Since Myanmar opened its doors to the world, it has been rapidly redeveloping its legal infrastructure and creating local and foreign investment opportunities to aid the country in becoming an attractive and robust emerging market. At the forefront has been the much anticipated Yangon Stock Exchange (YSX), which is set to launch in late 2015; foreign investor protection concerns; and the highly controversial Condominium Law, which would allow foreign ownership in immovable property for the first time in a long while.
We had the opportunity to discuss the latest updates on these issues with Krishna Ramachandra who serves as the Head of the Corporate Finance and Investment Group and the Private Client Practice Group at Duane Morris & Selvam LLP, and this is what he had to say.
Conventus Law: The much anticipated YSX is set to launch in late 2015, and is to replace the existing Myanmar Securities Exchange Centre, which did not achieve the desired level of success. Do you anticipate the YSX will succeed where its predecessor failed; and if yes, why?
Duane Morris & Selvam: It is certainly a step in the right direction, but any stock exchange requires time to credentialise itself.
Shares in YSX listed companies will be competing with other avenues of investment, such as real estate and the high interest rate savings accounts in local banks. And since only Myanmar citizens will be able to buy stock on YSX, its growth may be limited1, but the risk of boom and bust should be equally limited.
In order for YSX listed companies to earn the public’s confidence, these companies must demonstrate stability, profitability, and accountability. Therefore, international standards of accounting and disclosure should be followed.
Fortunately, as compared to several neighbouring states, Myanmar has a large number of public companies (over 200) and there is potential for them to be listed in the future. This may improve the diversity of market sectors available, which provides public shareholders more choices of investment. Developing an educated investing public will also be key to the eventual depth of liquidity the YSX achieves.
Looking at the strong interest shown by international securities agencies hoping to participate in the YSX2, there should be sufficient quality advice available.
CL: Currently, it is unknown what type of companies may be allowed to list. Moreover, the actual listing requirements have yet to be announced. Without knowing either, how would you best advise a company that is anxious to list, and how can they begin making preparations?
DMS: The Myanmar government is careful to allow only ‘quality’ companies to list. These companies are likely to be large, stable, responsible, and have a good track record. This would allow a relatively low risk environment where the local population can be encouraged to take a stake in their nation’s growth. Approximately 10 companies are expected to meet the requirements, but only First Myanmar Investment, Asia Green Development Bank, and Myanmar Agri-business Public Company (MAPCO) have announced their intention to list.
The listing rules and regulations are final and should be approved by the President’s Office soon.
As lawyers representing First Myanmar Investment in their endeavour to list, we are keenly aware of best practices as well as pitfalls that companies intending to list in Myanmar should avoid.
CL: Current listing requirements in most large stock exchanges require a great deal of disclosures, warranting 300+ pages of listing documents and significantly increased legal and staffing expenses. Do you anticipate the listing and disclosure requirements to be more relaxed in the beginning to entice more companies to list on the YSX?
DMS: The listing rules were drafted over a year by Myanmar government bodies, state-owned corporations and the Japanese Ministry of Finance in order to ensure the same level of disclosure practiced by first world jurisdictions.
The rules attempt to avoid unnecessary complexity, perhaps to better familiarise both corporate and individual participants with what is required, but regulatory standards have not been relaxed.
Simpler rules will not directly entice more companies to list, as our experience suggests that foreign legal experts are likely to be required to assist with this process.
CL: It can be said that Myanmar is both on the fast and slow track. It is on the fast track to creating comprehensive legal reforms and enacting new laws to aid in its country’s growth. On the other hand, it’s on the slow track in developing the necessary infrastructure and training to support the new legal regime. As a result there are concerns that Myanmar is putting the “cart before the horse.” With this concern in mind, how can a foreign investor, whose country has a bilateral investment treaty with Myanmar, best protect themselves in the event of a lawsuit?
DMS: Foreign investors should be well aware, or made aware of all relevant challenges and difficulties before jumping in.
There are only five bilateral investment treaties involving Myanmar in force (China, India, Japan, Philippines, and Thailand), but Myanmar is also bound by ASEAN investment agreements. Each of these agreements have differing dispute resolution mechanisms, and investors have to be advised of the relevant procedures under the relevant treaty.
Apart from treaty protections, foreign investments made under the Foreign Investment Law can be subject to dispute resolution via international arbitration if the relevant contract provides so.
However, the keystone would be the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”). The New York Convention came into force for Myanmar on 15 July 2013. The New York Convention will require Myanmar’s courts to recognise and enforce foreign arbitral awards, as well as recognise the agreements of parties to privately contract for the resolution of commercial disputes through agreed arbitration mechanisms.
The May 2014 draft Arbitration Bill intends to give effect to the New York Convention, but until it is enacted, it may be difficult to enforce arbitral awards independent of investment treaties.
The Myanmar-Japan Bilateral Investment Treaty is the first investment treaty to be negotiated and signed by the new civilian government. It allows qualifying investors a choice between the ICSID Additional Facility Rules, or the UNCITRAL Rules, and may suggest the current stance of the Myanmar government.
CL: The highly controversial condominium law has been the subject of much political debate, and the latest draft of it is set to be revisited this year by Parliament, with the hopes of it passing. What are some of the highlights of the bill that you can share with us?
DMS: It has been a long time since foreigners have been allowed to have legal ownership in immovable property.
As reported, the condominium law intends to allow foreigners to own apartments above the 6th floor, with a maximum 40% of a single building to be held by foreigners, granting strata title to owners of units in registered condominiums, and creating perpetual ownership by unit owners in the land.
The draft law requires at least 1 acre of land for subdivided property to be considered a condominium. This means that most apartment buildings in Yangon will technically not be considered condominiums.
CL: If it is passed in its current form, what concerns remain for foreigners interested in investing in condos in Myanmar?
DMS: The condominium law would circumvent Section 4 of the Transfer of Immovable Property Restriction Law of 1987, which prevents foreigners from acquiring interests in immovable property.
However, the granting of strata title is just the first step. The next concern would be whether foreigners can secure bank financing for their purchases.
After the Transfer of Property Act of 1882 was amended, security on any type of mortgage or fixed charge is legally enforceable subject to certain conditions, but the laws and regulations to perfect a mortgage on immovable property are mostly untested.
Furthermore, the domestic loan interest rate is at a 10-13%, and foreign loans have been recently subject to tighter control by the Central Bank of Myanmar.
However, if local recognition and enforcement of title and security are carried out in accordance with the law, foreigners should be entitled to more comfort with investing in condominiums in Myanmar.