Reconsidering How to Get Taiwan-based Companies to Come List Shares in Taiwan

Written By: Amy Lee

It has been reported that the number of companies listing on the Taiwan Stock Exchange or the GreTai Securities (over-the-counter) market in 2006 will have been the lowest in many years. As of the end of October, a mere ten companies had listed on the TSE, and only 37 had listed over-the-counter. Given how Taiwanese-controlled companies have been falling over each other in their eagerness to obtain listings in Hong Kong and set up shop there, it is clear that Taiwan's stock market is facing a serious marginalization crisis.

The way home: How Taiwanese firms can come back and list shares in Taiwan

Although the "International Edition" plan – formulated by the Financial Supervisory Commission to solve the Taiwan listing quandary – was late in coming and has yet to be passed, there are yet some ways for Taiwanese-controlled companies to obtain listings here: For firms without parent companies in Taiwan, or which otherwise are not going to use the Taiwan parent company they originally had to get a listing, the fastest short-run method is a back door listing (i.e., acquiring a company already listed in Taiwan, as when Ting Hsin acquired more than 50% of Wei Chuan's shares in 1998). This approach needs to be backed by abundant capital and skillful financial operations, however. Companies newly established in Taiwan, on the other hand, are limited by years-in-operation restrictions, capital requirements and profitability conditions, and setting up a new company means redesigning the business model. Although this approach might be more suitable for a small- or medium-scale enterprise, it is not a way to meet short-term financing objectives.

Also, some venture capital firms actively encourage listed companies in Taiwan to merge with Taiwanese-controlled companies on the mainland. This is another workable approach that indirectly brings about a market listing in Taiwan. In the past, there was no way for venture capital to go to companies in mainland China that did not have a Taiwan-based parent company because an exit mechanism for capital was lacking. If, by merging with a public company in Taiwan, venture capital could effectively exit after a public listing takes place, that would be beneficial to both the international positioning of Taiwan's companies and the efficient use of venture capital.

Additionally, under the current Company Law and existing public listing regulations, Taiwanese-controlled firms use of the Taiwan depositary receipt (TDR) model, but they must have already been listed for a full six months on one of ten-plus stock exchanges approved by the Securities and Futures Commission. The problem is that the Hong Kong Stock Exchange, where most Taiwanese-controlled businesses on the mainland seek listings, is not yet one of the approved exchanges, so this approach toward listing in Taiwan has limited utility.

Problems for Taiwanese-controlled Businesses Listing in Taiwan

The key reason that makes Taiwanese-controlled businesses reluctant or unable to come list in Taiwan is the maximum limit on investment in the PRC. The government agencies concerned may have floated a number of plans over the last several years, such as the "Operations Headquarters Market Listing Plan", a proposal to include the Hong Kong Stock Exchange on the list of exchanges approved for listing before issuing TDR in Taiwan, the "International Edition" regulatory reform plan, and the "Capital Market Internationalization Plan", but all the while the way forward has been blocked because a consensus could not be reached on the mainland investment cap.

Even if the investment limit issue can be resolved, there would still be the following problems to face in practice:

1. Making mainland companies more transparent

Providing transparent information from the mainland China side is a basic requirement for safeguarding investors, so for Taiwanese-controlled companies, which were in the habit of using layers of offshore holding companies to lower the transparency of their financial statements, the big challenge will be to provide enterprise information and financial statements that are transparent, have credibility, and can show operating conditions and profitability as they truly are.

2. Local financial, tax and customs issues in mainland China

The financial, tax and customs issues that Taiwanese-controlled companies encounter locally in mainland China are extremely wide-ranging, and first-time investors more often than not skirt the boundaries of the law, or even break it unknowingly, because of their unfamiliarity with the pertinent regulations or their pursuit of profits. To deal with discrepancies between their financial accounts, tax books and customs records, and alleviate the concerns of Taiwan's securities regulators, companies will have to rely on cooperation between themselves, professional underwriters and accountants.

3. The impact of transfer pricing and related tax risk

In the process of "deploying globally", most Taiwan-based companies have migrated lower-value-added manufacturing functions to the mainland, while also setting up companies in offshore tax havens as part of their tax planning. However, when such companies seek a listing in Taiwan, their transfer pricing policies will be examined by the governing authorities there, and they might face a tax adjustment by mainland tax authorities as well. In consequence, a necessary condition for Taiwan-controlled companies to list in Taiwan is that they establish a set of transfer pricing policies that meet the requirements of transfer pricing audits on both sides of the strait. That way, they can avoid bearing uncertain global tax risk.

Conclusion

In the midst of an ongoing push by Taiwanese companies to list in Hong Kong, the challenge is to develop a set of measures that will remove or relax mainland investment restrictions to an appropriate extent and with certain conditions, on the condition that financial stability is not affected and the strengths of Taiwan's stock market are safeguarded. This would help Taiwanese-controlled companies list in Taiwan, strengthen Taiwan's capability as an Asia-Pacific capital-raising center, and induce companies to "put down deep roots in Taiwan", which is what the government agencies involved are most anxious to achieve. Also, if those companies in mainland China analyze the feasibility of listing in Taiwan, act early to plan out the approaches they can take to obtain a public listing, and preemptively address the problems they could face in such a listing, they will reap ample savings from lower capital costs and achieve a structure that is both firmly rooted in Taiwan and globally deployed.