Taiwan
© Copyright 1996 The Northern Trust Company. All rights reserved. Distributed
by permission of the copyright owner.
Area(sq. km.): 36,000
Currency: (TWD) New Taiwan dollar
Exch Rate (per USD): 27.5 As of: 12/6/96
Major Exports:
Electrical equip.
Northern
Trust Subcustodian Economic Diversity
Agriculture 3.40
Market Performance
MSCI Index
* Year to date as of: 8/31/95 Legal / Regulatory Environment The Securities and Exchange Commission (SEC) regulates direct foreign portfolio investment in the Taiwanese capital markets. The SEC, created in 1960 as a division of the Ministry of Finance, implements the "Regulations Governing Securities Investment by Overseas Chinese and Foreign Investors and Procedures for Remittance", which is the main legislation establishing the framework for foreign investment in Taiwan. The other regulatory body in Taiwan that oversees foreign investment is the Central Bank of China, which reviews the flow of New Taiwanese Dollars (TWD) into and out of the country. While the market was effectively opened to all types of foreign investors in early 1996, registration approval as a foreign investor is still required prior to investment. Two classes of foreign investors have been created from the new regulations issued in March 1996. The first class is called Qualified Foreign Institutional Investors (QFIIs) who are defined as: banks, brokers, investment managers, government investment companies, pension funds and insurance companies. QFIIs were the only group of investors who were eligible for investment prior to March 1996. QFII registration approval is limited to a specific amount of USD to be invested in Taiwan, known as an investment quota. QFIIs may apply for up to USD 200 Million and may subsequently raise their investment quota to a total of USD 400 Million upon successfully remitting USD 200 Million into the market. Once an investment quota has been approved, QFIIs have six months in which to convert USD to New Taiwanese Dollars (TWD). A QFII's total approved quota after the six month inward remittance period will equal the total amount actually converted to TWD during this period. A QFII may re-apply for additional quota after their original quota has lapsed up to the USD 400 Million limit.
The second class of foreign investors can be categorized as anyone or any other entity not falling within the QFII definition. Foreign investors who would be eligible for registration as QFIIs may register for investment as Non-QFIIs. Registration from a Non-QFII status may be changed for such investors to QFII status. However, once an investor has been registered as a QFII they may not change the status to Non-QFII status. Non-QFIIs are regulated differently from QFIIs as the SEC has granted various responsibilities to the Taiwan Stock Exchange (TSE) while retaining control/oversight of the market.. One difference is that non-QFIIs are granted investment registration by the TSE instead of the SEC and Central Bank. This makes the approval process much simpler as Non-QFIIs are only required to produce proof of Incorporation, a Power of Attorney in favor of a local custodian bank and hire a local Tax Agent. (Please refer to the Taxation Section for additional details concerning the role of a Tax Agent.) Each Non-QFII which is defined as an Institution may invest up to a total of USD 20 Million, while Individuals are limited to a total of USD 5 Million. The following additional points generally govern both QFII and Non-QFII investment.
1. Foreign currency must be converted into TWD before trading can begin. QFII and Non-QFII purchase and sale of TWD is free of Central Bank regulation. 2. Once TWD balances are acquired, shares can be purchased and sold as desired. Sales must settle in TWD. Short-term interest bearing investments such as time deposits must be limited to 30% of all funds invested under the investment quota. 3. Past currency regulations have placed restrictions on funding and repatriation of TWD. However, currently such regulations allow for the open purchase and sale of TWD by both QFIIs and Non-QFIIs. It should be noted that QFII and Non-QFIIs must pay all income taxes prior to repatriation of TWD investments. (See Taxation section for additional details.)
4. Foreign ownership restrictions limit purchases to 7.5 percent of each security per investor, and 20 percent per security for all foreign investors as a group. Certain company shares, particularly those that are defense related, cannot be bought by foreigners.
5. The SEC reserves the right to rescind investment authorization if trades are not settled on T+1. Clients or their investment advisors must provide settlement instructions to Northern Trust on the trade date to avoid fails. 6. Holdings may not be transferred "free of payment" between investors. Only transfers on a No Change of Beneficial Ownership basis may be effected upon receipt of SEC approval. Foreign investors in Taiwan must appoint both a local custodian and an "Agent". The Agent ensures that all taxes are paid, applications for inward remittance or repatriation are made to the Central Bank, brokerage accounts are set up on behalf of the investor, and all reports to the SEC and tax authorities have been filed. Northern Trust has appointed Central Trust of China as both its local custodian and Agent for all QFII and Non-QFII accounts. For further information concerning the respective regulations for QFII and Non-QFII investment or the application process, please contact your Northern Trust Representative. Exchange Locations Created in 1962, the Taiwan Stock Exchange (TSE), located in Taipei, is the only stock exchange in Taiwan. The TSE is a private corporation, of which 39 percent is held by government controlled financial institutions and companies. The TSE is open Monday through Friday from 9:00 a.m. to 12:00 noon and Saturday from 9:00 a.m. to 11:00 a.m. Depositories / Clearing Agencies The Taiwan Securities Central Depository (TSCD) is the central depository for all securities in Taiwan, and is majority owned by the TSE. Virtually all securities in Taiwan are eligible in the TSCD system, making the market almost entirely scripless. The TSCD transfers shares on a book-entry basis between member accounts, though it does not provide cash clearing facilities. The TSCD requires all accounts on its books to reflect the SEC approved name of a QFII or TSE approved name of a Non-QFII.
