Newsletter
RESTRICTIONS ON FINANCIAL HOLDING COMPANIES’ USE OF FUNDS
Since the Financial Holding Company Law ("FHCL") was enacted, doubts have remained concerning the application in practice of a number of its provisions. In particular, further clarification and regulation is needed regarding the mode and content of, and restrictions on, a financial holding company’s permissible short-term use of funds and long-term invest-ments.
Under Article 39 of the FHCL, a financial holding company’s short-term use of funds is limited to: (1) deposits or trust funds; (2) pur-chase of government bonds or financial deben-tures; (3) purchase of treasury bills or negotiable certificates of deposit; (4) purchase of bank guarantees, banker’s acceptances or commercial paper above certain credit ratings as set by the competent authority; and (5) purchase of finan-cial products related to the above four categories, as approved by the competent authority.
Because the above provisions impose rather strict limitations on the use of funds, companies have applied to the Ministry of Finance (MOF) for interpretations on related issues. In an inter-pretation letter dated 16 May 2002, on the ques-tion of whether short-term funds of financial holding companies can be invested in beneficiary certificates issued by securities investment trust enterprises ("SITE"), the MOF stated that the point at issue is whether such beneficiary cer-tificates can be regarded as short-term or low-risk vehicles, conducive to maintaining the sound operation of a financial holding com-pany’s subsidiary businesses. Because benefi-ciary certificates issued by SITEs are largely based on portfolios of long-term, high-risk fi-nancial products, such as stocks or corporate bonds, they cannot be considered suitable vehi-cles for financial holding companies’ short-term use of funds. Another point of doubt is whether the securities allowed by the above provision are limited to domestic securities, or may include both domestic and foreign securities. From this it can be seen that the MOF is currently taking a conservative view with regard to financial holding companies’ short-term use of funds.
It is also understood that with regard to financial holding companies’ long-term investment of funds, the MOF favors requiring prior regulatory approval for all investments, regardless of the source of funds. Because the regulations gov-erning investments by financial holding compa-nies are still being drafted by the MOF, doubt remains as to what sources of funds financial holding companies will be allowed to use for investments, and what application procedures and criteria the MOF will impose. In particular, dispute arises as to whether financial holding companies will be allowed to make investments with the proceeds from Euro-convertible bond (ECB) issuances and/or the liability reserves of insurance company subsidiaries. The MOF’s initial view on the first issue is that in principle, financial holding companies will be allowed to use proceeds from ECB issuances as a source of funds for investment, but the MOF will retain the discretionary power to approve or refuse such an application. As to the liability reserves of in-surance company subsidiaries, because such re-serves affects the interests of policyholders, at present the MOF is not willing to allow such reserves to be used for investment.
The current lack of a clear regulatory framework for financial holding companies’ use of short-term and long-term funds is an obstacle to their effective use of funds, and is likely to give rise to inefficiencies in their operations. Thus there is an urgent need for the regulator to devise clear rules in order to address such issues.