More Protectionist Regulatory Intervention on the Cards, Experts Warn

The raft of government measures designed to stave off corporate raiders is unlikely to abate soon, compliance practitioners say.

Expect to see governments across Asia and the globe impose more protectionist measures on their financial markets over the next 18 months as the impact of the Covid-19 pandemic hits their respective financial markets, experts are predicting.

“I firmly believe that there’s going to be heavy [regulatory] focus on foreign investment,” a senior compliance executive at a global asset manager told Regulation Asia. “It’s been accentuated by what we’re seeing right now with the virus and countries wanting to know who’s investing, and I think there will also be a further analysis of what is considered to be critical or central business or industry within a country.”

In Australia, the government has tightened its foreign investment rules amid concerns that strategic assets that have lost value as a result of the coronavirus crisis could be taken over. Previously, Australia’s foreign investment review board would only examine overseas takeovers worth more than AUD 1.1 billion (USD 720 million). Under recent changes, approval is now required for all proposed foreign investments regardless of value or the nature of the foreign investors.

Meanwhile in India, a pre-approval requirement has been introduced for all foreign investment from seven countries it shares a land border with (notably, China) to curb “opportunistic takeovers or acquisitions” of Indian companies. Regulators have already been collecting details on foreign investors into the country from Hong Kong and China, a move said to be aimed at creating barriers for Chinese investors.

One consistent theme that has been emerging in compliance departments at asset management firms is the ability to rapidly respond to the high volume of regulatory updates coming in response to worsening economic conditions and the increased threat of overseas corporate raiders.

If it is not governments putting in place tighter rules around shareholder disclosures and short selling reporting, many are implementing more strategic protective measures.  Last year, the Japanese government rattled markets by announcing new legislation that would require advance government approval for a foreign investor to take a stake of 1 percent or more in any Japanese enterprise in 12 of what it has defined as core strategic sectors. (The previous threshold was 10 percent)

Fortunately for many firms, subsequent clarifications were published ahead of the rules taking effect, including blanket exemptions for investment managers and other regulated funds. But, the event offers up a perfect example of the regulatory volatility and uncertainty many are now witnessing.

Earlier this year, South Korea’s regulator amended its so-called ‘Five Percent Rule’, to clarify the scope of shareholder activities that constitute ‘exercising influence’ over management and are therefore be subject to more stringent disclosure requirements. There are now separate disclosure requirements for investors that have no intention of exercising influence over the management of their target companies.

“I think a lot of investors would have struggled to keep up with the recent flurry of changes,” said Gaurav Chandra, a specialist on shareholding disclosures at AxiomSL. “But it’s not just that, investors also need to quantify what that rule change means for them.”

With the best will in the world, and as exemplified by Japan’s Ministry of Finance, regulators may not always effectively communicate changes to the depth businesses need to comply. Legal and compliance professionals would tend to agree that in instances where new rules are published, it is best to apply a conservative interpretation of the rules until further clarification is established.

It’s not all doom and gloom, though. As much as there is broad expectation governments will continue to seek ways to protect domestic business from what they perceive as attacks, it is equally possible they will find ways to encourage outside investment.

To learn more about managing multi-jurisdictional shareholder disclosure requirements, sign up for this webinar.

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