All members of the TSCD are electronically linked to the depository. Although security positions can be confirmed on-line, security movements are not available until T+2, one day after settlement. Since cash settlement is arranged outside of the TSCD and security movements cannot be ascertained on T+1, the settlement process cannot be considered true delivery versus payment. Trading Practices Foreign investors are able to trade in all TSE listed stocks, beneficiary certificates, and bonds through a fully-automated system. The system automatically matches bid and offer prices based on broker input.
Unlike trading in most other countries, clients or their investment advisors cannot open their own brokerage accounts in Taiwan. Instead, trading must be done through special brokerage accounts opened by the local agent.
Trading on the TSE is arranged in board lots, which typically contain 1,000 shares. When purchasing or selling oddlot positions, cash or shares must be delivered to brokers before trade execution.
Margin trading, short sales, securities lending, or turnaround transactions (i.e., buying and selling on the same day) are not permitted in Taiwan. Though the TSE is open each Saturday, Northern Trust clients should not trade on Saturday without prior authorization because the timing makes it too difficult to ensure that settlement instructions are received by all parties the following Monday. Settlement / Registration Practices TSE-listed equity trades are settled on T+1 by exchanging check payments for copies of TSCD settlement instructions. Once the TSCD has been instructed to transfer shares, their records immediately reflect the transfer of ownership. However, TSCD members can not confirm receiving shares until T+2. Therefore, settlement cannot be described as delivery versus payment since checks must be provided before share movement can be confirmed. Payment made on T+1 is typically valued for the following day as check clearance requires one day.
Debt securities are settled on the same day, with trading executed in the morning for settlement in the afternoon. As with equity settlement, checks are exchanged for copies of TSCD settlement instructions. Again, checks must be provided before bond movements can be confirmed. Northern Trust clients or investment managers wishing to trade in debt securities should contact their Investment Manager Liaison Group representative prior to actually trading in such securities to coordinate special arrangements to ensure settlement of these securities.
Registering securities is not necessary in Taiwan, as all securities are held in book-entry form and their ownership is reflected immediately after settlement on the TSCD's books. The TSCD periodically provides issuing companies with a list of current holders. Securities are available for sale at the TSCD on T+2. Income/Corp. Actions/Proxy Voting The TSE announces dividends and corporate actions by letter to its members and custodian banks. Income payments and corporate actions entitlements are paid directly by the issuing company or their registrar to custodian banks. Income payments are typically received annually by check one week after the payable date.
Common types of corporate actions in Taiwan are rights issues and bonus issues. Rights are not tradable in Taiwan, and do not have a market value of their own. They can only be exercised or allowed to lapse.
Foreign investors are entitled to full voting privileges in Taiwan, and proxy materials will be forwarded as they become available. Materials issued in Chinese will be translated in summary form. A foreign investor's designated Agent is required to represent the investor at company meetings. Taxation Dividend and interest income is taxed at 20 percent for all investors, and tax is typically withheld at source. Exceptional dividends are occasionally declared to distribute corporate retained earnings, and these types of dividends are not subject to tax. No capital gains tax exists in Taiwan. Relief from income tax is not currently available, as Taiwan has not established tax treaties with any country except Singapore. The Singapore treaty does not, however, provide any relief from income taxation. While income withholding tax is typically withheld at source, all Non-QFIIs must appoint a local tax agent. The local tax agent, upon acceptance of such appointment, is responsible for guaranteeing to the government that the foreign investor has paid all income taxes prior to repatriation of investments. Such responsibility is quite onerous as local tax agents can be forced to pay the outstanding/underpaid tax themselves on behalf of their Non-QFII clients. Cash Management Northern Trust can provide interest bearing call and fixed term deposits upon request for idle TWD balances. Fixed deposits may have a maximum term of three months, they may not be rolled over, and they may not exceed 30 percent of an investor's total invested capital.
Various money market instruments are also commonly traded. Operating Procedures Instruction Deadlines: Northern Trust requires customer settlement instructions by 4:00 p.m. GMT or 10:00 a.m. CST on trade date. Trades may only be executed on behalf of registered QFIIs or Non-QFIIs.
Foreign Exchange: All purchases and sales of TWD must be arranged by the designated local custodian/agent. Please contact your Investment Manager Liaison Representative to initiate such activity.
Registration Name: All securities will be held in book-entry form in a TSCD account as defined by the SEC for QFIIs and TSE for Non-QFIIs.
Structure of Accounts: Northern Trust has received approval as a QFII. Northern Trust has made its investment quota available through an omnibus account structure to its clients under certain circumstances. Please contact your Northern Trust Representative for more information concerning our omnibus Taiwan custody opportunity. Separate accounts are maintained on behalf of all clients registered in their own name as either a QFII or Non-QFII.
Proxy Voting: Northern Trust will forward announcements of company Annual General Meetings or any voting issues immediately after receipt of English translations. Northern Contacts For more information, contact:
Larry Kohn
Andrew Osborne
The contents of this report are intended for informational purposes only and are not to be construed as investment advice or guidance.
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