There's no doubt that opening our stock market to foreign investment-doing away with the QFII system-will help our securities markets thrive. However, what we should look forward to even more is seeing foreign investors able to make more real, honest to goodness investments in our domestic industries, creating employment opportunities, developing high-value-added industrial sectors and bolstering our competitive strength.
The foreign investment problem
Since the end of December 1997, when German pharmaceutical giant Bayer decided to scrap its plans to build a plant in Taiwan, there has not been one investment of over NT$50 billion. According to statistics from the Investment Commission, MOEA, in the first 5 months of 2003 there were a total of 418 foreign investment cases, amounting to US$1 billion. The number of approved cases was down 3.24 person from the same period in 2002, and the total approved amount was down 22%. It appears that, from the end of April 2003, the havoc wreaked upon Taiwan by the SARS outbreak caused a severe retrenchment in inbound foreign investment. It is time we confronted this fall-off in investment in Taiwan by overseas Chinese and other foreign investors. Towards that end, this article takes a closer look at Taiwan's current legislation affecting investment by overseas Chinese and foreign nationals.
The case for improving Taiwan's foreign investment and M&A legislation
Taiwan's foreign investment laws and application procedures have changed greatly in recent years, and the investment review process has been shortened. Nonetheless, there have been some inevitable oversights and omissions in connection with the foreign investment laws, and these constitute a potential obstacle keeping foreign investors from coming to Taiwan to invest, and to do merger & acquisition deals. Consider three of the most conspicuous examples:
1. Consequences of the requirement that the foreign target company in a share assignment must be a publicly listed or OTC traded company.
According to Article 30 of the Company Merger Law issued on 6 February 2002, when a company carries out an assignment of shares with a foreign company, then the last two items of Article 30 concerning an assignment of shares or a resolution to do so, Article 29 on shareholders' meeting resolutions, and Article 21's merger regulations apply. Clearly, a company in Taiwan may engage in a share transfer with a foreign company under the Company Merger Law. However, according to the regulations on documents that foreign investors are required to attach, the foreign company targeted to acquire the local company's shares must be listed on a stock exchange of the foreign country, or the said company must have already submitted a formal application for a listing on such exchange and had its application accepted. For example, say an electronics company in Taiwan plans to carry out an assignment of shares with a certain US company. It would be prevented from doing so by the foreign investment laws now in force if the US business happened not to be a listed or OTC-traded company.
It is true that the government has acted with good intentions, fearful that Taiwan's shareholders would be harmed if their shares were swapped for those in non-traded companies. They perhaps did not realize that this could end up increasing the share assignment costs borne by Taiwan's shareholders. The fact is, it costs a considerable amount to search for an overseas listed/OTC-traded company and then negotiate a share transfer deal. If the government did not restrict the objects of share transfers to only listed/OTC-traded companies, shareholders in Taiwan after a share assignment could choose the optimal time to sell shares in the US, possibly lowering the cost of achieving global deployment.
2. The need to apply for approval to make loan investments
Currently, if an overseas Chinese or other foreign investor wants to extend an investment loan-along with the capital they intend to contribute for stock in the company-with a maturity greater than one year, they must first predict the source and use of those funds in an application to the authorities, and only after prior approval is obtained may the company obtain that share investment or loan investment. Here, the investor will typically take into consideration both the company's financial leverage and the tax effects of the loan interest.
Moreover, if an invested business's long term loan is not from foreign investors but is rather from an overseas affiliate, then it does not fall within the definition of a loan investment, and is still subject to the rules in “Guidelines Governing the Settlement of Private Inward Remittances” concerning the remittance of long-term loans.
If it were not necessary to apply to the Investment Commission, MOEA, for approval of the loan investment, and it could all be handled under the relevant rules of Taiwan's foreign exchange management system, it would appear that the relevant proof of settlement documents could take the place of the prior approval. At any rate, the amount of loan investments at present is less than the recorded figure for approved investment from abroad. So, whether or not it is necessary to seek prior approval, there will be some room for simplification.
3. Restrictions on using transfers of creditors' rights to increase capital should be loosened.
Under Article 156 of the current Company Law, an investor may use monetary claims against a company in the place of (or in addition to) a cash contribution. However, at present only approved loan investments and certain approved rights of creditors in a reorganization may be transferred in a capital increase. Consequently, claims remitted inward by a foreign-invested business have to be approved by the Central Bank of China (CBC), or there must be no doubt as to the existence of the claim (creditors right) based on the foreign exchange receipt/expenditure or trade declaration used in completing procedures for settlement and sale of foreign exchange. Therefore, one should consider relaxing restrictions on using transfers of claims to increase capital so that foreign investors may enjoy freer use of the financial leverage that they require.
The risks of accelerated opening
Steps to liberalize the laws on investment by overseas Chinese and foreign nationals would help such investors invest in Taiwan, and government assistance with appropriate business promotion activities overseas can certainly improve the foreign investment problem Taiwan has encountered over the past few years. However, there is also no denying that the US, a free country, still has a foreign investment control policy, based on national security reasons, and it has opposed the purchase of Global Crossing Ltd. by Hong Kong billionaire Lee Ka-shing, for example. We too must give thought to security and industry protection when considering the proper level of foreign investment openness. This is why we still maintain “negative list” regulations enumerating investment categories from which foreign investors are excluded or restricted. The government may be justified in having various exclusions and restrictions on those grounds, but as for ordinary laws on investment by foreigners, these should be loosened as soon as possible.
