The Ministry of Domestic Trade and Consumer Affairs ('MDTCA') has issued a set of revised guidelines called the Guidelines on Foreign Participation in Distributive Trade Services in Malaysia 2020 ('DP2020') a decade after the fourth edition of the guidelines were published in 2010 ('DP2010').

Some of the changes introduced by DP2020 are highlighted in this Alert.

  1. Approach
  1. The approach adopted by the MDTCA in DP2020 to regulate foreign participation in distributive trade services in Malaysia is less prescriptive than in DP2010. Foreign business operators engaged in distributive trade services in Malaysia are "encouraged and recommended" to obtain the MDTCA's approval before commencing operations (section 3.0 of DP2020). This approach is augmented in paragraph 5.2 of DP2020 where the MDTCA recommends that a party who proposes to submit an application for foreign involvement in distributive trade to consult the Distributive Trade Committee ('DTC') of the MDTCA before submitting its application.
  1. On a similar vein, the conditions relating to incorporation, capital and equity structure for the various formats of distributive trade are now stated as "recommendations", rather than mandatory requirements. It remains to be seen whether this soft-touch approach will be borne out in practice.
  1. Preferential participation
  1. The preference given to "bumiputera" for local participation, whether at board level or as shareholders, or to fulfil the quota for local products displayed, has been extended under DP2020 to "Malay", which is assigned the meaning set out in Article 160 of the Federal Constitution.
  1. Exemption and disapplication
  1. The two exemptions from the application of DP2020 have been clarified/updated in paragraph 4.5 of DP2020 as follows –
  1. the exemption accorded to licensed manufacturing companies is only applicable to the distribution of products under the same production line; in other words, a licensed manufacturing company with foreign participation which distributes products sourced from third parties will be required to obtain approval under DP2020; and
  1. the list of regional establishments that are exempted from DP2020 has been updated to include companies that have been granted 'principal hub' status by the Malaysian Investment Development Authority (MIDA).
  1. The requirement in DP2010 for foreign business operators to obtain the MDTCA's approval for ancillary businesses has been omitted from DP2020 and is presumably, no longer required.
  1. General conditions
  1. Three new conditions have been recommended under paragraph 5.4 of DP2020 in addition to the eight requirements stipulated in DP2010 that are to be complied with by all distributive trade companies with foreign equity, namely –
  1. to limit the hiring of low skilled foreign workers to 15% of the total workforce;
  1. to develop and provide transparent standard operating procedures for local suppliers to market their goods; and
  1. to support the initiatives and agenda for sustainable development as provided under the Government's Sustainable Development Goals.
  1. Hypermarket
  1. A minor amendment has been made to the definition of 'hypermarket' in that the requirement in DP2010 that the products are to be sold "in a range of transaction sizes or quantities" has been removed.
  1. DP2010 requires a hypermarket operator to submit to the MDTCA indicative plans for additional branches two years before "an application is to be considered". This requirement has been clarified in paragraph 6.3.1 of DP2020 which requires the application to be submitted to the DTC at least one year before the proposed date of operation.
  1. The mandatory requirement under DP2010 to obtain the MDTCA's approval for any reduction or increase in sales floor area has been changed to a recommended practice under paragraph 6.3.3 of DP2020.
  1. DP2020 permits a hypermarket to operate as an anchor tenant. Under DP2010, a hypermarket was only permitted to operate on a stand-alone basis on the outskirts of major towns.
  1. A new requirement in DP2020 permits a food court under the management of a hypermarket to commence operations at 9.00 a.m. (previously all operations in a hypermarket commenced at 10.00 a.m.)  
  1. Paragraph 6.3.7 of DP2020 introduces a new requirement for a hypermarket operator to submit a report to the MDTCA by June and December annually on its percentage achievement of the requirement to allocate at least 30% of total stock keeping unit displayed on its shelf space to goods and products by Bumiputera and Malay small medium enterprises.
  1. The requirements as to the permitted location of a hypermarket has been refined. The prohibition against a hypermarket operating within a radius of 3.5 km of residential areas and town centres has been reduced to a radius of 1.6 km (paragraph 6.4.3 of DP2020). In addition, the requirements under DP2010 that permit only one hypermarket for every 250,000 residents and prohibit the construction of hypermarkets under the jurisdiction of local authorities that have less than 250,000 residents has been amended. Paragraph 6.4.4 of DP2020 now allows hypermarkets to be constructed in locations under the jurisdiction of local authorities that have the status of "City Council" or "Municipal Council".
  1. Paragraph 6.4.5 of DP2020 provides that in conducting the feasibility and impact studies on existing local retailers and residents before the proposed opening of a hypermarket, a minimum of 200 individuals, which includes retailers and residents, should be considered in the study.
  1. Departmental store
  1. DP2010 permits a departmental store to include a supermarket of not more than 2,000 square metres. This has been amended under DP2020 which prescribes that a supermarket in a departmental store is to have an area of not less than 1,000 square metres or 15% of the total sales floor area, subject a maximum of 4,999 square metres.
  1. The requirement in DP2010 for a review of the minimum capital investment for a departmental store once in every three years has been omitted from DP2020.
