Last week’s article (“Still too early for private equity firms”), analysed one of the most controversial aspects of the Myanmar legal system: Foreigners cannot acquire shares in local companies and as a result locals are not allowed to transfer shares to foreigners in a 100 percent locally owned entity.
We also suggested that it would be very important for the national economy to remove this restriction and allow foreign investors to inject capital in existing small and medium companies.
Now, the new Myanmar Citizens Investment Law (MCIL) has been enacted. It is intended to provide local businesspeople and companies with benefits and rules similar to those already provided to foreign investors. Among other provisions, locals can benefit from five years of tax exemptions on income tax, protection against nationalisation and remittance of foreign currency overseas.
In other words, this law has been drafted on the basis of the Foreign Investment Law (FIL) with certain amendments to provide Myanmar citizens with benefits in order to operate on competitive terms and conditions against foreigners.
However, among all these provisions which have been positively accepted by local businessmen there are few words that truly intrigue me. Article 16, item e, can be translated as follows: “[the investor is] entitled to transfer and sell some portion of his shares or all shares to any foreigner or to any foreign company in accord with the Foreign Investment Law. This wording is exactly what I was hoping to see one week ago.
According to Article 16, item e, a local businessperson has the right to transfer part of or all his or her shares in a company to “foreigners” with the prior consent of the Myanmar Investment Commission. The commission apparently will be the same authority to handle investment under the umbrella of the Foreign Investment Law.
Given that the MCIL has been enacted so recently, is totally untested and some inputs are expected over the next months (ie more rules and regulations will be issued in due course to integrate missing provisions), it may be too early to state that locals can now freely transfer shares to foreigners with approval of the MIC. However, on a speculative basis and with the relevant precautions, we can make some considerations.
A foreign investor willing to inject capital in an existing business that is 100pc locally owned, as we have seen, was prevented from doing so before the MCIL. However, relying on the theoretical interpretation of Article 16, local businesspeople can potentially apply for an investment permit “upgrading” the company to a Myanmar Citizen Investment company and propose to MIC that part of the investment shall include the transfer of shares to a foreign individual/company in exchange of certain assets (ie capitals, know-how, patents).
In such a case, ideally as soon as the transfer of shares has taken place, the same company shall automatically fall under the umbrella of the Foreign Investment Law – given the fact that there would be a new foreign shareholder.
From a practical perspective, this shift from the MCIL to the FIL should not cause any issue given that the Myanmar Investment Commission is the only option (no matter whether a company is under the umbrella of the MCIL or FIL) and it will have the opportunity to monitor the implementation of the investment plan any time.
Unfortunately, as mentioned above, we can only discuss on a speculative basis as the actual magnitude of Article 16 of the MCIL is unclear.
It may be interpreted in an extensive way (allowing transfer of shares) or, vice versa, ignored. However, I am very confident that it will be only a matter of time before the Myanmar legal system will be aligned with other jurisdictions in the region.