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FEER(7/5):Shroff
Issue cover-dated July 05, 2001

Daim Resignation Suggests Rift With PM

Why Mahathir Axed Daim

By Terence Gomez

Even after Daim Zainuddin submitted his resignation as finance minister of Malaysia in early June, most analysts remained divided over whether a rift had emerged between him and Prime Minister Mahathir Mohamad. Since Mahathir and his once most-trusted ally Daim have refused to state explicitly the reasons for the latter's resignation, speculation is rife over the factors that led to the finance minister's departure.

Events that have occurred in the corporate sector suggest, however, that the rift is serious and may be partly linked to the business affairs of Mahathir's second son, Mokhzani Mahathir. Specifically, Mokhzani's involvement in the bank-consolidation exercise seems to have affected Daim's private business interests.

Long before the onset of the financial crisis in 1997, the government had been keen to consolidate the domestic banking sector, then comprising more than 50 banks and financial institutions. When the government decided to forcibly merge Malaysia's financial institutions into just six anchor banks in 1999, there was considerable protest from the banks.

The Chinese business community was upset that the merger of some of the most enterprising Chinese-owned banks would diminish its presence in the industry. A general election was looming and Mahathir was aware that his ruling coalition needed non-Malay, especially Chinese, support to secure a strong presence in parliament. So the government decided to raise the number of anchor banks from six to 10. It was widely reported that this decision sparked a rift between Mahathir and Daim.

Before the bank-consolidation exercise was first proposed, Daim's allies had taken control of Multi-Purpose Bank from T.K. Lim, who had been closely associated with former Deputy Prime Minister and Finance Minister Anwar Ibrahim. Multi-Purpose Bank was originally supposed to be merged with PhileoAllied Bank, controlled by Tong Kooi Ong, who was also closely associated with Anwar. Although Tong only ventured into banking in 1994, he quickly developed PhileoAllied Bank into one of the most dynamic, technologically innovative banks in Malaysia. When the bank-consolidation exercise was revised, PhileoAllied Bank was re-assigned from Multi-Purpose Bank to the Malayan Banking, or Maybank, group. Maybank is controlled by Permodalan Nasional, or National Equity Corp., also known as PNB, which is chaired by the prime minister.

Another shareholder of PhileoAllied Bank was Mahathir's son, Mokhzani, who had acquired an indirect stake in the bank before the consolidation exercise was first proposed. Mokhzani's publicly listed company, Tongkah Holdings, had cross-holdings with another quoted company, Pantai Holdings. Pantai and Tongkah jointly owned a 28% stake in Phileo Land, a listed company. Phileo Land, with 18.4%, was the single largest shareholder in PhileoAllied, the owner of PhileoAllied Bank. Phileo Land was later re-named Avenue Assets.

Although Mokhzani was then close to Daim, Tong was reportedly reluctant to merge his bank with Multi-Purpose Bank. Under the revised bank-consolidation scheme, Maybank offered Avenue Assets a share-swap deal valued at 1.2 billion ringgit ($316 million) to take over PhileoAllied Bank. Avenue Assets rejected Maybank's offer as its directors felt that PhileoAllied Bank's equity was underpriced and the deal involved no cash. Avenue Assets held out for more, and eventually ensured that PhileoAllied got 1.3 billion ringgit in cash from Maybank for the bank's equity. With the sale of its bank, Phileo Allied became a cash-rich shell company.

In January, soon after the sale of PhileoAllied Bank, the Securities Commission, under the control of the Finance Ministry, informed Phileo Allied's shareholders, which included Avenue Assets, that they could not divest their interests in their now cash-rich shell company. Nor could they make any changes in substantial shareholding without the prior consent of the commission.

This stipulation by the Securities Commission was unprecedented in Malaysian corporate history. It was also noteworthy because similar conditions were not imposed by the Securities Commission on Tajuddin Ramli, Daim's former business partner, whose company, Naluri, controversially received 1.8 billion ringgit for the sale of Malaysia Airlines to the government, a takeover implemented around the same time as the PhileoAllied Bank sale.

In early April, Daim voiced his intention to take long leave, and not long after, Mokhzani announced that he intended to divest himself of all his corporate interests. Since Mokhzani's direct corporate holdings were in Pantai and Tongkah, which owned a sizeable chunk of Avenue Assets, he did not violate the conditions imposed by the Securities Commission when he sold.

