Prime Minister Najib Razak announced that listed companies will no longer be required to allocate 30 percent of their stake to Malays as part of an affirmative action program for the country's ethnic majority.
Najib said the rule was neither benefiting poor Malays nor was sustainable amid the global economic slowdown, which will force Malaysia into its first recession in a decade. The economy is expected to shrink by up to 5 percent this year.
"The world is changing quickly and we must be ready to change with it or risk being left behind," Najib told an investment conference organized by Malaysia's stock exchange.
"It is not a time for sentiment or half measures but to renew our courage and pragmatism to take the necessary bold measures to advance the national interests for the long term benefit of all Malaysians," he said.
Najib will have to walk a political tightrope by diluting the New Economic Policy, which provides a host of privileges in business, education, jobs and property ownership to the Malays who make up 60 percent of the country's 28 million people.
Chinese and Indian ethnic minorities have long chafed against the New Economic Policy, which Najib has been slowly dismantling since taking office April 3. Even many Malays have protested against the program, saying it mainly benefits the elite Malays with connections in high places.
Najib later told reporters that the NEP has failed to meet its target of raising Malay share of corporate wealth to 30 percent by 2010. It stands at 19 percent now.
The government still wants to meet the target by reforming the system and creating a new investor-friendly economic model, Najib said.
"We will help the best and the good in business. We want to be fair to all communities. No one must feel marginalized ... It is a tricky balancing act but it is doable." he said.
Among other steps in the liberalization, stock brokers and unit trust management companies will be allowed 70 percent foreign ownership, up from the current level of 49 percent. Foreigners can also own 100 percent of fund management companies, Najib said.
The liberalization moves take away most powers of the Foreign Investment Committee, an omnipotent government body that has been the bane of foreign investors.
The FIC has been derided as an impediment in Malaysia's efforts to become competitive against regional rivals such as Singapore, Indonesia and India in attracting investment by imposing various restrictions.
Foreigners will also not be required to get the FIC's approval before buying property in Malaysia, either residential or commercial.
"We can only achieve high income by creating more opportunities for growth rather than protecting our narrow turf," Najib said. "We can only achieve our social equity goals by expanding the pie."
The removal of the 30 percent Malay ownership requirement for listed companies does not apply to "strategic industries" such as telecommunications, water, ports and energy.
Critics have complained that the Malay ownership rule was being abused to enrich a handful of Malay individuals or companies.
Listed companies will still be required to sell at least 25 percent of their shares to the public, and half of those public shares must be given to Malays so that ordinary people from the community get to participate in businesses.
The government also plans to set up a private equity fund with an initial capital of 500 million ringgit ($143 million) to buy private companies and hand them over to Malay managers. The fund will be enlarged to 10 billion ringgit ($2.8 billion) with no fixed time frame.