  1. DP2010 requires a departmental store operator to submit to the MDTCA indicative plans for additional branches two years before "an application is to be considered". This requirement has been clarified in paragraph 7.3.1 of DP2020 which requires the application to be submitted to the DTC at least one year before the proposed date of operation.
  1. The mandatory requirement under DP2010 to obtain the MDTCA's approval for any reduction or increase in sales floor area has been changed to a recommended practice under paragraph 7.3.3 of DP2020.
  1. A new requirement in DP2020 permits a food court under the management of a departmental store to commence operations at 9.00 a.m. (previously all operations in a departmental store commenced at 10.00 a.m.)  
  1. Paragraph 7.3.6 of DP2020 introduces a new requirement for a departmental store operator to submit a report to the MDTCA by June and December annually on its percentage achievement of the requirement to allocate at least 30% of total stock keeping unit displayed on its shelf space to goods and products by Bumiputera and Malay small medium enterprises.
  1. The prohibition against a departmental store operating within a radius of 3.5 km of residential areas has been reduced to a radius of 1.6 km (paragraph 7.4.3 of DP2020).
  1. Under DP2010, the requirement to carry out an impact study before opening a new departmental store only applied if the proposed departmental store is to operate in a standalone building or if the business floor area is not less than 5,000 square metres. Paragraph 7.4.4 of DP2020 now requires feasibility and impact studies to be conducted before the opening of any departmental store. It further requires a minimum of 200 individuals, which includes retailers and residents, to be considered in the study.
  1. Superstore
  1. The definition of a 'superstore' (which, inter alia, includes having a sales floor area of 3,000 square metres to less than 4,999 square metres) has been amended by the inclusion of an additional provision that allows a superstore with a sales floor area of at least 1,000 square metres to operate at a location under the jurisdiction of either a City Council or Municipal Council. The requirement in DP2010 that only companies that operate hypermarkets may apply to operate a superstore has been removed from DP2020.
  1. DP2010 requires a superstore operator to submit to the MDTCA indicative plans for additional branches two years before "an application is to be considered". This requirement has been clarified in paragraph 8.3.1 of DP2020 which requires the application to be submitted to the DTC at least one year before the proposed date of operation.
  1. The mandatory requirement under DP2010 to obtain the MDTCA's approval for any reduction or increase in sales floor area has been changed to a recommended practice under paragraph 8.3 of DP2020.
  1. A new requirement in DP2020 permits a food court under the management of a superstore to commence operations at 9.00 a.m. (previously all operations in a superstore commenced at 10.00 a.m.) 
  1. Paragraph 8.3.7 of DP2020 introduces a new requirement for a superstore operator to submit a report to the MDTCA by June and December annually on its percentage achievement of the requirement to allocate at least 30% of total stock keeping unit displayed on its shelf space to goods and products by Bumiputera and Malay small medium enterprises.
  1. The requirements under DP2010 that permit only one superstore for every 200,000 residents and prohibit the construction of superstores under the jurisdiction of local authorities that have less than 200,000 residents have been omitted from DP2020.
  1. Paragraph 8.4.3 of DP2020 provides that in conducting the feasibility and impact studies on existing local retailers and residents before the proposed opening of a superstore, a minimum of 200 individuals, which includes retailers and residents, should be considered in the study.
  1. Specialty store
  1. The requirement for a review of the minimum capital investment for each specialty outlet once in every three years has been omitted from DP2020. Paragraph 9.2.2 of DP2020 now states that the minimum capital investment in terms of shareholders' funds for a specialty store is RM1.0 million.
  1. A new provision has been included in DP2020 which requires a specialty store that operates through a franchise system to obtain the approval from the MDTCA before applying for registration under the Franchise Act 1998.
  1. DP2020 requires feasibility and impact studies to be carried out on existing local retailers and residents if the sales floor area of a specialty store is more than 5,000 square metres. The further requirement in DP2010 for such studies to be carried out where the specialty store is operated in a standalone building has been omitted from DP2020.
  1. Convenience store
  1. DP2010 did not permit foreign involvement in convenience stores. This has been liberalised with the introduction of Part 10.0 of DP2020.
  1. DP2020 defines "convenience store" as a distribution store which operates 24 hours and sells fast moving items, namely items with a fast stock turnover rate such as cigarettes, newspapers, magazines and bread.
  1. Paragraph 10.1.2 of DP2020 provides that convenience store companies with foreign interests are companies that cooperate with a foreign distribution company which at all times must comply with the following –
  1. have a form of agreement, partnership, agent, service contract or supply; and
  1. use or not use a foreign distribution company's trademark as the name of convenience stores; or
  1. have equity holders and/or directors from a foreign distribution company.
  1. Any foreign involvement in convenience store companies is recommended to comply with the following –
  1. the convenience store companies must be locally incorporated under the Companies Act 2016;
  1. the convenience store companies with foreign interest must operate through a franchise system under the Franchise Act 1998;
  1. the capital investment in terms of shareholders' funds is RM1.0 million at the minimum; and
