Malaysia enforces cap on foreign ownership of insurers' local units -sources

* Overseas owners asked to cut 100 pct stakes -sources

* Foreign firms can only own up to 70 pct in an insurer

* Companies given until June 2018 to divest -source

By Liz Lee

KUALA LUMPUR, June 23 (Reuters) - Malaysia's central bank has asked foreign insurers to raise the proportion of local shareholders in their firms to at least 30 percent, under an initiative to lift domestic participation in the industry, people familiar with the matter said on Friday.

Foreign ownership of Malaysian insurers was set in 2009 at 70 percent - or more if the buyer could help consolidate and rationalise the industry. But some foreign insurers operating in the country could still be wholly owned by their overseas parent.

Bank Negara Malaysia last week sent letters to such wholly owned insurers requesting their foreign parents to reduce their stakes in line with regulation for domestically incorporated insurers, two people said. Recipients included the Malaysian units of Japan's Tokio Marine Holdings Inc and Hong Kong's AIA Group Ltd, one of the people said.

The deadline to comply is June 2018, said one of the people, without elaborating on the consequences of non-compliance.

The people declined to be identified as they were not authorised to speak publicly on the matter. Bank Negara Malaysia and the local units of AIA and Tokio Marine did not respond to requests for comment.

The expected stake sales are a concern considering the size and timing, one of the people said. Malaysia has only a small number of large local funds and so insurers may have to compete for the same pool of institutional investors, the person said.

"These companies are very large," the person said. "How many Malaysian shareholders are there that will have the appetite and wallet to pick up this sort of stake, and invest this sort of money in that time frame?"

Moreover, regulation restricts firms to buying into no more than one insurer.

"Most of this 100 percent shareholding is a result of legacy ownership, rather than the foreign shareholders getting special leeway from the central bank," said Brian Chia, Wong & Partners head of corporate, commercial and securities practice group.

RAM Rating Services Bhd said there were 11 Malaysia-incorporated insurers wholly owned by foreign firms. It said it was too early to deduce whether enforcing the foreign ownership cap would enhance or impede the industry.

"Local ownership is good in that wealth creation from premiums is retained within the country," the credit-rating firm said. "But foreign players can bring innovation and expertise to the local industry." (Reporting by Liz Lee; Additional reporting by Praveen Menon; Editing by Christopher Cushing)