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Newsletter No020

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Newsletter No: 020

January 16, 2006

I. News and Events   (Chinese)

‧ Key amendments to the Securities and Exchange Act

Amendment to the Securities and Exchange Act took effect on January 13, 2006. The amendment focuses mainly on promoting corporate governance, expanding the business scope of securities firms, and establishing closer cooperation with overseas authorities (e.g. by signing of information sharing agreements and working together to prevent securities crime), and will go far toward strengthening Taiwan's international competitiveness and facilitating Taiwan's development into a regional financial services center. The following is a description of the amendments and the benefits expected to yield:

1. Promotion of corporate governance
1.1 Introduction of independent director system

1.1.1 Amended articles: 14-2 and 14-3

1.1.2 Content of amendment: The Act expressly provides that a public company may appoint independent directors in accordance with its articles of incorporation. The Competent Authority, however, must as necessary in view of the company's scale, shareholder structure, type of operations, and other essential factors, require public companies to appoint independent directors, not less than two in number and not less than one-fifth of the total number of directors. The FSC will implement this measure in gradual steps, putting top priority on financial holding companies as well as other firms (including banks, securities firms, insurers, securities investment trusts, exchange-listed companies, and OTC-listed companies) with authorized capital at or above a certain amount. A company must submit financial or operational actions of material significance to the board of directors for approval by resolution, and when an independent director has a dissenting opinion or qualified opinion, it must be noted in the minutes of the directors meeting.

1.2 Introduction of audit committee system

1.2.1 Amended articles: 14-4 and 14-5

1.2.2 Content of amendment: The amended Act expressly provides that a public company must establish either an audit committee or a supervisor, with the proviso that the Competent Authority may, in view of the company's scale, type of operations, or other essential considerations, order it to establish an audit committee in lieu of a supervisor. The Act further provides that the audit committee must be composed of the entire number of independent directors, and that the committee must not be fewer than three persons in number (one of whom must be the convener, and at least one of whom must have accounting or financial expertise). Moreover, financial and operational matters of material significance require the consent of one-half or more of all audit committee members.

1.3 Greater independence for directors and supervisors

1.3.1 Amended article: 26-3

1.3.2 Content of amendment: The Act requires the following of public companies: the board of directors may not number less than five persons; when the government or a juristic person is a shareholder, its representative may not concurrently be selected or serve as the director or supervisor of the company; and among a public company's directors and supervisors, a certain minimum must be independent; independent directors/supervisors must account for a certain share of the total number of directors supervisors; and certain familial relationships may not exist between the directors. The act also expressly provides that a company must formulate rules for the conduct of directors meetings, while regulations governing the content of deliberations, procedures, matters to be recorded in the meeting minutes, public announcement, and other matters for compliance are to be prescribed by the Competent Authority.

1.4 Stricter liability for persons preparing company financial reports

1.4.1 Amended articles: 14, 20, and 20-1

1.4.2 Content of amendment: The chairperson, manager, and accounting officer are all required to sign or stamp financial reports, and must also produce a declaration that the reports contain no misrepresentations or nondisclosures. The Act also expressly provides that a accounting officer must possess certain qualifications and must receive continuing professional education while holding the position. The Act expressly sets forth the conditions under which civil damages may be sought and the persons who may be held liable for falsehoods contained in financial reports or any other relevant financial or business documents. For example, with the exception of the chairman and general manager, other employees who sign or chop financial reports or other documents will not be liable for damages if they can demonstrate that they were not culpable or negligent in any way. Where other such employees do bear liability, their liability is in proportion to their degree of responsibility. In addition, CPAs who perform attestation of financial reports or financial and business documents are liable, in proportion to their degree of responsibility, for the occurrence of any damages that arise out of misconduct, violation or negligence in connection with the performance of their duties as CPA. Also, bona fide purchasers, sellers, or holders of the securities in question may petition a court to requisition the CPA's working papers, and further, to review or make copies of the same, and the CPA or accounting firm may not refuse such action.