Mokhzani said he was getting rid of all his corporate holdings because his involvement in business was giving rise to baseless allegations of nepotism. To protect his father's name, he had decided to focus on his involvement in politics -- he was then treasurer of the youth wing of the ruling United Malays National Organization, or Umno Youth. But in June he relinquished that post, too. Since Mokhzani sold his assets at a loss, other factors could have influenced his decision to get out of business.

When Mokhzani divested his equity holdings, ostensibly to concentrate on politics, Daim issued a statement that the public should respect his decision. Interestingly, former Finance Minister Razaleigh Hamzah, once a strong critic of the involvement of the prime minister's children in business, made a statement that Mokhzani should retain his corporate interests. Razaleigh is widely believed to harbour hopes of being appointed Daim's replacement in the Finance Ministry, thus providing him with an avenue to make a comeback in the Umno hierarchy.

Mokhzani divested his controlling stake in Pantai to Lim Tong Yong, a little-known businessman who controls a listed soap-making company, Paos Holdings. While Lim has pointed out that Pantai has a potentially profitable interest in the health-care sector, the company also has a large stake in debt-ridden Tongkah. Pantai subsequently divested 1.2 percentage points of its 16% equity in Tongkah, while Tongkah sold off, at a loss, 12 percentage points of its 32.5% equity in Pantai to help reduce debts. Tongkah also has 462.5 million ringgit worth of bonds due in 2004.

In late May, the government's postal service, Pos Malaysia was sold to PhileoAllied. There was no prior disclosure by the government of its intention to privatize the profitable Pos Malaysia or to secure a backdoor listing for it by injecting it into PhileoAllied. In fact Pos Malaysia could have secured a public listing on its own merits, but its board of directors had reportedly decided not to list the company this year because of poor market conditions.

PhileoAllied is to pay the government 800 million ringgit for Pos Malaysia -- 550 million ringgit in cash, and the balance through a five-year, 5% convertible loan from the government. The government can convert its loan into equity, so it has the option of becoming a major shareholder in PhileoAllied at any time over the five years. Since Pos Malaysia was privatized while Daim was on leave, the decision to transfer control to PhileoAllied is unlikely to have been his.

These issues involving PhileoAllied, the bank-consolidation exercise and the privatization of Pos Malaysia raise many questions about corporate and public governance in Malaysia. Why was PhileoAllied Bank sold to Maybank, which was reportedly not keen on this merger, when it could have been merged with one of the other nine smaller anchor banks? What, indeed, were the criteria for determining the anchor banks and their merger partners? Why did the Securities Commission impose conditions on PhileoAllied but not on Naluri when both firms received huge sums of government money from the sale of assets?

Why was Pos Malaysia sold, without notice, to a company that is ultimately controlled by a person who bought out the firms owned by Mokhzani? Were these corporate manoeuvrings linked to an apparent souring of the relationship between Daim and Mokhzani? Interestingly, the differences between Mahathir and Anwar were due to the latter's opposition to a proposed government acquisition of the assets of a debt-ridden company owned by Mahathir's eldest son, Mirzan Mahathir.

All this political manoeuvring for control of corporate assets does, however, point to important developments since 1998. With Anwar out of the frame following his expulsion from Umno, corporate assets owned by his allies have been taken over by men not aligned to his faction. Businessmen linked to Daim appear to have benefited most from redistribution of these assets. That, in turn, precipitated disputes between political and business elites and exposed Daim to severe criticism from even his own party members. More important, Daim's attempt to secure overwhelming influence over the consolidated banking industry was a major cause for the rift between him and Mahathir.

Although the influential Daim is out of favour, it is unlikely that the government will practise a more transparent, accountable form of governance. The government has announced that the 10 anchor banks will be put through another consolidation exercise. Only four or five banks are expected to emerge from this new consolidation. Although it is unlikely that Daim will secure control or ownership of one or more of these enlarged financial institutions, there is no reason why the Malaysian public should believe that these banks will not be abused in future.

With no checks and balances in this government, it appears unlikely that Mahathir's reforms will inspire any confidence in the Malaysian corporate sector. Instead, the key focus will now be on how Mahathir will deal with Daim's closest business allies and the vast corporate assets--and debts--that they still hold.

(END) Dow Jones Newswires 27-06-01