  1. a foreign interest is only allowed to hold a maximum of 30% of the company's equity and a minimum of 30% of the equity is reserved for Bumiputera or Malays; this condition must be fulfilled during the submission of the application to the DTC.
  1. A convenience store with foreign interest is recommended to comply with the following–
  1. to subject the operation of its convenience stores to the Franchise Act 1998;
  1. to allow only Malaysians to be franchisees;
  1. to operate the convenience stores 24 hours daily; however convenience stores that operate in shopping complexes, hospitals, factories, education institutions and public areas are subject to conditions specified by the management of the premises;
  1. to ensure that the sales floor area must not exceed 180 square metres (one shop lot or approximately 2,000 square feet);
  1. to operate convenience stores only within metropolitan and urban areas with a population of 10,000 and above (as defined by the Department of Statistics Malaysia in Population and Housing Census 2000, Malaysia);
  1. to sell fresh, perishable, refrigerated and frozen products only if they are produced in proper and systematic packaging; and
  1. to allocate at least 30% of the overall stock keeping unit per outlet for Bumiputera or Malay products from small and medium enterprises.
  1. A company which owns convenience stores and/or their master franchisees are allowed to maintain not more than 30% of the total outlets as direct outlets.
  1. Franchisees are to be appointed immediately after the submission of three consecutive years of the company's audited accounts and in any event, within five years from the establishment of the company's first direct outlet.
  1. Prior to the submission of the application to the DTC, the company must submit a comprehensive business plan.
  1. All applications are subject to the approval of the DTC.
  1. Distribution centre
  1. The distribution centre format is a new format introduced under DP2020.
  1. A "distribution centre" is a specialised building designed to temporarily store goods for its group of companies and redistribution of goods to another location according to the outlet orders. Distribution centres also cater for order fulfilment process, especially for online retailers and e-commerce business.
  1. Any foreign involvement in a distribution centre is recommended to comply with the following –
  1. the distribution centre must be locally incorporated under the Companies Act 2016; and
  1. the capital investment in terms of shareholders' funds must be RM1.0 million at the minimum.
  1. The criteria for the establishment of a distribution centre are as follows –
  1. contribution to the socio-economic development in Malaysia;
  1. generate substantial foreign direct investment;
  1. create employment opportunities; and
  1. transfer of technology/skills to locals.
  1. Site and floor plans must be submitted with the application for approval of a distribution centre.
  1. The establishment of additional branches are subject to the approval of the DTC.
  1. Various Other Distribution Formats
  1. Paragraph 12.1 of DP2020 states that "various other distribution formats" means other types of distributive formats and unregulated sector, including e-commerce.
  1. The minimum capital investment stipulated in DP2020 is RM1.0 million, and not RM1.0 million per outlet as stated in DP2010.
  1. Feasibility and impact studies on existing local retailers and residents are to be carried out if the sales floor area is more than 5,000 square metres. The requirement in DP2010 for such studies to be carried out where the business is operated in a standalone building has been omitted from DP2020.
  1. The requirement under DP2010 for a business to ensure a safe and clean environment as well as efficient use of energy has been omitted from DP2020. This is probably an inadvertent omission.
  1. Franchisor and Franchisee
  1. DP2020 provides that any foreign involvement in a franchise business, including the operational, environmental and public interest conditions, are to be in accordance with the Franchise Act 1998.
  1. Prohibited sectors
  1. The sectors of distributive trade services where foreign participation is not allowed has been amended by the exclusion of convenience store operations for which DP2020 allows a maximum foreign equity participation of 30%. As in the case of DP2010, the MDTCA has reiterated that the list of prohibited sectors is not exhaustive.
  1. Non-compliance with DP2020
  1. The MDTCA has reiterated that the DTC may reject any application to open a new branch and revoke any previous approval granted in the event of non-compliance with any provision of DP2020 and for national security purposes.
  1. Processing of applications
  1. Unlike DP2010, paragraph 14.3 of DP2020 expressly states that the MDTCA will only process applications with complete supporting documents.
  1.  Tenure of approval
  1. New provisions have been included in paragraph 14.4 of DP2020 which state that –
  1. any approval granted by the MDTCA for foreign participation in distributive trade services in Malaysia will be valid only for three years at the maximum and is subject to renewal; and
  1. any application for renewal of an approval is to be submitted three months prior to the expiry of the current approval, failing which a renewal application will be considered as a new application.

Comments

The liberalisation of the distributive trade services sector to allow up to 30% foreign participation in 24-hour convenience stores is welcomed. The inclusion of distribution centres in DP2020 clarifies the regulatory framework under which this format of business is to operate. Apart from these significant changes, DP2020 has also introduced drafting refinements and liberalised some requirements that are applicable to the various distributive trade formats.

In an attempt to reduce Malaysia's dependence on low skilled foreign labour, a recommendation has been introduced in DP2020 that companies in the distributive trade sector that have foreign participation limit their hiring of low skilled foreign workers to 15% of the total workforce.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.