1.5 Stronger proxy management

1.5.1 Amended articles: 25-1 and 178

1.5.2 Content of amendment: The Act states more clearly what matters are to be addressed by the "Rules Governing the Use of Proxies for Attendance at Shareholder Meetings of Public Companies," which the Act empowers the competent authority to issue. Such matters include: the qualifications of an issuer's proxy solicitors, proxy agents, and those handling proxy solicitation matters on its behalf; statistical tallying and verification of proxies; and the documents that must be reported and made available for public access. Another problem addressed by the amendment is the fact that, until now, the only sanction for violation of proxy rules was disqualification of the improper votes; there were no provisions for related criminal or administrative sanctions. To ensure that the aims of governmental regulation are achieved, the amended Act now provides for administrative sanctions. The amended Act also provides for the offer of a reward for the report of a violation of Article 25-1 that leads to successful discovery of a violation, and empowers the competent authority to issue regulations governing such reward.

1.6 Companies are now offered simpler capital raising procedures. Securities issues that formerly needed prior approval from the competent authority now require only effective registration. Article 22, which governed the prior approval regime, has been deleted.

2. Expanded scope of business for securities firms

2.1 Amended articles: 44, 45, 51, 54, 60, 73, and 76 to 78.

2.2 Content of amendment: Securities firms that have obtained approval from the competent authority are now allowed to borrow and lend securities and money, and to accept a commission from a client to act as depository or invest the client's funds. The amended Act no longer prohibits the directors, supervisors, and managers of a securities firm from investing in other securities firms or concurrently serving as a director or supervisor of a public company, and a provision has been added to the Act stating that when there is an investment relationship, and when the approval of the Competent Authority has been obtained, the aforementioned personnel as well as associated persons employed by securities firms whose duties relate to the securities business may serve concurrently as a director or supervisor of the invested securities firm. In addition, a number of provisions have been deleted from the Act to simplify underwriting procedures, including requirements pertaining to the underwriting period, matters that must be included in an underwriting contract, and matters that must be reported to the authorities.

3. Signing of information sharing agreements with overseas authorities

3.1 Amended article: 21-1

3.2 Content of amendment: The Act expressly provides that the ROC government and agencies (or institutions) authorized by it may, based on the principle of reciprocity, enter into a cooperative treaty or agreement with a foreign government or agency (institution), or with an international organization, to facilitate matters such as information exchange, technical cooperation, and investigation assistance.

4. Market manipulation and insider trading

4.1 Amended articles: 155 and 157-1

4.2 Content of amendment:

4.2.1 Market manipulation: The Act expressly mentions two types of market manipulation, namely, failure to settle a buy order (where an investor does not settle with a securities firm) and failure to settle a reported trade (where a securities firm does not settle on the market). The Act also prohibits actions taken with the intent of creating an impression of brisk trading in a particular security.

4.2.2 Insider trading: The Act further clarifies the definitions of the constituent elements of insider trading (e.g. who is considered an insider, the manner in which insider information is disclosed, and what constitutes material information) and also sets forth clearer provisions governing the calculation of civil damages.

5. Stiffer penal provisions

Amended article: 178

Content of amendment: The Act raises the minimum administrative fine for violation of administrative laws and regulations from NT$120,000 to NT$240,000. And where failure to make rectification leads to successive administrative fines, the range has been raised from NT$240,000 ~ 480,000 to NT$480,000 ~ 4.8 million.

6. The competent authority for the Securities and Exchange Act is now the Financial Supervisory Commission. References to the competent authority (Securities and Futures Commission, Ministry of Finance) have therefore been updated. This same change has also been reflected in the Securities Investment Trust and Consulting Act.

Amended articles: 3, 6, 22, 60, 95, 156, 182-1, and Articles 18, 18-2, 18-3, and 172.

7. Date of implementation

Amended articles: 181-2 and 183

Content of amendment: To give enterprises ample time to implement corporate governance (e.g. adopt rules governing the establishment of independent directors and audit committees, the minimum number of [independent] directors, and a prohibition against the existence of familial relationships between a certain percentage or certain number of directors and supervisors), articles setting forth new corporate governance requirements will not be implemented until 1 January 2007, and after implementation will not be enforced with respect to currently serving directors and supervisors until their terms have expired. Other amended articles, however, were implemented from the date of promulgation.

