“Par value”methodology on bumi equity seriously flawed

 Malaysian Opposition Leader Lim Kit Siang

This is an article from his blog “For Malaysia” entitled Smashed to smithereens – EPU’s NEP methodology using par value for 18.9% bumiputra equity .

You will find his April 2006 Parliamentary speech on bumi equity and the anonymous accountant’s argument on the same matter very interesting. Happy reading!

STOP PRESS (Oct. 17, 2006 @ 1712 hrs) I have received a comment/clarification from the anonymous accountant who had debunked the EPU’s methodology of using par value instead of market value to compute corporate bumiputra equity ownership of 18.9%, whose illustrations and arguments I had blogged here, as follows:


[I have read the response to my article and sensed that some readers may have misunderstood the contents of the article. I have asked Kit to include this note to clarify the following:

[1.My article does not claim that this is the sole methodology used by EPU. There may be redeeming adjustments made by EPU to correct the inherent flaws of a par value accounting system. That we don’t know until EPU reveals the detailed methodology. My point is that if EPU uses the par value system without modification then it will suffer these inherent weaknesses mentioned in the article.

[2.As I have already mentioned in my article, please don’t view the examples Ali, Ahmad and Aziz as belonging to one ethnic group. It includes other ethnic group as well. They are fictitious names used just to drive home the point of the inherent flaws of a par value system. As you can see the figures in the examples are not real and they are deliberately over stretched to make the points simple to understand. Don’t for a moment assume the examples actually happened.]

An accountant has smashed to smithereens the methodology of the Economic Planning Unit’s (EPU) in using par value to compute corporate equity distribution.I had spoken on this several times in Parliament in the past two decades, the last time during the debate on the Ninth Malaysia Plan on 3rd April 2006, where I said:

In 1970, when the initial calculations of share ownership were done, the calculations were done on the basis of taking the par value of the shares of all limited companies, both public limited and private limited companies, distributed by ethnic origin. Thus, the total stock of share capital at that point in time was valued in nominal ringgit terms.

The calculations took no account of the true asset or equity values which are a correct measure of wealth. Par valuations are notional and equate a single share in a small private family owned business with a single share in a large asset-rich public limited company listed on the stock exchange. The resulting aggregate values (at par values) understated the net worth of asset-rich companies whilst exaggerating the value of shares in private companies. The total par value of shares as measured is an under-estimate of the value of all corporate assets/equity or the net worth of corporate entities.This same methodology has been applied consistently since 1970.

According to the 9th Plan (table 16.6), the total par value of share capital in 2004 amounted to RM 529.8 billion of which 18.9 percent was owned by Bumiputras, 40.6 percent by Non-Bumiputras, 32.5 percent by Foreigners and 8.0 by Nominee companies.


Many observers have argued that the holdings of Nominee companies should be aggregated with Bumiputra holdings to give an overall Bumiputra ownership of 26.9 percent, a figure close to the NEP target of 30 percent. These commentators have contended that Nominee companies are mainly Bumiputra owned.The figure of 18.9 percent is clearly an under-estimate for other reasons beyond those cited above.The total value of RM 529.8 billion represents the total par value of all shares in both public and private limited companies.
As of last Friday, the market capitalisation of 1,025 listed companies with Bursa
Malaysia stood at RM732.9 billion. – a figure that exceeded by RM 203.1 billion the total share capital of all companies (both listed and unlisted) in par value terms.
This is clearly an inconsistency. No published figures are available about the ethnic distribution of the capitalized value of RM 732.9 billion.
It can however be reasonably argued that all listed companies on Bursa Malaysia are companies that have been restructured, resulting in a minimum 30 percent Bumiputra ownership.It must be recalled that restructuring is a pre-condition for listing on Bursa
Malaysia. On this basis, it would not be erroneous to assume that 30 percent of the capitalized value of listed shares belongs to Bumiputras.

To this extent then, Bumiputra ownership is close to or even exceeds the NEP target.

It should also be observed that ownership is but one dimension. Control matters. In terms of control, even through minority holdings, Bumiputras and Bumiputra controlled entities are likely to be in control of corporate wealth well in access of 30%.

