1 A. FOREIGN INVESTMENT REGULATIONS Regulation Policies and Laws Regulation Policies and Laws...

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A. FOREIGN INVESTMENT A. FOREIGN INVESTMENT REGULATIONSREGULATIONS

Regulation Policies and LawsRegulation Policies and Laws • Reasonably consistent worldwide.Reasonably consistent worldwide.• CaveatCaveat: In some counties practice is not : In some counties practice is not

consistent with stated policy or law.consistent with stated policy or law.

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Typical Foreign Investment Typical Foreign Investment RegulationsRegulations • Regulations authorizing and Regulations authorizing and

encouraging foreigners to invest encouraging foreigners to invest locallylocally. .

Foreign investment guarantees are Foreign investment guarantees are commonplacecommonplace

• Regulations defining the business Regulations defining the business form a foreign firm must takeform a foreign firm must take. .

Most regulations encourage a business form Most regulations encourage a business form that allows for local participation, such as that allows for local participation, such as publicly traded stock companies.publicly traded stock companies.

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• Regulations limiting foreign equity Regulations limiting foreign equity investmentinvestment: :

Many states limit the percentage of equity Many states limit the percentage of equity that foreigners may own in a local firm.that foreigners may own in a local firm.

• Regulations to oversee the local Regulations to oversee the local activities of foreign investorsactivities of foreign investors. .

These commonly impose liability on foreign These commonly impose liability on foreign owners for obligations of local subsidiaries.owners for obligations of local subsidiaries.

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• Regulations restricting and Regulations restricting and promoting the economic sectors promoting the economic sectors foreigners may invest inforeigners may invest in..

• Regulations restricting and Regulations restricting and promoting the geographical areas promoting the geographical areas foreigners may invest inforeigners may invest in..

• Regulations establishing procedures Regulations establishing procedures for making debt and equity for making debt and equity investmentsinvestments..

Known as “Securities Regulations.”Known as “Securities Regulations.”

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B. SECTORAL INVESTMENT B. SECTORAL INVESTMENT REGULATIONSREGULATIONS

Sectoral Regulations Sectoral Regulations limit or limit or encourage investments in particular encourage investments in particular economic sectors. economic sectors. • Closed sectorsClosed sectors: Foreigners are often : Foreigners are often

forbidden from investing in sectors that forbidden from investing in sectors that host governments consider important to host governments consider important to their national independence and their national independence and security.security.

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B. SECTORAL INVESTMENT B. SECTORAL INVESTMENT REGULATIONSREGULATIONS

• Restricted sectorsRestricted sectors: The percentage of : The percentage of foreign investment allowed in certain foreign investment allowed in certain economic sectors is limited by many economic sectors is limited by many countries.countries.

• Foreign priority sectorsForeign priority sectors: : Foreigners are encouraged (in many Foreigners are encouraged (in many

countries) to invest in sectors where: countries) to invest in sectors where: • Local development resources are limited.Local development resources are limited.• Where foreign investment will increase the Where foreign investment will increase the

number of local jobs.number of local jobs.• Where the foreign export trade will grow.Where the foreign export trade will grow.

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C. GEOGRAPHIC INVESTMENT C. GEOGRAPHIC INVESTMENT REGULATIONSREGULATIONS

Geographic RegulationsGeographic Regulations commonly establish Free Zones commonly establish Free Zones • A A Free ZoneFree Zone is a geographical area to is a geographical area to

which goods may be imported and which goods may be imported and exported free from customs tariffs and exported free from customs tariffs and in which a variety of trade-related in which a variety of trade-related activities may be carried on.activities may be carried on.

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• Free zones categorized by their Free zones categorized by their sizesize: :

Free Trade AreasFree Trade Areas: geographical areas : geographical areas made up of two or more states that made up of two or more states that have agreed to let some or all of each have agreed to let some or all of each others enterprises carry on their trade others enterprises carry on their trade across and within each state's borders across and within each state's borders free from customs tariffs and other free from customs tariffs and other restrictions. restrictions.

• Examples: NAFTA and the EU.Examples: NAFTA and the EU.

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StatesStates may open their entire territory or may open their entire territory or some part of it to international trade. some part of it to international trade.

• Example of a state that has opened its entire Example of a state that has opened its entire territory: Singapore.territory: Singapore.

• Example of regional free zones: China's Special Example of regional free zones: China's Special Economic Zones.Economic Zones.

Free CitiesFree Cities (or free ports) are cities that are (or free ports) are cities that are open to international trade.open to international trade.

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Free Trade ZoneFree Trade Zone (or foreign trade zone in (or foreign trade zone in the US) is an area within a city or near a city the US) is an area within a city or near a city that is open to international trade. that is open to international trade.

• Subzones are special-purpose free trade areas Subzones are special-purpose free trade areas near a free trade zone.near a free trade zone.