The establishment of a corporate governance regime will facilitate effective supervision of corporate activities and boost investor confidence, thereby attracting long-term capital and foreign investors. Easing statutory and regulatory restrictions, allowing securities firms to engage in a broader scope of business, and promoting the launch of innovative new financial products will bring Taiwan's financial regulatory regime more closely in line with global standards. Moreover, the signing of information sharing agreements with foreign authorities for the purpose of cross-border supervision, and the adoption of stronger measures to prevent securities crime, will enable Taiwan to exercise more effective financial supervision and more successfully maintain orderly securities trading.

To familiarize the public with the content and impact of this latest amendment to the Securities and Exchange Act so as to have enough time to prepare for compliance and implement more smoothly, the FSC has organized a wide-ranging campaign to publicize the amendment. The campaign will be carried out by the FSC and various securities-related organizations, and will address the following matters: (1) the functions of independent directors and audit committees, and the structure and operations of boards of directors; (2) changes to the offering and issuance system; (3) qualification and continuing professional education requirements for accounting officers; (4) the professional liability of CPAs and other personnel who sign or chop financial reports; (5) easing of regulatory restrictions on securities firms, and expansion of their business scope; (6) improved proxy management; and (7) measures to prevent insider trading. These key issues will be explored in public forums, seminars, and colloquia to be held specifically for the purpose of introducing this latest amendment to a wider audience, including exchange- and OTC-listed companies, other public companies, directors, supervisors, managers, accounting officers and their assistants, securities firms, CPAs, attorneys, investors, and other members of the general public.

‧Easing of asset transfer procedures for foreign investors

To resolve difficulties experienced by foreign investors in completing securities transfer consent forms due to large numbers of final beneficiaries, rules relating to signing by final foreign beneficiaries have been eased in cases where the final beneficiary is the same and no violation of off-exchange transaction rules would be involved.

‧ Amendment of Regulations Governing Information to be Published in the Annual Reports of Public Companies and Regulations Governing Information to be Published in Public Offering and Issuance Prospectuses

The Regulations Governing Information to be Published in the Annual Reports of Public Companies and Regulations Governing Information to be Published in Public Offering and Issuance Prospectuses have been amended in order to strengthen measures relating to compensation and risks for directors, supervisors, general managers, and deputy general managers, enhance the transparency of information disclosure in private placements of securities, and provide greater consistency between the regulations governing the preparation of financial reports by securities issuers and those governing preparation of annual reports.

‧Internal control and auditing systems strengthened at public companies

To strengthen internal controls and implement internal auditing procedures, while meeting international practice standards, on December 19, 2005, the FSC issued the Regulations for the Establishment of Internal Control Systems by Public Companies.

II. Market Wrap-up

As of the end of December, 691 companies were listed on the Taiwan Stock Exchange, same as the previous month. The total capital issued was NT$5,415.96 billion, an increase of NT$11.09 billion over the preceding month, and the market capitalization was NT$15,633.86 billion, an increase of NT$870.26 billion over the preceding month.

As of the end of December, 503 companies were listed on the GreTai Securities Market, an increase of two against the previous month. The total capital issued was NT$643.18 billion, an increase of NT$0.74 billion against the preceding month, and the market capitalization was NT$1,312.46 billion, an increase of NT$203.56 billion against the previous month.

In December, the trading value of shares on the Taiwan Stock Exchange was NT$2,460.95 billion, an increase of NT$709.75 billion over the previous month, while the trading volume was NT$75.81 billion, an increase of 21.61 billion shares compared with the previous month.

As of the end of December, the accumulated net inward remittance of foreign investors was US$108.92 billion, an increase of US$8.53billion over November. There are currently 143 securities firms, 23 futures commission merchants, 45 securities investment trust enterprises and 213 securities investment consulting enterprises.


1. Investment quotas for foreign investors

Under the newly amended Regulations Governing Investment in Securities by Overseas Chinese and Foreign Investors, foreign investors are divided into two categories: foreign institutional investors (FINIs) and foreign individual investors (FIDIs). While FIDIs are subject to a US$5 million investment quota, FINIs are free of an upper limit on investment. However, in a few specific industries foreign investors are still subject to investment ceilings under relevant acts or regulations.

