GAME CHANGER
Foreigners hail ease and transparency of Myanmar’s new Companies Law but some local firms fear takeovers.
Myanmar’s new Companies Law has come into force amid widespread acclaim. It will eliminate layers of bureaucracy and streamline the company registration process, which will also offer greater investment opportunities for foreign businesses.
Foreign investors will also be permitted to trade on the fledgling Yangon Stock Exchange (YSX), but officials have cautioned that this could take more time to develop fully.
“It’s a game changer,” said Aung Naing Oo, the director-general of the Directorate of Investment and Company Administration (Dica).
“It will support the momentum of economic growth and provide a major impetus for foreign investment by making it much easier for foreign investors,” he told Asia Focus.
One provision of the law allows foreign investors to buy up to a 35% stake in local companies, opening up enormous potential. “More foreign investment is likely to be attracted as international investors will be able to consider alternative financial deals, and not be restricted to forming joint ventures,” said Maung Maung Lay, vice-president of the Union of Myanmar Federation of Chambers of Commerce and Industry (UMFCCI).
But local businessmen are less enthusiastic about this provision because they fear it will effectively encourage the “takeover” of local companies, he admitted. However, the new law will encourage the transfer of desperately needed expertise and technology, he added.
Passed by Parliament in November last year, the new law replaces the colonial-era Myanmar Companies Act of 1914 and adopts elements of the 1950 Special Companies Act. It will govern the registration, ownership, management and internal affairs of all companies in the country.
Registration and regulations have all been simplified and the bureaucracy involved streamlined. “Everything is being done online: it’s a clear and simple process that significantly reduces the regulatory burden and compliance costs on companies,” said Aung Naing Oo. It also introduces a level playing field for both local and foreign businesses.
According to Dica, more than 50,000 local companies and 7,000 foreign companies are currently registered in Myanmar.
All companies have to re-register using the Myanmar Companies Online (MyCO) electronic register. They have six months to do so or face being fined and eventually struck off the register. Once registered online, however, they will not have to re-register every five years as in the past.
Companies can also file their annual reports and tax returns electronically — they will no longer have to submit physical copies of their original documents. The ability to easily and readily access online documents is an effective way of ensuring greater transparency.
“This is a positive step in the eyes of international investors as there will be more reliable information available,” said Vicky Bowman, director of the Myanmar Centre for Responsible Business. “The actual law is a solid law, a well-drafted and well-translated law.”
The real challenge, she said, is whether the law is effectively implemented and enforced, and the ability of companies to live up to the ambitions of the law.
“It’s the weakness of corporate governance in Myanmar generally,” she said, noting for example that the quality of audits is poor among the very few firms that submit them.
Pressure to improve the reliability of information submitted online will come from the market — inaccurate information will lead investors to put their money elsewhere. Foreigners in particular will be looking for well-managed companies to invest in.
Under the new law, investors no longer need to submit memoranda and articles of association. In the past, company owners had to specify the purpose of their company. Now they only need to have a constitution.
Smaller foreign investors will like a provision that does away with the requirement for a minimum of two shareholders and two directors, Ola Nicolai Borge, a Norwegian lawyer and business consultant who has been based in Myanmar for many years, told Asia Focus.
Under the law, a company with a foreign stake of up to 35% will still be considered local, meaning it can own land. This change is very welcome, he said. Foreigners will now be able to invest in companies that own land or engage in imports and distribution. “This was previously not possible and has indeed been a show-stopper for many investments,” said Mr Borge.
Many sectors previously off-limits to foreigners are now open. They include general trading, banking and insurance. The 35% limit applies, with investments in banks, the financial sector or insurers subject to Myanmar Central Bank approval.
In the past, foreign investors had to apply for a “permit to trade” after they registered a company. This has been abolished.
But Mr Borge and others are not sure whether the reforms will make investing in the local stock market more attractive. The YSX has only five companies listed, two years after it opened. Neville Daw, leader of the Special Task Force on the YSX, acknowledges that it could be a while before the bourse starts to see some of the benefits.
“I’m afraid that as far as foreign investors on the YSX are concerned, it is unlikely to have any impact before October at the earliest as the infrastructure needs to be put into place,” he said.
“For the larger frontier investment funds, it is likely that the infrastructure such as the processes will not be in place until the first quester of 2019.
“We need this time to make a healthy platform from which foreign investment can participate and so create real benefits for the Myanmar capital markets.”
Myanmar desperately needs increased foreign investment: In April and May, the first two months of the current fiscal year, foreign direct investment was only US$200 million compared with $700 million in the same period last year, said Aung Naing Oo. Most of it came from Asean, China, Korea, Japan and Hong Kong. Singapore topped the table, though much of that investment originated in China.
Another reform now being considered could enhance the country’s attractiveness, according to Ms Bowman.
“The intellectual property law, which is in the pipeline and hopefully will soon be approved by parliament, will be another important step,” she said.
“It’s one more area of opportunity against the background of the wider investment climate: lack of clear policy, (electrical) power, infrastructure. It won’t fix all the problems by any means but it opens up more opportunities for foreign investors.”
“Everything is being done online: it’s a clear and simple process that significantly reduces the regulatory burden and compliance costs on companies” AUNG NAING OO Directorate of Investment and Company Administration