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• Free zones categorized by activitiesFree zones categorized by activities Export Processing ZonesExport Processing Zones are zones in are zones in

which manufacturing facilities process raw which manufacturing facilities process raw materials or assemble parts from abroad, materials or assemble parts from abroad, then re-export the finished product. then re-export the finished product.

• Materials and parts brought into these zones are Materials and parts brought into these zones are not subject to local customs laws.not subject to local customs laws.

• Example: Mexico's Maquiladora program.Example: Mexico's Maquiladora program.

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Free Retail ZonesFree Retail Zones in international airports in international airports and harbors and near some border and harbors and near some border crossings.crossings.

Bonded WarehousesBonded Warehouses are places where are places where shippers can store goods between the time shippers can store goods between the time of their arrival from overseas to the time of their arrival from overseas to the time they clear customs and are taken away by they clear customs and are taken away by importers. importers.

• Found at the ports of entry of most countries.Found at the ports of entry of most countries.• Privately owned and operated by transportation Privately owned and operated by transportation

firms.firms.

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D. SECURITIES D. SECURITIES REGULATIONSREGULATIONS

SecuritiesSecurities are investment contracts. are investment contracts. • Investment contractsInvestment contracts are are

agreements, transactions, or schemes agreements, transactions, or schemes whereby a person invests his money in a whereby a person invests his money in a common enterprise and is led to expect common enterprise and is led to expect profits profits principally principally from the efforts of from the efforts of some other person. some other person.

Stocks (equity securities) and bonds (debt Stocks (equity securities) and bonds (debt securities) are the most common examples securities) are the most common examples of securities.of securities.

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Form of SecuritiesForm of Securities: : • Certificated SecurityCertificated Security is a paper instrument is a paper instrument

representing an investment contract of the “type representing an investment contract of the “type commonly dealt in on securities exchanges.”commonly dealt in on securities exchanges.”

• Uncertificated SecurityUncertificated Security is an investment is an investment contract whose ownership is only recorded on the contract whose ownership is only recorded on the books of the issuer.books of the issuer.

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Trading of SecuritiesTrading of Securities • Most countries limit the persons who Most countries limit the persons who

may publicly trade in securitiesmay publicly trade in securities Typically they are brokers who have Typically they are brokers who have

registered with a Securities Commission or a registered with a Securities Commission or a securities exchange.securities exchange.

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D. SECURITIES REGULATIONSD. SECURITIES REGULATIONS

• Securities ExchangesSecurities Exchanges are are marketplaces where member brokers marketplaces where member brokers buy and sell securities on behalf of buy and sell securities on behalf of investors.investors.

The six largest exchanges (New York, The six largest exchanges (New York, NASDAQ, Tokyo, London, Frankfurt and NASDAQ, Tokyo, London, Frankfurt and Paris) account for 90 percent of all securities Paris) account for 90 percent of all securities transactions in the world.transactions in the world.

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Issuance of SecuritiesIssuance of Securities • Securities laws require securities issuers Securities laws require securities issuers

who offer securities to the general public who offer securities to the general public to prepare and register a prospectus to prepare and register a prospectus which they must then make available to which they must then make available to buyers. buyers.

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• ProspectusProspectus: a printed statement : a printed statement setting out a full, true, and plain setting out a full, true, and plain language disclosure of all material facts language disclosure of all material facts relating to the security and the issuer. relating to the security and the issuer.

Must be audited (in most cases).Must be audited (in most cases).

Must be signed by officers and directors of Must be signed by officers and directors of the issuing corporation. the issuing corporation.

• They certify that the prospectus is true and They certify that the prospectus is true and complete to the best of their knowledge.complete to the best of their knowledge.

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Prospectus must be registered with a state's Prospectus must be registered with a state's Securities Commission or (in some Securities Commission or (in some countries) a Securities Exchange. countries) a Securities Exchange.

• Not required if the issuer is a government body, a Not required if the issuer is a government body, a bank, or a non-profit company.bank, or a non-profit company.

• Not required if offer is made to a very limited Not required if offer is made to a very limited number of potential buyers.number of potential buyers.

• May be a simplified prospectus if the number of May be a simplified prospectus if the number of buyers or the monetary amount is limited.buyers or the monetary amount is limited.

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Foreign companies may offer securities if Foreign companies may offer securities if they comply with the prospectus they comply with the prospectus requirements.requirements.

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Clearance and Settlement Clearance and Settlement ProceduresProcedures allow the buyer to pay the allow the buyer to pay the price and the seller to deliver the security price and the seller to deliver the security certificatecertificate..

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• Domestic clearance and settlement Domestic clearance and settlement proceduresprocedures. .

In the United States: In the United States: • Settlement is handled by the National Securities Clearing Settlement is handled by the National Securities Clearing

Corporation (NSCC).Corporation (NSCC).• If buyer does not need a certificate, the recording of If buyer does not need a certificate, the recording of

ownership transfers is handled by the Depository Trust ownership transfers is handled by the Depository Trust Company (DTC).Company (DTC).