On this basis, the data presented in the 9th Plan is moot and anomalous. In terms of value of corporate equity attributable to Bumiputera, the amount increased from RM447 million or 2.4% in 1970 to RM100 billion or 18.9% in 2005, though a major portion of this stock remains in the hands of the GLCs.So long as Malays can sell their shares to realize short-term profits, Malay equity ownership would never reach 30% even if the NEP was extended beyond 2020. If the Malays had held on and not sold the shares, the Malay equity would have reached 30% by its stated period of 1990. An estimated 40% of the Malay preferential shares given were sold for profit gains.

The accountant, who had actually posted his arguments in two separate threads of this blog in the past 48 hours, said in his email:

I’m an accountant by profession and I would just want to highlight the serious flaws in the EPU methodology. I know the DPM has announced that they will reveal the methodologies. Whatever they announce, par value accounting is still par value accounting and it has very serious weakness.

If par value accounting is used in the private sector, it’ll be very close to a scam – i.e. you can NEVER reach 30% bumi equity for your generations and generations to come. We have been duped for a long time.The accountant has brought his arguments together in one powerful debunking of the EPF’s methodology as follows:

EPU’s Methodology is seriously flawed!

It’s very normal for a company to start with a paid up capital based on par value and remains so for a long time. It doesn’t need to increase the paid capital (as long as the company is not short of new capital injection) because the accounting and business fraternities value the shares on market value. Par value of shares have little significance except for a archaic company law disclosure requirement.For example, a company starts with a paid up (par value) capital of $1 million in 2006, and is awarded a 10 years contract to build a bridge. Say, it makes a profit of $10 million for the duration of 10 years and keeps the profits intact. The market value of the company in 2016 is $11 million but its par value still remains intact at $1 million. The shareholders of the company can extract the profits through directors’ emoluments, dividends, management services, etcEPU’s methodology of calculation of bumi equity is shrouded in secrecy. From what has been disclosed in the press, it is gathered that the methodology uses the par value of shares and exclusion of GLC companies.Until things can be clarified, basing on generally accepted accounting principles and present accounting norms, EPU’s methodology is seriously flawed as demonstrated below.

Example 1 :

Ali owns 100 Tenaga shares. Par value $100 ($1 per share). Market value $1,000 ($10 per share).
Ah Chong owns 1,000 Farlim shares. Par value $1,000 ($1 per share). Market value $430 ($0.43 per share).

EPU Methodology :Ah Chong is 10 times richer than Ali. Therefore, Ali needs help to be on par with Ah Chong.

Flaw: Par value has no relation to the actual value of shares. In fact, Ali’s is richer than Ah Chong. If EPU does not take relative wealth into the equation, how does it know who to help to redress the equal distribution of wealth? Obviously, as this case shows, EPU may be helping the wrong guy!

Example 2 :

Ali owns 100% of Ali Berhad. 5 years ago, he sold off 90% of Ali Berhad at $100 million. He bought a property in London for $30 million and a property in Malaysia at $10 million after 7% discount; Invested in shares in Africa $20 million ; Spent son’s wedding $10 million; Gave his first wife alimony $30 million after marrying his 2nd wife. Nobody knows anything about his foreign assets although his personal marital affairs became hot news in Utusan Malaysia.

EPU Methodology :

Ali is holding only 10% share in Ali Berhad now. Ali is marginalized because other races have 90% share. He should be given an additional 20% to make 30%.

Flaws :

1.It only takes Malaysian shares into account and omits other important assets such as properties, bank savings, foreign share investments, etc and profits extraction (spendings). Ali was originally given 100% share but he divested his shares and converted his proceeds into foreign and other assets. If Ali were to invest 100% of his proceeds into shares of a Malaysian company, only then the actual bumi % can be correctly reflected.

2.It only captures the data at one point of time. If you look at the statistics now, it will show that he only owns 10% share and not 100% as he was originally given.Example

3 :Ali owns 100% of Ali Berhad. He sells off 90% of Ali Berhad to a GLC controlled by UMNO

EPU Methodology :

Ali Berhad is no longer a Bumi company since GLC is not counted as a Bumi company. Ali share is 10%. Since the GLC doesn’t want to sell down its shares, Ali should be given another 20% in another company, Ah Chong Berhad to make 30%.

