26 November, 2015
This alert focuses on the implications of the "moneylending exemptions" that are to be broadened in the draft regulations1 under the amendments to the Foreign Acquisitions and Takeovers Act 1975 (Act), which are scheduled to take effect from 1 December 2015.
What was the previous position?
The previous foreign investment regime did not require notification to or approval of the Foreign Investment Review Board (FIRB) in respect of interests acquired for the purposes of certain moneylending agreements in the following circumstances:
- where an interest in rural land is acquired solely to hold as security, or by way of enforcement of a security, for the purposes of a "moneylending agreement";
- where the investor (other than a foreign government investor) takes security over assets for the purposes of a "moneylending agreement"; or
- where a foreign government investor, which is regulated by the Australian Prudential Regulation Authority as an Authorised Deposit-taking Institution (ADI), takes security over an asset(s) as part of a moneylending agreement (in which case, notification and prior approval is also not required if the security is enforced and the asset(s) is sold within 12 months).
A "moneylending agreement" is an agreement entered into in good faith in the ordinary course of carrying on a business of lending money, not being an agreement dealing with any matter unrelated to the carrying on of that business, such as one that allows a degree of influence or control over the borrower, their business activities or assets (other than the usual terms for such a security).
The broadened "moneylending exemptions"
The moneylending exemptions provided in the draft new regulations, as discussed below, will make secured financing transactions involving foreign financiers lending funds and taking security over Australian assets easier as they expand the circumstances where it no longer will be necessary to notify or obtain approval from FIRB of an acquisition of foreign interests.
- The moneylending exemptions will be available to not only lenders but also their subsidiaries, holding entities, security trustees and receivers.
- Providers of financial accommodation such as bank guarantees and letters of credit may also rely on the moneylending exemptions.
- Acquisition of interests by way of enforcement of a security is clearly covered in the moneylending exemptions.
The definition of "moneylending agreement" is expanded to include, for a person carrying on a moneylending business, an agreement to acquire an interest arising from a moneylending agreement, meaning the moneylending exemptions will also apply to secondary transactions and portfolio acquisitions.
- The minimum substantial interest holding in determining foreign government investors has increased from 15% to 20%.
General moneylending exemption
Under the draft new regulations, no notification to or approval of FIRB is required for a foreign interest in securities, assets, a trust, Australian land or a mining, production or exploration tenement if the interest is not in residential land or acquired by a foreign government investor and where:
- the interest is held solely by way of security, or acquired by way of enforcement of a security held solely, for the purposes of a moneylending agreement; and
- the holder or acquirer of the interest is:
- the entity (Lender) that provided money or financial accommodation under the moneylending agreement;
- a subsidiary or holding entity of the Lender or a person who is (alone or with others) in a position to determine the investment policy of the Lender;
- a security trustee on behalf of the Lender; or
- a receiver, or a receiver and manager, appointed in relation to a person or entity referred to above.
The requirement that moneylending agreements have "ordinary commercial terms" has been added to the requirement that such agreements are "in the ordinary course of carrying on a business of lending money".
Moneylending exemption for interests in residential land
Where the interest is in residential land, the above moneylending exemption also applies if each holding entity of the entity that holds or acquires the interest (a) has at least 100 holders of securities in that holding entity, and (b) is listed for quotation in the official list of a stock exchange (whether or not in Australia), and (c) is an ADI or otherwise licensed as a financial institution.
It is currently unclear whether the moneylending exemption for residential land interests would be available for persons not having a holding entity.
Moneylending exemption for foreign government investors
Where the interest is held or acquired by a foreign government investor and is not in residential land, the foreign government investor is eligible for the above moneylending exemption if:
- the foreign government investor is an ADI or a subsidiary of an ADI and holds the interest for less than 12 months; or
- the foreign government investor is making a genuine attempt to dispose of the interest.
Accordingly, FIRB's approval is required for the holding or acquisition of any interest in residential land by a foreign government investor unless the criteria for the moneylending exemption for interests in residential land are satisfied.
In addition, it appears that a foreign government investor being an ADI or a subsidiary of an ADI may rely on the moneylending exemption in taking security over non-residential land assets while the foreign government investor is holding the security for less than 12 months. Under the previous moneylending exemptions, the mere taking of security by such a foreign government investor would not require notification to or approval of FIRB.
We understand that, consistent with the current policy, the 12 month requirement is only intended to apply with respect to an acquisition by way of enforcement of a security, so that merely taking security would not require notification or approval. Hopefully this issue will be clarified in the final draft of the new regulations.
1. A number of important aspects of the new regime will be determined by regulations, which are currently in draft form. This alert assumes that the regulations will be passed as drafted (unless otherwise expressly stated).
For further information, please contact:
Bryan Paisley, Partner, Baker & McKenzie