Most developed countries follow a similar Most developed countries follow a similar procedure.procedure.

In developing countries the buyers and sellers In developing countries the buyers and sellers actually meet to exchange money for certificates. actually meet to exchange money for certificates.

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• International clearance and International clearance and settlement proceduressettlement procedures. .

Two clearinghouses handle most Two clearinghouses handle most international clearance and settlement international clearance and settlement transactions: transactions:

• EuroclearEuroclear in Brussels handles $125 billion in in Brussels handles $125 billion in daily transactionsdaily transactions

• Cedel BankCedel Bank in Luxembourg handles $60 billion in in Luxembourg handles $60 billion in daily transactionsdaily transactions

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Depository Receipts Depository Receipts are used by are used by clearinghouses to facilitate international clearinghouses to facilitate international trade in securities. trade in securities.

• Depository Receipts Depository Receipts are issued by a bank or are issued by a bank or clearinghouse as a substitute for securities.clearinghouse as a substitute for securities.

• How they are created (an example): How they are created (an example): Company X stocks are deposited in a Country Company X stocks are deposited in a Country

X bank in the name of Cedel Bank.X bank in the name of Cedel Bank. Cedel Bank then issues Receipts which are Cedel Bank then issues Receipts which are

traded as substitutes for the securities.traded as substitutes for the securities.DepositoryReceipt

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• American Depository ReceiptsAmerican Depository Receipts (ADRs) are issued (ADRs) are issued by a US bank.by a US bank.

• Advantages of Depository ReceiptsAdvantages of Depository Receipts: : The physical delivery requirements of many small The physical delivery requirements of many small

exchanges is avoided by trading the receipt on exchanges is avoided by trading the receipt on one of the large exchanges.one of the large exchanges.

Security transfer taxes imposed by some home Security transfer taxes imposed by some home states can be avoided since the security itself states can be avoided since the security itself remains registered in the name of the depository remains registered in the name of the depository bank.bank.

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D. SECURITIES REGULATIONSD. SECURITIES REGULATIONS

Takeover RegulationsTakeover Regulations• Countries with an active Countries with an active

acquisitions marketacquisitions market (UK and US) (UK and US) directly regulate the takeover process. directly regulate the takeover process.

US: US: Williams ActWilliams Act of 1968. of 1968. UK: UK: City Code on Takeovers and MergersCity Code on Takeovers and Mergers..

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• Countries without takeover Countries without takeover regulationsregulations are generally biased are generally biased against foreign acquisitions, mergers, against foreign acquisitions, mergers, and takeovers. and takeovers.

Common barriers to takeover attempts Common barriers to takeover attempts include: include:

• Restrictions on share transferability.Restrictions on share transferability.• Cross-ownership of shares.Cross-ownership of shares.• Restrictions on the voting rights of publicly held Restrictions on the voting rights of publicly held

shares.shares.

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Insider Trading RegulationsInsider Trading Regulations• Insider tradingInsider trading is using material is using material

nonpublic information about a corporation nonpublic information about a corporation to buy or sell securities for personal gain. to buy or sell securities for personal gain.

Outlawed in the US by the Section 10(b) of the Outlawed in the US by the Section 10(b) of the Securities Exchange ActSecurities Exchange Act of 1934 and Rule of 1934 and Rule 10b-5 issued by the Securities and Exchange 10b-5 issued by the Securities and Exchange Commission. Commission.

Outlawed in the UK by the Outlawed in the UK by the Company Company Securities (Insider Dealing) ActSecurities (Insider Dealing) Act of 1985. of 1985.

Outlawed in Japan, Germany, and France by Outlawed in Japan, Germany, and France by similar laws.similar laws.

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E. ENFORCEMENT OF E. ENFORCEMENT OF SECURITIES REGULATIONSSECURITIES REGULATIONS

Cooperative arrangementsCooperative arrangements: : • Memorandums of Understanding Memorandums of Understanding

(MOUs) between Securities Commissions in (MOUs) between Securities Commissions in developed countries provide for the developed countries provide for the exchange of information and mutual exchange of information and mutual cooperation in the investigation of cooperation in the investigation of securities violations.securities violations.

• Council of Europe's Council of Europe's Convention on Insider Convention on Insider Trading Trading provides for similar information provides for similar information exchanges and investigative cooperationexchanges and investigative cooperation

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E. ENFORCEMENT OF E. ENFORCEMENT OF SECURITIES REGULATIONSSECURITIES REGULATIONS

Extraterritorial Application of Extraterritorial Application of Securities Laws Securities Laws • The country most willing to apply its The country most willing to apply its

securities regulations internationally is securities regulations internationally is the US. the US.

Jurisdictional requirements: minimum Jurisdictional requirements: minimum contacts.contacts.

1 A. FOREIGN INVESTMENT REGULATIONS Regulation Policies and Laws Regulation Policies and Laws...

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