As part of the First Annual Institute on Corporate & Securities Law in Hong Kong in April 2013, Latham & Watkins partner Sharon Lau participated in a panel titled “Asian Capital Markets: India, China, Korea and Singapore.”
In this Q&A interview, Lau shares highlights from the panel and offers insight on the latest developments in several of Asia’s most active capital markets.
What are the latest developments in the Indian capital markets?
Lau: The discussion about India was particularly interesting during the panel. We had an esteemed member of the Indian bar speak about several key developments. The one that I think is of most interest is something called the safety net. This is a new and rather controversial initiative that has been undertaken in India by SEBI, the stock exchange regulator. It is basically a form of protection for small retail investors. Safety net gives a retail investor a put option to sell shares back to the promoter or selling shareholder at issue price if the company’s share price falls by more than 20 percent of the issue price post listing. This does not have the force of law yet and is contained in a draft paper, but the regulator has required this in recent transactions.
As you can imagine, this has been making waves in India. At the time of the panel, banks as well as lawyers were struggling with trying to figure out how to meet these requirements and how to structure deals around these requirements. We weren’t able to offer solid answers to these questions because it is still early days for this safety net proposal.
Beyond that, there have also been a lot of new proposed rules and bills in India, some of which are very relevant from the securities market perspective, including enhancing liability on directors and promoters, which seems to be a common trend among all the various emerging markets as well as mature markets, and India is following suit.
What is China doing to encourage foreign investment and capital?
Lau: China is definitely trying to open its capital markets to foreign investors. Right now, even though we hear a lot about China-based companies listing in Hong Kong or the US, the Chinese market itself is still a pretty restricted market that's not really open to foreign investors, except certain qualified types of foreign investors. The stock exchange and their key regulator, the China Securities Regulatory Commission (CSRC), have been working quite closely together to see if they can streamline the rules in order to allow approved foreign investors to invest. We are likely to see movement firstly in the bond market and hopefully eventually the equity markets as well.
They are also working to streamline the approval processes. The goal is to shorten approval times so that deals can come to the market a little quicker. This is what they have been loosely calling the trend of deregulation—you won’t have to then go through so many different regulatory authorities to get approvals, particularly for companies that are already listed and are looking to do secondary follow-on offerings.
What is the status of the move toward convergence of accounting standards and practices in Asia?
Lau: One of the areas of focus on this panel was the convergence in these various markets to International Financial Reporting Standards (IFRS). The market that has probably made the most progress is Korea. Korea’s conversion has been very interesting compared to the other markets such as India, China and Singapore, where even though the convergence to IFRS is taking place—it hasn’t been complete.
Korea, on the other hand, dove right in and their road map for IFRS was a formal commitment to adopt IFRS completely, as issued by the International Accounting Standards Board (IASB). They adopted these standards verbatim. The voluntary adoption started as early as 2009 and by 2011 the adoption of what is known as the Korean IFRS (KIFRS) became mandatory for all listed companies in Korea and unlisted financial institutions as well. They are pretty ahead of the game in terms of accounting standards.
Are you seeing growth in the “frontier economies” in Asia?
Lau: The frontier economy that generated the most discussion during the panel was Mongolia. From time to time, you hear about foreign investors looking at investments in Mongolia. It is one of the themes that keeps coming up again and again and there are a couple of reasons why: (1) it’s a very resource heavy economy right now, mining, for example, is very important and (2) Mongolia is strategically located between Russia and China, two mammoth economies. Mongolia would benefit from foreign capital, both foreign direct investment and capital raisings. While they have been rather successful at debt capital market fund raisings, equity fund raisings have been few.
Foreign investment in Mongolia has also been somewhat restricted because of freedom of contract and civil law issues and uncertainties about enforcing foreign judgments and arbitral awards, problems that are not uncommon in emerging markets. This has been compounded by a new law Mongolia recently adopted known as the Regulation of Foreign Investment in Business Entities Operating in Sectors of Strategic Importance (“the SFI Law”). This law stipulates that when there is foreign investment in business entities operating in sectors of strategic importance, governmental approval has to be obtained for acquisitions of more than a one-third share in any strategic business entity. Furthermore, if the acquisition is for a majority stake, anything more than 49 percent, and/or if the investment amount exceeds about US$75 million, which is not huge at all, parliamentary approval is required.
This was only enacted in May of last year, so it’s still very new and at the time of the panel they were still waiting for implementation procedures to be clarified. With many of these emerging markets, the law is published first and then you often have to wait for implementation procedures—and the devil is always in these details with the implementation procedures. I think the fear is that this may have a cooling effect on foreign investment in Mongolia, given the regulatory scrutiny that you are likely to face in what are dubbed as strategic sectors, which span everything from mining to finance, to banking, to media and telecommunications. In an emerging market where infrastructure is key, these are the very areas that foreign investors are looking to go into. So, I think that is going to be interesting to watch for practitioners that are focused on Mongolia.