2. Investment scope for foreign investors

The scope of investment in Taiwan securities markets open to foreign investors is as follows:

Stocks and bond conversion entitlement certificates of listed/GTSM companies.
Listed/GTSM beneficiary certificates.
Government bonds, financial bonds (including subordinated financial bonds), straight corporate bonds, and convertible bonds.
Funds that have been duly and timely remitted into Taiwan for the purchase of domestic securities and that have not yet been invested may be used as follows (with the total value of such use not to exceed 30 percent of the amount remitted in, except in the case of outright bond trading):
(a) Investment in government bonds, time deposits, and money market instruments; trading of futures contracts and TAIEX options contracts for hedging purposes.
(b) Investments in NT dollar time deposits shall be limited to a duration of three months, with a one-time extension of three months allowed at expiration.
(c) Investments in money market instruments, limited to bills within 90 days of expiration.
Taiwan Depositary Receipts.
Open-ended beneficiary certificates.
Underwritten stocks of listed companies in secondary public offerings.
Underwritten stocks in IPOs prior to initial listing and underwritten stocks in rights offerings.
Underwritten stocks in IPOs prior to initial GTSM listing and underwritten GTSM stocks in rights offerings.
Beneficiary certificates prior to initial listing.
Call/put warrants.
NT dollar bonds issued in Taiwan by international financial organizations.
Preferred shares issued by listed/GTSM companies.
GTSM Emerging Stocks.

3. Requirements concerning the outward remittance of investment principal, capital gains, and other investment gains by foreign investors

After receiving permission to invest in Taiwan, foreign investors may apply to remit investment capital and investment earnings out of the ROC. However, outward remittances of capital gains and stock dividends may be made from realized earnings only.
Applications for foreign exchange remittance for investment capital and earnings shall be handled in accordance with the Act for the Regulation of Foreign Exchange (under the purview of the Central Bank).
When a foreign investor intends to repatriate investment earnings, the investor's agent or representative shall submit documents evidencing the filing of a tax return and payment of taxes by an agent/representative approved by the tax authorities and carry out exchange settlement in accordance with the Act for the Regulation of Foreign Exchange; however, during a period when assessment of ROC income tax on capital gains from securities transactions is suspended, the agent or representative may submit a tax clearance certificate from the tax authorities and carry out exchange settlement in accordance with the Act for the Regulation of Foreign Exchange.

4. Exercising shareholder's rights or creditor's rights of foreign investors

When an offshore foreign institutional investor holds more than 300,000 shares (including 300,000 shares) in a listed or GTSM company in Taiwan, its designated domestic agent or representative, may under the authorization of the offshore foreign institutional investor, to appoint a person other than the designated domestic agent or representative to attend the shareholders meeting and exercise the voting rights; such attendance shall be viewed as attendance of itself. Offshore foreign institutional investors may not give proxies to a proxy solicitor or proxy agent.

5. Restrictions on investment in money market instruments for foreign investors

The government's opening of Taiwan’s securities market to foreign investors is primarily oriented toward drawing investment into securities on the centralized exchange market. Investing in money market instruments is purely for short-term cash management needs. The cap of 30 percent should be sufficient for this purpose. Therefore, currently there are no plans to raise the ceiling.

6. Prefunding Issues in Taiwan

Domestic financial institutions in Taiwan since 4 May 2004 have been allowed to provide intraday credit to foreign investors to assist foreign investors who, due to time differences, are unable to make timely remittance of funds to complete settlement.
In the past, Taiwan's securities market imposed severe penalties for settlement default (a 3-year ban from trading). To avoid fail trade, some securities firms instituted their own requirement on foreign investors to provide settlement funds in advance (i.e., prefunding) when they place an order, causing inconvenience to foreign investors. A late settlement system has therefore been adopted for foreign investors, under certain circumstances, to postpone settlement until 6 p.m. of the third business day after the date of the trade, and extending the deadline for securities firms to report default by foreign investors to the third business day after the date of the trade. Besides, the TSEC has amended Article 76 of the Operating Rules of the Taiwan Stock Exchange Corporation on August 1, 2005, repealing the provision that an investor may not open an account and engage in trading for a period of three years after a conclusive finding of settlement default.
The amendment of “ Securities and Exchange Act” has been promulgated so securities firms will be permitted to engage in Securities lending and borrowing operations in the future.
7. Disclosure of the investment positions of foreign investors

The FSC does not disclose investment information of individual foreign investors, but foreign investors are nevertheless obligated to comply with reporting requirements.

