NRCCs might be seen as a way to encourage foreign investment in Malaysia. The next question is want will happen to NRCCs in the future? One of the Malaysia’s recent projects is the Iskandar Development Region in southern Malaysia. The IDR status companies will allow foreign companies to enjoy:

 1.         Exemption from the Foreign Investment Committee rules;2.         Freedom to source capital globally;3.         The ability to employ foreign employees freely within the approved zones, depending on the amount of space occupied in these zones4.         Exemption from corporate income tax for a period of 10 years from commencement of operations for activities within the zone and outside Malaysia, provided these operations commence before the end of 2015; and5.         Exemption from withholding tax on royalty and technical fee payments to non-residents for a period of 10 years from commencement of operations. 

Whether NRCCs will enjoy similar privileges remains to be seen.

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