Flaws :

1.Notice how this caused the overall bumi equity to drop by 90% viz-a-viz increasing the non-bumi equity % immediately upon the sale to the GLC even though nothing has been changed.

2.To alleviate this, there must be some bumi value ascribed to the GLC shareholding and not 0% as is presently the case. For guidance, The ASLI methodology of accounting 70% as bumi equity is fair as GLC’s employees and contracts awarded are mostly opened to bumis. This also roughly reflects the bumi population as the Government argues that it benefits all races. Use 68%, 65% or even 60% maybe, but to treat GLC’s bumi share as 0% is even furthest away from justice and fairness than ASLI’s methodology.Example

4 :Ali is given 30% share (30 million shares) in Muthu Berhad at an IPO price of $1.50 per share for a total sum of $45 million. After 1 year Ali sold off all his shares in Muthu Berhad at $10 per share for $300 million. He made a cool profit of 255 million which he keeps in the bank.

EPU Methodology :

Since he does not now own any share, he is entitled to another bumi portion (30%) of IPO in Ah Chong Berhad at $1.50 in the 2nd year. Ali proceeded to buy Peter Berhad, Ranjit Berhad, Sayonara Berhad, etc, …. in the 3rd, 4th, 5th year…..using the same modulus operandi. All these years the bumi equity had never exceeded 30%!

Flaw :

It doesn’t take into account how many times Ali applies for an IPO as long as he had sold off his shares before applying for another IPO or if he had used the name of his nominees. This obviously results in double (triple, quadruple…etc) handouts as long as he keeps his money out of the system of calculation (e.g. in the bank, purchased properties, foreign investments, etc).As you can see in this example, there are ample opportunities for leakages (triple, quadruple, etc, handouts) without even disturbing the 30% equity barometer.

Example 5 :

Ali forms a $2 company called Ali Sdn. Bhd. in year 1. He found an ingenious way to sell a piece of paper for an enormous amount of money and made $200 million a year. In the 5th year his $2 company company is worth $1 Billion (in cash).Ahmad forms a $2 company called Ahmad Sdn. Bhd. in year 1. He has been given a huge number of taxi permits and made a reasonable profit of $10 million a year which he drew out as salary each year. In year 5 his company is still $2 but he had earned $50 million in salaries.Aziz is a rich man but involved in a risky business where he feared creditors going after him. On the advice of his accounting firm, he transfered all his assets worth $500 million into an Investment holding company called Aziz & Sons Sdn. Bhd. controlled by his nominee for $250 Ordinary shares and the rest in Preference Shares in year 1. His investment company earns $20 million a year in rental and dividends but in year 5 his company’s share is still $250.Muthusamy forms a company called Muthusamy Sdn. Bhd. In year 1, he borrowed $1,000 from his relative, put this money into his company as capital and started a business selling “kacang putih” peddling his wares around Chow Kit road on a motorbike which his company bought on hire purchase. He made $1,000 a year and re-invest $100 a year into his company as capital. In year five his capital has risen to $1,400.

EPU Methodology :

1. Year 1Since the methodology counts only ordinary shares at its par value, the bumi equity is only 20% (254/(254 + 1000) x 100 = 20%) while Muthusamy has 80%. Therefore Ali, Ahmad and Aziz all need help and should be continued to be given assistance until the equity reaches 30%.2. Year 5Since the methodology counts only ordinary shares at its par value, the bumi equity is reduced from 20% to 15% (254/(254 + 1400) x 100 = 15%) compared to Muthusamy equity of 85%. Ali, Ahmad and Aziz performances have deteriorated. Muthusamy’s equity has increased at the expense of Ali, Ahmad and Aziz. Muthusamy must share his knowledge with Ali, Ahmad and Aziz. In the meantime, Ali Ahmad and Aziz needs help badly and must be continued with assistance indefinitely until the equity reaches 30%.

Flaws :

Now, notice the biggest flaws of using par value to account for % equity:

1.Ali, Ahmad and Aziz are way, way richer than Muthusamy in wealth but using the par value methodology shows that Muthusamy is way ahead of them by 80:20.

2.Ali, Ahmad and Aziz Sdn Bhds. could continue to receive enormous contracts without even increasing 0.01 % of their equity.

