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FEER: Daim Resignation Suggests Rift With PM [Mesti Baca]
By Terence Gomez
28/6/2001 4:18 pm Thu
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
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
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
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
Terence Gomez is associate professor at the Faculty of Economics, University of Malaya, Kuala Lumpur