8. Locking period of stocks

The trading of stocks held by foreign investors is not subject to a "locking period".

9. Off-exchange transactions

Article 150 of the Securities and Exchange Act provides that trading of listed securities shall be conducted on a centralized securities trading market operated by a stock exchange. However, paragraph 4 of the same Article empowers the Competent Authority to make provisions for permitting off-exchange transactions in exceptional situations. For example, a foreign investor who has received approval from the Investment Commission of the Ministry of Economic Affairs under the Act Governing Investment by Foreign Nationals to transfer assets to another foreign investor may do so through off-exchange trading. Many foreign investors have invested in Taiwan stocks through such off-exchange channels over the years.
Under current law, securities listed on the GreTai Securities Market (GTSM) can be traded off-market. But, in those cases of securities for which the relevant authorities have duly set a foreign investment ceiling in accordance with law, foreign investors (who must have obtained approval or registration in accordance with the Regulations Governing Securities Investment by Overseas Chinese and Foreign Investors) are required to trade such securities through the GTSM trading system. However, only a very few OTC stocks are subject to this requirement. Most GTSM stocks can also be traded by foreign investors via price negotiation at the business places of securities firms.
After each market close, the TSEC also provides auction and tender offer systems in which securities prices are negotiable to satisfy various investors’ demands.
10. Foreign ownership restrictions

Taiwan lifted limits on total/individual foreign shareholding in public companies from 30 December 2000. Applicable acts and regulations may in a few instances limit the percentage of equity holdings by foreign nationals in companies in certain industries (such as posts, telecommunications, and shipping) to meet policy needs related to national interests in the economic, social, or cultural spheres. Most developed countries have similar policies, and the practice in Taiwan is in line with FTSE developed-market standards.

11. Odd-lot trading

In the past, offshore foreign investors were permitted to sell stocks in odd lots, but not to buy them. To meet the varied trading and investment demands of foreign investors, the FSC announced on 22 July 2005 that offshore foreign investors are also permitted to buy odd lots.

12. Permission for asset transfers between offshore foreign investors with different ID numbers but where the final beneficiary is the same person

A foreign investor may open multiple depositary accounts in Taiwan, as long as each account bears the same investor registration number. Assets may be transferred freely between such accounts, without the need for a buy-sell process.
The FSC further announced that transferring of assets accounts involved belonging to the same final beneficiary legal entity and there is no violation of off-exchange trading rules. Moreover, the FSC has eased rules relating to signing documents by a great number of final beneficiaries.

13. Evaluation of the MSCI revision of the Limited Investability Factor

Morgan Stanley Capital International (MSCI) raised the Limited Investability Factor (LIF) applied to the MSCI Taiwan Index to 1 from the former 0.75 effective after market close on 31 May. This adjustment has raised the international standing of Taiwan's securities market and pushed Taiwan into the top spot in the MSCI Emerging Markets (EM) Index, and has helped to boost investor interest in Taiwan stocks, attract a stronger influx of foreign capital, and enliven and expand Taiwan's securities markets.

14. Developments related to Taiwan's FTSE status

In its list of country classifications announced in September 2004, the FTSE Group upgraded Taiwan and South Korea from its Provisional Watch List for Developed Markets to its Watch List for Developed Markets. In response, the FSC formed a special working group in November 2004 to study and launch further market reforms in Taiwan, and held an overseas roadshow in Hong Kong, Singapore, London, New York, Boston, London, and Edinburgh in May 2005.
To support an upgrade of Taiwan's securities market to Developed Market status, the FSC has launched a series of improvements aimed at further deregulating and internationalizing the market. For example: introducing a settlement grace period mechanism for foreign investors, easing requirements for foreign investor participation in the securities borrowing and lending system, streamlining the foreign investor registration system, simplifying asset transfers between foreign investors with different ID numbers, and relaxing off-exchange trading systems.
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