Circular on Liberalization updates

Board has issued another circular updating the liberalization requirement as below.

There is again No Change in the Law. Only the Practicing Company – the firm is now “directly participated” by all shareholders, irrespective of whether they are corporate entity or individuals. In this article we will look at how this change is to impact the formation of firms (starting from 01 April, 2022) although the circular is dated 05 April, 2022.

Let us look back at earlier write ups:

We understand that the salient point of liberalization is about corporate structure which allows non-registered persons to take part in the shareholding of a firm under Sdn Bhd or Bhd. In Sole-prop, Partnership and LLP, all members of the firms must be registrants.

Pursuant to earlier circular, a Practicing Company comes into formation by participation of 2 companies – Approved Holding Company (minimum 51%) and Non-registered Entity (maximum 49%). Now – as of 01 April, 2022 this structure is no longer required (as per circular 9/2022 above).

Let us understand this by asking why such corporate structure is different from direct ownership by individuals.

Take a scenario ABC Real Estate Sdn Bhd, a firm with 2 EA and 2 Valuers who have 25% ownership equally.

Later on, an investor came in with 20% shareholding and injected fund to build the iT structure. The new structure is as below.

  • 2 EA and 2 V = 80%
  • iT investor = 20%

If by earlier structure, this investor has to form a company (be it a sole-prop, partnership or body corporate) and the approved holding company is the ABC Real Estate Sdn Bhd. The new company needs to be formed as a Practicing Company, having these 2 shareholders (80% by approved holding company & 20% by the iT company) – or any arrangement within the minimum 51% controlling stake by the Approved Holding Company.

Instead, if the formation of firm under liberalization can go through direct participation of individuals. The below illustrates:

The injection of fund and 20% of the shareholding by the iT arm is directly assimilated to the current firm – ABC Real Estate Sdn Bhd.

There is no NEW Practicing Company but the existing ABC Real Estate Sdn Bhd just need to allot shares to the new shareholder directly. In other words, the existing firm becomes the “New Practicing Company”. The new composition is 80% by 2 EA & 2 Valuers and 20% by the iT individual or corporate entity within the corporate structure of the existing firm.

We know that the incoming iT partner may be a corporate entity or an individual. In both cases, the existing VE firm is not carrying on iT business or being restructured to become a non-VE firm. Therefore, having to separately create another practicing company is rather unnecessary.

Amidst, there are possible business reasons for the iT arm to engage in non-core valuation or estate agency practice instead of being supportive role in the current setting of a VE firm. This is not permitted unless prior approved by BoVAEP – Rules 71 & 94. – shall not, without the prior written approval of the Board, be gainfully employed in activities other than valuation/estate agency work.

However, despite the earlier requirement of forming a Practicing Company, this possibility (of engaging in activities other than core professional work) would not be eradicated. Owing to such redundancy and its much complicated administrative steps, I guess the Board decided to do away with this structure (in circular 21 & 22/2020).

In this context, we would reckon that by admitting a new shareholder, the constitution or object of the firm should be unchanged. This should be the prerequisite of the new firm structure. Otherwise, the new structure is to seek special approval by the Board.

On the other hand, most of the firms might want to have a succession plan with future running of the firm in a management team consisting of non-registered persons like Professional Managers or Senior RENs.

This means when a Sdn Bhd is handed over to the future shareholders and directors, the professional managers and RENs can still see their profit sharing within the firm. This can inculcate loyalty and sense of belonging to the firm.

The second part that subsidiary firm can only hold 49% of the shareholdings I have explained in the earlier write up. To this, the law in particular S.23(4) & (4A) is key to understanding this requirement – that a person cannot become or remain in more than one place of practice. Please refer to earlier write up for clarification.

lastly, the circular extended another year (from end 2023 to 2024). Moreover, starting from 01 April, 2022 the updated requirement is to do away with the structure of practicing company – approved holding company and the non-registered entity. This will speed up the process of liberalization, I hope.

I welcome this circular as it made the existing firms easier to assimilate to the new structure under Liberalization. The process is easier and probably faster as there is no need to form new corporate entity and Board can approve the structure based on the composition of the shareholdings immediately. There is no new incorporation and also no new firm formation under the Board.

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