3.Ali, Ahmad and Aziz could increase their personal wealth (through market value of shares and profits extractions by way of dividends, salaries, management fees, etc) without increasing even 0.01% of their equity.

4.It’s even mind bogging that Ali, Ahmad and Aziz Sdn Bhds. can even continued to receive enormous contracts and increased their wealth beyond their wildest dreams and yet register a drop in their % equity, in this case, a drop from 20% to 15%!This could be one of the reasons why the use of a flawed methodology, the actual bumi equity has dropped from 25% to 18.9% apart from the reason that some bumis have sold off their shares.

Comments :

I deliberately put the names as they were in the examples to elicit attention. People tends to view such sensitive matters with a racial slant – that it’s all about malay and non-malays. That’s when prejudice sets in and people clam up and start to defend their positions rather than seeing the need for and the good points of a possible restructure. What I want to stress to the readers is that it’s not about malays and non-malays!The Muthusamay in the EXAMPLE 5 above could well be Pak Dollah the fisherman from Kelantan, or Aminah selling tradisional kuihs in the KL central market, or Ah Swee selling popiahs in Penang or even the aborigine rattan gatherer in the outskirt of
Sarawak! Ali, Ahmad and Aziz could well be the elite, affluent and polically well connected Ah Chong, Vincent, Gonzales, Puspha or even Shahabbudin !
Try to substitute the names and you will see that it affects you in one way or another!

Conclusion :

1.Until and unless EPU is more transparent in their methodologies to rebuke the flaws, applying normal accounting principles and the knowledgeable public’s perception, the methodologies used by EPU are seriously flawed! Serious, in the sense that the interpretation of the results derived from the methodologies used (as shown in the examples) can be disastrously wrong!

2.Par value accounting does not change whereas market value changes according to the performance and wealth of a company. It does not take a genius to figure out that if the par value of Ali Sdn. Bhd. is $2 in 2006 it will still be $2 in 2020 even though you award 10 billions in contracts for this duration of time unless Ali wants to change it! Par value has no significance in accounting at all but I wonder whether the authority has an agenda in using par value accounting.

3.The figure of 18.9% could well be derived from a flawed methodology used. We all can see with our eyes everyday that elite bumis are already much more affluent than a decade ago (although the average bumis have not achieved the same measure of success) but statistics show that there is a shrinkage from 25% to 18.9%? How could this be? More importantly, the present EPU methodologies have proven that it has failed miserably to redress the equal distribution of wealth among the ordinary Malaysians.

4.In fact, on the contrary, par value methodology does the opposite! Taking Example 5 – Ali, Ahmad and Aziz are way, way richer than Muthusamy but the par value methodology in fact showed the reverse – that Muthusamy is way ahead of them. By not taking wealth into the equation helps to conceal the spoils of the elite group like Ali, Ahmad and Aziz (remember, who could well be the politically connected Ah Chongs, Vincents, Gonzales, Pusphas or Shahabbudins) comprising of both elite bumis and elite non-bumis! Instead of helping politically connected people like Ali, Ahmad and Aziz, the governing authority should be helping ordinary people like Pak Dollahs, Aminahs, the aboriginal rattan gatherers, Ah Swees and even Muthusamys.

5.The present EPU’s methodology of evaluating % equity based on par value of shares cannot achieve the objective of equal wealth distribution simply because “wealth” is not used in the methodology at all! If wealth (market value of shares) is not used in the formula then how can the answers lead you to equal wealth distribution? Because the methodology is tilted to elite group, I cannot but feel that the implementers of par value methodology are less than honest with all those hardworking non-politically connected, average Malaysians irrespective of race.The EPU’s findings are used in the formulation of the NEPs and in many other areas including in planning and charting of the Nation’s growth, investments and important policies making. Its impacts are so immense, far reaching and fundamental, not only to the daily lives of 26 million Malaysians, but also to the bilateral relations between countries across the world.

Countries, and recently Singapore (who is accused of marginalizing its minority population), are already moving away from using the par value of shares in their system.And yet Malaysia is still using par value (and possibly, far into the future, until the 30% equity is reached) which is so fundamentally flawed in charting the direction of the country!

How can a methodology so seriously flawed be used in making such important decisions for the country? 

33 Responses to ““Par value”methodology on bumi equity seriously flawed”

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