Indexers Wrestle With Malaysian Investor Policies

January 01, 1999

Malaysia's sudden imposition of a one-year holding period on foreign investments on Sept. 1, 1998 sent a wave of irritation and angst sweeping over the international investing community. The action resulted in its removal from a variety of indexes, including the Morgan Stanley Capital International (MSCI) Emerging Markets Free (EMF) Indices, the International Finance Corp.'s emerging markets indexes, the FT/S&P Actuaries World Index and Dow Jones & Co.'s Global Indexes.

The uproar may have helped provoke a much-anticipated turn-around in February 1999. The Malaysian government reversed its decision after months of debating what to do about its investment policies and introduced an exit tax. As of Feb. 15, 1999, funds already in the country can be removed before the end of the 12-month holding period if the investor pays a capital levy of up to 30%; the amount of the levy is reduced the longer the funds remain invested in Malaysia. After the one-year period is up, the capital levy is dropped, but investors aren't in the clear. After Aug. 31, 1999, they will be charged a similar levy on profits. Dividends and interest are unaffected.

At MSCI, the changes in Malaysia's economy were greeted with wary acknowledgement in an MSCI press release, 'MSCI views the announcement as a positive development and will analyze the impact of the new measures as further details are provided and the implementation framework is clarified.'

However, the company stated that it would not consider changing Malaysia's status within its indexes until there was discernible proof that the changes would have a positive influence on the country's investabili-ty. The only change by MSCI was the reduction of the 30% discount on MSCI's valuation of the MSCI Malaysia Index in US dollars to 15%.

IFC began to re-evaluate its removal of Malaysia from its indexes immediately after the country revised the controls it had imposed on investments. At the time of its removal, Malaysia represented 5.83% of IFC's Investable Composite index. The company was advised by an outside panel of representatives from mainly institutional investors. By mid-March, IFC announced that Malaysia would be reincluded in IFC's Investable Composite and Investable Asia indexes during the annual re-balancing of IFC's indexes on Nov. 1, 1999, on the condition that the country maintains its new policies.

Dow Jones & Co. has stated only that it will continue to monitor Malaysia's economy. Malaysia also has not been returned to the FT/S&P Actuaries World Indices, but separate indexes will continue to be calculated for at least one year based on the rules of the FT/S&P Actuaries World Indices.


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