Red tape cut for foreign custodians

Foreign custodians and the Australian companies in which they invest have been given some welcome and sensible relief from Australia's principal foreign investment law - the Foreign Acquisitions and Takeovers Act (FATA).

A new regulation introduced under the FATA yesterday will enable foreign custodians (licensed under the FSR regime) to apply for annual certificates to exempt from the operation of the FATA a foreign custodian's holding of a legal interest in a share of an Australian corporation held on behalf of an Australian investor.

The issue

Foreign custodian companies are foreign persons under the FATA and are required to notify the Foreign Investment Review Board (FIRB) of proposed acquisitions of substantial shareholdings (ie 15% or more) in Australian corporations. This investment has second round effects on Australian corporations whose shareholders include foreign custodians holding 15% or more. By virtue of the foreign substantial interest, the Australian corporation must notify FIRB of proposed acquisitions of certain businesses, shares and real estate, even if the substantial interest is not a controlling interest and the Australian corporation is not a foreign person.

Previously there was no exemption for foreign custodians holding the legal interest in a share on behalf of Australian investors or for Australian corporations caught by the operation of the FATA by virtue of a substantial interest held by a foreign custodian.

The exemption

Under the new regulation, FIRB will be authorised to grant certificates of exemption for foreign custodians' holdings of Australian shares held on behalf of Australian investors. The specific criteria for exemption include:

• the foreign custodian holding the legal interest in the shares must hold an Australian financial services licence;
• the equitable interest in the shares must be held by the custodian on behalf of a person who is either not:
  • a "foreign person"; or
  • a foreign life insurance company, insurance company, superannuation fund or managed investment scheme regulated under Australian law (or certain other persons) holding its shares primarily for the benefit of Australian residents (unless the entity is a substantial holder in the applicable Australian corporation);
• the custodian can only vote the shares in accordance with the Australian investor's instructions;
• the holder of the equitable interest in the shares must not be an associate of the foreign custodian.

Certificates will only be issued on application and, if granted, will generally be issued on an annual basis.

The effect

The new regulation is a sensible development but is not a complete answer. It only deals with foreign custodians' holdings for the purposes of the FATA. It does not address the position of foreign custodians under industry specific legislation such as the Broadcasting Services Act (BSA) and, accordingly, a foreign custodian could find their Australian holdings being treated as excluded under the FATA while included in their position under the BSA. Hopefully this issue will be addressed in the future.

That said, the new regulation does provide the possibility of much needed relief for:

• foreign custodians:
  • the removal of Australian-sourced investments from their FATA "portfolio" may allow the financial services group of which they form part to increase the amount they invest in Australian companies on their own behalf without needing to lodge a FIRB notification;
  • the use of an annual certificate will relieve them from the need to make repeated applications to FIRB to cover changes in their portfolios.
• Australian companies with foreign custodians on their register who can persuade these investors to seek a FIRB certificate may be able to reduce their foreign interests to below 15% investments. This would remove the need for the Australian company to seek FIRB approval for its acquisitions, as long as the "uncertificated" level of investment by the foreign custodian stays below 15%.
• Australian institutions who use foreign custodians to hold their investments on behalf of Australian residents will enjoy an efficiency benefit from the fact that their investment will now be FATA-transparent.

The application

In order to obtain these benefits, a certificate must be obtained from FIRB. The application has to be made by the foreign custodian.

Clayton Utz has considerable experience in dealing with FIRB and foreign investment issues, and would be pleased to advise on this new procedure.