Newsletter No: 016
October 1, 2005
|I. News and Events |
(1) Fair valuation mechanisms enhanced for securities investment trust funds
To enhance fair valuation mechanisms for securities investment trust funds managed by Taiwan's securities investment trust enterprises, the Financial Supervisory Commission has issued an order on 24 August 2005 stating that upon the occurrence of a trading holiday in a country where a fund's investment reaches a certain percentage threshold or public holidays in the main countries where a fund is invested, the calculation of the fund's net asset value shall be suspended and the trading of the fund shall be also suspended.
(2) Stock-index-linked futures trading costs reduced
To invigorate the futures market by lowering trading costs to futures traders, the Taiwan Futures Exchange, under the guidance of the Financial Supervisory Commission, has taken measures to reduce margin requirements for after-market long-short portfolios of stock-index-linked futures contracts effective from 29 August 2005.
(3) Penalty eased for settlement default by foreign investors
In response to the concerns of foreign investors, the Financial Supervisory Commission initiated amendments to lift the former rule subjecting foreign investors who defaulted on settlement obligations to a three-year trading ban. Effective from 1 August 2005, when a settlement default occurs, a customer's trading account and privileges will be reinstated once the customer has settled the debt completely and the securities broker has notified the Stock Exchange or GreTai Securities Market（GTSM） to close the case. The three-year ban no longer applies.
II. Market Wrap-up
As of the end of August, 697 companies were listed on the Taiwan Stock Exchange, an increase of two compared to the previous month. The total capital issued was NT$5,346.98 billion, an increase of NT$152.61 billion over the preceding month, and the market capitalization was NT$14,205.76 billion, a decrease of NT$457.78 billion over the preceding month.
As of the end of August, 498 companies were listed on the GreTai Securities Market, an increase of one against the previous month. The total capital issued was NT$649.93 billion, a decrease of NT$20.95 billion against the preceding month, and the market capitalization was NT$1,129.11 billion, a decrease of NT$251.72 billion against the previous month.
In August, the trading value of shares on the Taiwan Stock Exchange wasNT$1,726.64 billion, a decrease of NT$158.66 billion over the previous month, while the trading volume was NT$55.57 billion, a decrease of 11.74 billion shares compared with the previous month.
As of the end of August, the accumulated net inward remittance of foreign investors was US$96.40 billion, a decrease of US$0.84 billion over July. There are currently 145 securities firms, 24 futures commission merchants, 45 securities investment trust enterprises and 219 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:
(1) Stocks and bond conversion entitlement certificates of listed/GTSM companies.
(2) Listed/GTSM beneficiary certificates.
(3) Government bonds, financial bonds (including subordinated financial bonds), straight corporate bonds, and convertible bonds.
(4) 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.
(5) Taiwan Depositary Receipts.
(6) Open-ended beneficiary certificates.
(7) Underwritten stocks of listed companies in secondary public offerings.
(8) Underwritten stocks in IPOs prior to initial listing and underwritten stocks in rights offerings.
(9) Underwritten stocks in IPOs prior to initial OTC listing and underwritten OTC stocks in rights offerings.
(10) Beneficiary certificates prior to initial listing.
(11) Call/put warrants.
(12) NT dollar bonds issued in Taiwan by international financial organizations.
(13) Preferred shares issued by listed/GTSM companies.
(14) GTSM Emerging Stocks.
3. Requirements concerning the outward remittance of investment principal, capital gains, and other investment gains by foreign investors
(1) 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.
(2) 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).
(3) 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 owns a certain number of shares (300,000 shares or more) in a listed or GTSM company in Taiwan, its voting rights may be exercised by means of appointment by the designated domestic agent or representative, as authorized by the offshore foreign institutional investor, of a person other than the designated domestic agent or representative to attend the shareholders meeting and exercise the voting rights. An offshore foreign institutional investor may not give a proxy form printed by the company 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
(1) Currently, under the Securities and Exchange Act, brokers may not lend money to investors to perform settlement for them, except in margin trading. Therefore, when a foreign investor wishes to place an order in Taiwan, the broker will usually first check to make sure that the investor has enough funds or securities in the custodian bank. When the custodian bank receives confirmation from the securities firm house that a trade has been executed, it must confirm with the foreign investor how the investor would like to settle or when the investor can deliver the funds (if there are insufficient funds). The same procedures apply to local investors. Currently, a pre-delivery system is implemented only for securities labeled "disciplinary" or “altered trading,” and this system applies equally to every investor in the Taiwan Stock Exchange. Since the Taiwan Stock Exchange does not require investors to deposit margins when placing orders, this system is a way to reduce the risk of default.
(2) Earmarking of securities or cash via the local custodian bank or the Taiwan Securities Central Depository's system is for reference purposes only. These two institutions do not have any legal obligation to keep securities or cash for settlement purposes. Therefore, this procedure does not reduce settlement risk.
(3) In addition, effective from May 2004, the Government now allows local financial institutions to offer foreign investors intra-day finance / credit advances to bridge delays in settlement due to time zone differences.
(4) Taiwan's securities market imposes severe penalties for settlement default (a 3-year ban from trading), and currently no recourse mechanisms are available where settlement is delayed by force majeure in the course of normal trading. For these reasons, some securities firms themselves have required foreign investors to provide settlement funds in advance (i.e. prefunding) when they place an order, causing confusion and operational inconvenience to foreign investors. A settlement grace period has therefore been adopted for foreign investors, allowing them, under certain circumstances, to postpone settlement until 6 p.m. of the third business day after the trade date, and extending the deadline for securities firms to report default by foreign investors to the third business day after the trade date.
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
(1) 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.
(2) 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 OTC stocks can also be traded by foreign investors via price negotiation at the business places of securities firms.
(3) 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
(1) 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.
(2) The FSC further announced on 29 July 2005 that transferring of assets between depositary accounts of foreign investors with different IDs is allowed as long as the final beneficiary of the assets in each of the accounts involved is the same legal entity and there is no violation of off-exchange trading rules.
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
(1) 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.
(2) 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.
15. Penalty eased for settlement default by foreign investors
In response to the concerns of foreign investors, the Financial Supervisory Commission initiated amendments to lift the former rule subjecting foreign investors who defaulted on settlement obligations to a three-year trading ban. Effective from 1 August 2005, when a settlement default occurs, a customer's trading account and privileges will be reinstated once the customer has settled the debt completely and the securities broker has notified the Stock Exchange or GreTai Securities Market （GTSM） to close the case. The three-year ban no longer applies.
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