Foreigners looking to acquire a stake in a Microfinance Institution (MFI) are often faced with various hurdles. Without the proper guidance and know-how, it is quite difficult to navigate the regulatory requirements and legal challenges involved in such an acquisition. Here we simplify the steps involved for the benefit of potential investors.
Approximately 168 MFIs operate in Myanmar, serve an estimated 1.45 million clients, and have a total loan portfolio of approximately $200 million. Microfinance Institutions are governed by the Microfinance Business Law, 2011. The Financial Regulatory Department (FRD) in the Ministry of Finance is responsible for all nonbank supervision, with the exception of some financial cooperatives that are supervised by the Ministry of Cooperatives. The Rural Development and Poverty Reduction Committee and Microfinance Supervisory Committee was formed under Section 6 of Chapter 4 of the Microfinance Business Law with 30 members, with Union Minister for Finance and Revenue as Chairman in order to provide support and guidance to the MFI framework. The Microfinance Business Law is accompanied by Regulations, Notifications and Directives, issued by the FRD from time to time. For a broad understanding of the legal regime governing MFIs in Myanmar, we have outlined the five most important points to be noted below:
Situation 1: Buying an onshore stake in an already foreign-owned MFI
In theory, foreigners can own up to 100% of a MFI in Myanmar. The MFI laws permit institutions, including foreign institutions, to acquire equity stake in an MFI. As per Section 2 (d) of the Directive No. 3 / 2014, equity financing is permitted. It states, “Local and foreign institutions that wish to raise equity financing in the local microfinance institutions are permitted to operate in accordance with the existing laws.”
Buying a stake in a Myanmar MFI which already has foreign shareholders is per se not complex. The shares in the Myanmar MFI can be transferred from the existing Myanmar and the foreign shareholders through a simple registration process. Registering the share transfer or issuance may take a few weeks to complete. This share transfer must be notified to the FRD and also registered with DICA. It is seen in practice that DICA normally requires FRD approval in addition to notification, which is an internal process and is duly granted by FRD as a matter of course.
In this situation, the seller may have to pay Capital Gains Tax in Myanmar at a rate of 10% in case he derives a gain from the sale. In any case, stamp duty is owed at 0.1% on the value of the sold shares.
Situation 2: Buying an offshore stake in the holding company of a Myanmar MFI
For a target which already has an offshore holding company, an acquirer has the option to buy a stake in that offshore holding rather than in the onshore Myanmar company. The foreign legal merits depend, of course, on the jurisdiction of that holding vehicle. In practice we most often see Singapore (which has a favourable tax treaty with Myanmar) and Hong Kong being used. As a principle there are no Myanmar transfer registrations in this case, as there is no share transfer in Myanmar. There may still be tax implications, though.
Situation 3: Buying a stake in a wholly Myanmar-national owned MFI
The situation is more complex when the target is a wholly Myanmar-national owned company. The Companies Act 1914 distinguishes Burmese companies and Foreign companies. Section 2A currently defines “Burmese company” as “(a) in the case of a company having a share capital, a company whose entire share capital is, at all times, owned and controlled by the citizens of the Union of Burma, or (b) in the case of a company limited by guarantee but not having a share capital, a company which is, at all times, owned and controlled by the citizens of the Union of Burma” and Section 2B defines “Foreign company” as “(a) any company other than a Burmese company or a special company formed under the Special Company Act, 1950 (Note: this applies to companies where the government is a shareholder); or (b) a company incorporated outside the Union of Burma and having an established place of business in the Union of Burma”.
Therefore, in order to effect a transfer of shares in a Myanmar national company to a foreigner, the nature of the Myanmar national company would necessarily change to a foreign company. Till recently, it was administratively impossible for foreigners to acquire shares in a Myanmar company – one that was established and owned exclusively by Myanmar citizens – except through the creation of a new legal entity which was incorporated as a foreign company. Not only was this process time-consuming due to transfer of licenses, assets and employees etc. from the old company to the new, it was also expensive and filled with uncertainties, with all the tax consequences and formalities.
Myanmar’s Directorate of Investment and Company Administration (“DICA”) very recently, in March 2017, for the first time implemented a transfer of shares in a company wholly owned by Myanmar citizens and registered as a Myanmar company to a foreigner. The most important development is that, foreigners in Myanmar can now acquire shares in wholly Myanmar-owned companies, subject to case by case approval and conditions which apply to this “conversion with continuing legal personality”. In other words, investors no longer need resort to beneficial ownership or other solutions using intermediaries or agents.
Under the July 2017 draft of the Myanmar Companies Law, a “foreign company” is defined as “a company incorporated in the Union in which an overseas corporation or other foreign person (or combination of them) owns or controls, directly or indirectly, an ownership interest of more than the prescribed ownership amount.” The prescribed amount is expected to be 35% of the ownership interest, which means that a foreigner can acquire a stake of upto 35% in a Myanmar-national MFI company without effecting a change in form to a foreign company.
Acquiring a stake in a public company
Another special case is the MFI which is a public company. As per the Companies Act, 1914, a public limited liability company must have at least seven shareholders. The company must also apply for a Certificate of Commencement of Business before its operations begin. As a practical matter, this form is not used for foreign investment. This is because under the present DICA policy, public companies are not open to foreign investment. Therefore, this becomes problematic when looking to acquire stake in an MFI, where the MFI is a public company. Foreigners are not able to effect a share transfer, even through the creation of a new legal entity which was incorporated as a foreign company. So what is the solution? We take a look below.
Converting a public company to a private company
The way out when trying to acquire stake in an MFI which is a public company is to first convert that public company into a private company. This has not been implemented so far and for all intents and purposes, is not possible at present as a practical matter. We note that the Companies Act, 1914, provides for Section 154, regarding conversion of private company to public company, however, there is no corresponding section on conversion of public company to a private company. The Companies Act, 1914 is silent on this aspect. However, this does not mean that it may not be permitted or is restricted under law. The mere omission of this provision should not invalidate the conversion of a public company to a private company. However, as a practical matter per DICA practice, so far it is not possible to convert a public company to a private company. We anticipate that this may not be the case for long, as there is good news on the horizon. The new Companies Act (which is currently in a draft stage) provides for changing of company type.
New Act provides for conversion from one to another
As per Division 10 of Part II of the July 2017 draft of the Myanmar Companies Law, a company is specifically permitted to change its type. As per section 57 (Changing of company type), “(a) A company may change to a company of a different type as provided in this section by passing a special resolution resolving to change type and complying with this Division. (b) The following changes may be made subject to compliance with this Division: (i) a private company may change to a public company; (ii) a public company may change to a private company; (iii) a company limited by guarantee may change to a public or a private company limited by shares; and (iv) an unlimited company may change to a public or a private company.”
We understand that the concerned government authorities are in advanced stages of discussion of this draft and it is likely to be presented as a bill for passing into law. If indeed it is passed into law, this will open up the floodgates for a lot of investment in MFIs in the near future.
Common issues found in the Due Diligence (DD) of an MFI in Myanmar
While we note that acquiring a stake in an MFI is possible, there are certain pointers to keep in mind while going about the acquisition. It is imperative to conduct a thorough DD of the MFI. We commonly find the following issues: