The

Marine Law

Box

by Dr. Arun Kasi

What is in this Bulletin?

  • What is “domestic shipping”?
  • Who may engage in domestic shipping?
  • What is a Malaysian ship and who may own it?
    o TSR route
    o MISR Route

Bulletin of

Arun Kasi & Co

International Maritime Lawyers and Arbitrators

Bulletin No. MLB 23/2024

25 October 2024 https://arunkasico.com

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MLB 23 (DSL) 25-10-2024

Domestic Shipping Licence for foreign ships in Malaysia – the “cabotage” rule

Adjunct Prof. Dr. Arun Kasi

MLB 23/2024. Acknowledgment and Disclaimer[i] 

What is “domestic shipping”?

“Domestic shipping” means the use of a ship:[ii]

  • to provide services (other than fishing) in Malaysian waters or the exclusive economic zone (EEZ) of Malaysia, OR
  • to carry goods or passengers:
    1. from any port/place in Malaysia to another port/place in Malaysia, OR
    2. from any port/place in Malaysia to any place in the EEZ of Malaysia or vice versa.

Who may engage in domestic shipping?

To engage in domestic shipping, the general rule is that the ship must be a Malaysian ship[iii] AND it must obtain a Domestic Shipping Licence (“DSL”)[iv] from the DSL Board,[v] which is issued by the Board at its discretion.[vi] The general rule is reinforced by a general prohibition against foreigners chartering or otherwise engaging a Malaysian ship for domestic shipping, unless permission is obtained from the Minister of Transport (“Minister”).[vii]

These general rules work two ways. First, a Malaysian may not use a foreign ship for domestic shipping. Likewise, a foreigner may not use a Malaysian ship for domestic shipping.

The Minister may grant an exemption to a ship from the requirement of being a Malaysian ship or of obtaining a DSL or both.[viii]

As to the first requirement of being a Malaysian ship, the Minister has declared automatic exemptions for:

  • cruise services from any port or place in Malaysia to another port or place in Malaysia,[ix]
  • repair services of submarine cables landed at any submarine cable landing centre in Malaysian waters,[x]
  • transport of containerized transhipment cargo services for the sectors between the Port of Tanjung Pelepas to the Port of Pasir Gudang and vice versa and the Port of Tanjung Pelepas to the Port of Kuantan and vice versa (valid until 5 October 2026),[xi]
  • cable laying ship for service of installation, maintenance and repair of submarine telecommunication cable landed at any submarine cable landing centre in Malaysian waters,[xii]
  • container ship for service of containerized transshipment cargo, in a non-stop single voyage:[xiii]
    1. from a port in Peninsular Malaysia to a port in Sabah and vice versa,
    2. from a port in Peninsular Malaysia to a port in the Federal Territory of Labuan and vice versa, and
    3. from a port in Sabah to another port in Sabah.

As to the second requirement of obtaining a DSL (regardless of whether it is a Malaysian ship or not), there are automatic statutory exemptions[xiv] for:

  • ships of less than 15 tons nett,
  • licensed boats,[xv]
  • in relation to Sabah and Sarawak, ships licensed under the Merchant Shipping Ordinance 1960 of Sabah[xvi] or Sarawak,[xvii] as applicable,
  • any ship owned by or in the employment of the Government of Malaysia or a state thereof or any port authority therein.

From both requirements, the Minister has declared an automatic exemption for:

  • transportation of cargo[xviii]
    1. from any port in Peninsular Malaysia to any port in East Malaysia (Sabah, Sarawak or Labuan) and vice versa,
    2. from any port in Sabah to another port in Sabah, and
    3. from any port in Sarawak to another port in Sarawak.

Apart from these automatic exemptions, the Minister has the authority to grant case-specific exemptions to ships for engaging in domestic shipping.[xix]

If the Board refuses a DSL application, the applicant may appeal the decision to the Minister within 30 days of the decision being notified in writing to the applicant, and the Minister’s decision is final.[xx]

What is a Malaysian ship and who may own it?

A ship may qualify as a Malaysian ship through two routes. One is the Traditional Ship Registry (“TSR”) route. The other is the Malaysia International Ship Registry (“MISR”) route. There are four TSR registries, namely in the ports of Port Kelang (Peninsular Malaysia), Penang (Peninsular Malaysia), Kota Kinabalu (Sabah) and Kuching (Sarawak). The MISR is situated in the Labuan port.

TSR route

Pursuant to s 11 Merchant Shipping Ordinance 1952 (“MSO”), a ship is a Malaysian ship if it is owned by Malaysian citizens OR by a Malaysian company that meets the following criteria:[xxi]

  • the company is incorporated in Malaysia, its principal office is in Malaysia, and its management is carried out mainly in Malaysia,
  • the majority of the shares are held by Malaysian citizens free from any trust or obligation in favour of non-Malaysians,
  • the majority of the directors are Malaysian citizens,

A Malaysian ship, unless exempted, is entitled to and must be registered in any of the four TSR registries.[xxii] When applying for registration, the applicant must make a statement that no other person is entitled as owner to any legal or beneficial interest in the ship or any of the 64 shares in the ship.[xxiii] When not exempt, if it is not so registered, it loses its character as a “Malaysian ship”. The said exemption is for:

  • ships not exceeding 15 tons nett used for navigation on the rivers and coastal waters of Malaysia,
  • licensed boats,[xxiv] and
  • local fishing vessels not exceeding 500 tons gross licensed under any law relating to fisheries.

Typically, a foreigner desiring to engage in domestic shipping activity in Malaysia would set up a joint venture (“JV”) company in Malaysia with a Malaysian, whereby the Malaysian would hold 51% of the shares and the foreigner would hold 49% and transfer the ship to the JV company – unless of course an exemption is automatically applicable or is obtained from the Minister in respect of the “Malaysian ship” requirement or the MISR route (below) would work for the foreigner.

The natural concern for the foreigner will be as to the protection of their investment, being the minority shareholder. However, there are avenues in the companies law to mitigate this concern. It will be a mistake to think that minority shareholding automatically means compromised control over the company or protection. An appropriately planned JV structure with a suitably drafted constitution of the JV company might satisfactorily answer the concern. It is beyond the scope of this paper to deal with the JV structures and constitution for JV companies.

MISR route

This is a new route that has been there since 2006.[xxv] To be eligible for registration in the MISR, the following criteria must be met:

  • the company is incorporated in Malaysia and has an office in Malaysia,[xxvi]
  • the majority of the shareholding are NOT held by Malaysian citizens,[xxvii]
  • the paid-up capital of the company is not less than 10% of the value of the first ship to be registered here or one million ringgit, whichever is higher,[xxviii]
  • the ship is fitted with mechanical means of propulsion, is not of less than 1,600 gross tonnage, and is not aged more than 15 years for tankers and bulk carriers or 20 years for all other types of ship[xxix] – the Minister may exempt a ship from this requirement.[xxx]

Eligibility does not guarantee registration, which is at the discretion of the MISR.[xxxi] There is no appeal against the decision of the MISR.[xxxii]

However, there are practical and legal limitations to using the MISR route. The practical limitation is as follows. The company might successfully register their ship in the MISR, but that does not mean they would subsequently get the DSL. When considering an application for the DSL, the Board would take into account Malaysia’s cabotage policy, which generally aims to avoid foreign-owned ships from competing with Malaysian-owned ships in providing domestic shipping services. The chances of obtaining a DSL might improve if the company gives a bareboat or time charter of its MISR-registered ship to a majority Malaysian-owned company. However, this still does not put them on par, in their DSL application, with a ship owned and operated by a majority Malaysian-owned company. If the DSL application fails, the efforts spent obtaining the MISR registration would be wasted.

The legal limitation is as follows. The company that owns the ship would not be entitled to own the ship had they used the TSR route.[xxxiii]  Consequently, they would not be eligible directly to engage the ship for domestic shipping without the permission of the Minister.[xxxiv] This permission requirement is in addition to the DSL requirement. This legal limitation can be overcome by the company’s giving a bareboat or time charter of the ship to a majority Malaysian-owned company that will meet the s 11 MSO 1952 criteria to allow the latter to engage in domestic shipping subject to a DSL.

In both the scenarios discussed above, the majority Malaysian owned company can be a JV company with 51% Malaysian citizens’ shareholding and 49% foreign shareholding. Again, a suitably drafted constitution of the JV company would be pivotal in managing the relationship between and the control of the company among the shareholders.

[i] Thanks to Priya Naanthini Panilchelvam, LLB (Hons) Liverpool, for proofreading a draft of this paper.

This material is provided free of charge on a full disclaimer of any liability. The contents are the opinion of the author, the correctness of which is not assured. The opinion of others may differ. Readers should not rely on the contents provided in this paper but should seek legal advice specific to their context. If they rely on the contents provided in this paper, they do so solely at their risk. All the images use in this paper are purely illustrative only and have no connection with the subject.

[ii] Sec 65A Merchant Shipping Ordinance 1952.

[iii] Sec 65KA(1) Merchant Shipping Ordinance 1952.

[iv] Sec 65L(1) Merchant Shipping Ordinance 1952.

[v] Regulated by Domestic Shipping Licensing Board Regulations 1981.

[vi] Sec 65H(4) Merchant Shipping Ordinance 1952.

[vii] Sec 65KA(2) Merchant Shipping Ordinance 1952.

[viii] Sec 65U Merchant Shipping Ordinance 1952.

[ix] PU(B) 66/2012.

[x] PU(B) 166/2019.

[xi] PU(B) 436/2023.

[xii] PU(B) 19/2024.

[xiii] PU(B) 200/2024.

[xiv] Sec 65L(3) Merchant Shipping Ordinance 1952.

[xv] Licensed by a Port Officer pursuant to s 475 Merchant Shipping Ordinance 1952.

[xvi] See s 247 Merchant Shipping Ordinance 1960 of Sabah.

[xvii] See s 247 Merchant Shipping Ordinance 1960 of Sarawak.

[xviii] PU(B) 274/2017 and PU(B) 275/2017.

[xix] Sec 65U Merchant Shipping Ordinance 1952.

[xx] Sec 65K Merchant Shipping Ordinance 1952. The finality of the Minister’s decision should still be subject to the “judicial review” jurisdiction of the High Court.

[xxi] Sec 11 Merchant Shipping Ordinance 1952.

[xxii] Sec 12(1) Merchant Shipping Ordinance 1952.

[xxiii] Sec 16(2)(e) Merchant Shipping Ordinance 1952.

[xxiv] Licensed by a Port Officer pursuant to s 475 Merchant Shipping Ordinance 1952.

[xxv] 17 August 2006.

[xxvi] Sec 66B Merchant Shipping Ordinance 1952.

[xxvii] Sec 66B Merchant Shipping Ordinance 1952.

[xxviii] Sec 66D Merchant Shipping Ordinance 1952.

[xxix] Sec 66E(1) Merchant Shipping Ordinance 1952.

[xxx] Sec 66E(2) Merchant Shipping Ordinance 1952.

[xxxi] Through the Malaysian Registrar General of Ships; sec. 66B(2) Merchant Shipping Ordinance 1952.

[xxxii] However, the avenue of “judicial review” application to the court to challenge the decision must be open.

[xxxiii] Sec 11 Merchant Shipping Ordinance 1952.

[xxxiv] Sec 65KA(2) Merchant Shipping Ordinance 1952.