To avoid capital gains tax, public listings of Malaysia’s high growth start-ups and SMEs set to double

KUALA LUMPUR - Public listings of high growth start-ups and small and medium-sized enterprises (SMEs) on Malaysia’s stock exchange are set to double in 2023 from a year ago, as companies seek to avoid a new capital gains tax (CGT) unveiled by Prime Minister Anwar Ibrahim in his Budget speech last Friday.

The new CGT comes into effect in 2024 and will be imposed on gains from the disposal of shares in unlisted companies. This will lead to a rise in listings on the local bourse, said Ms Wong Muh Rong, managing director and founder of corporate advisory firm Astramina Advisory.

In general, private companies will dispose of their shares to the public to get listed on the stock exchange. They may also plan to dispose of unlisted shares to streamline business operations via merger and acquisition or even group restructuring activities.

Private companies which are considering listing on the stock exchange or undergoing a restructuring exercise will expedite their corporate plans in 2023 before the CGT kicks in.

In 2022, a total of 35 companies made their debut on Bursa Malaysia – five on the Main Market, 25 on the Ace Market and five on the Leap Market, marking the highest number of initial public offerings (IPOs) over the past five years.

Companies seeking to get listed on the Ace Market tend to be high-growth start-ups, while the Leap Market is a platform for SMEs.

The amount of money raised through IPOs in 2023 is likely to outstrip the RM3.5 billion (S$1 billion) raised in 2022.

In comparison to the Main Market, both Ace and Leap markets will see a flurry of listings in 2023 from a year ago due to less stringent requirements, said Ms Wong.

The requirement for companies to list on the Main Market is more strict, as it includes established companies having to post at least RM20 million in profit after tax over a three to five financial year period.

“For some unlisted companies that have planned to list in 2025, they may not be in time to meet the strict requirement of the Main Board of Bursa Malaysia. To escape CGT, they may opt to list in either Ace or Leap markets,” said Ms Wong.

The anticipated spike in IPOs in 2023 will also add value to the growth market capitalisation of Malaysia’s stock exchange, valued at RM1.74 trillion as at last Friday, but is trailing the regional stock exchanges including Singapore, Indonesia and Thailand, Ms Wong said.

Since the 1997 Asian financial crisis, the total market cap of Bursa Malaysia grew merely close to 8 per cent as at September 2022. In comparison, the market cap of the Singapore Exchange increased by 179 per cent, while growth in market cap for the Thailand and Indonesia stock exchanges rose by around 300 per cent and 565 per cent respectively during the same period, according to Bloomberg.

Last Friday, Datuk Seri Anwar, who is also finance minister, announced an extension of the tax exemption of up to RM1.5 million for listing expenses on the Ace Market and the Leap Market until year of assessment 2025.

“This tax exemption should broaden to cover the listing expenses of technology companies seeking to be listed on the Main Market of Bursa Malaysia,” said Mr Anwar.

Calling the anticipated uptick in listings a “temporary surge” for 2023, Ms Farah Rosley, Malaysia tax managing partner at Ernst & Young Tax Consultations, said the government has to come up with a plan that focuses on the long-term and sustainable growth of the capital market.

There is also a possibility of foreign-owned entities in the country seeking to quickly dispose of their shares and reconsider their plans to make new investments in Malaysia, leading to capital flight to countries that do not impose CGT, said Ms Farah.

This could impact foreign direct investments and trade flows as well, she added.

Singapore and Hong Kong, the two largest financial markets close to Malaysia, do not impose CGT.