By PAULINE NG
IN KUALA LUMPUR

THE Malaysian stock exchange does not have enough large companies and the problem is compounded by the government's huge shareholding in many of these entities.

Reducing the government's stake in these firms would improve trading liquidity and velocity, said Bursa Malaysia chief executive Yusli Mohamed Yusoff. The bourse has a mid-term goal of achieving an average velocity of 60 per cent from just over 30 per cent at present.

'The reality is a lot of small to medium companies are trading at very high velocity. What is dragging our average down is the low velocity in the bigger companies,' he told BT.

Given that government-linked corporations (GLCs) account for about a third of the exchange's market capitalisation, their performance has a marked effect on the market.

Former prime minister Abdullah Ahmad Badawi had announced plans to reduce the government's stake in GLCs but there has been little change. The state holds huge stakes in GLCs - as much as 70 per cent in the case of national utility Tenaga Nasional.

Bursa Malaysia wants to raise the bar on higher free floats, liquidity and governance for the exchange, which has 1,000-odd companies.

In many instances, it begins with the board of directors, Mr Yusli said. 'We need the board to take ownership because the board really sets the tone.'

He believes the reluctance to sell down has to do with control but pointed out there are many other ways the government can exert its influence. 'If the government says it is going to sell down, then what is the board doing about it?'

The right people should be appointed to the board, which should be given the necessary powers to run the company, he said. 'If it has to then report to another level of authority, why have the board in the first place? The board cannot run the company just for the interests of a certain group of shareholders. They represent all shareholders.'

Owned 20 per cent by the Ministry of Finance and an equal amount by the Capital Market Development Fund (a public fund), Bursa Malaysia's free float is about 60 per cent.

Mr Yusli agrees there is excessive government ownership in the market. Perhaps it was necessary in the past, but it should be eased now for reinvestment in new economic activities.

Recent attempts by Malaysia to liberalise its economy by easing equity ownership rules notwithstanding, Mr Yusli concedes that competition is ferocious.

'In the early days, we had a very high weightage on these (emerging market) indices because there was no China, India or Brazil. We have lost a lot of ground because these are much bigger economies. We have to fight on the basis of quality as we can never win on size.'

More synergistic mergers and acquisitions to boost entity size such as Sime Darby, the world's biggest palm oil planter, are also necessary.

Attracting new listings is another challenge. Bursa clinched its first foreign listing in the form of Xingquan International Sports Holdings, but the Chinese shoemaker's initial public offering was small, raising just RM200 million (S$42.3 million).

There are some more in the pipeline - including one from the Middle East, according to news reports - but Mr Yusli knows multinationals will often put international financial centres first.

Even Malaysian companies and local investors can opt for more dynamic markets. 'That's the challenge for us: to make sure we can retain investors as well as attract new investors.'

That less developed rival bourses are catching up is evident. Although still smaller in market capitalisation, Indonesia's average daily value has been steadily growing to some US$465 million or RM1.65 billion. In comparison, Bursa's is about RM1 billion currently.

In the bullish year of 2007, Bursa's average daily trading value was RM2.7 billion. Singaporean participation was significant, accounting for about a fifth of the total foreign trade value of RM84.6 billion.

In percentage terms, Singaporean participation was bigger in 2005, reaching 37 per cent or RM55 billion. Up to June this year, it amounted to RM12 billion or 16 per cent of the total foreign trade value.

Mr Yusli said the bourse wants more direct participation from Singapore retail investors but acknowledges 'it will have to be based on good fndamentals as people have choices'.

This article was first published in The Business Times.