The Irrawaddy

Companies Law to Take Effect in Shadow of Rakhine Crisis, Civil War

Shipping containers at Asia World Port in Rangoon on Sept 16, 2016. Photo - Pyay Kyaw / The irrawaddy

YANGON — Amid growing concern over the economic policies of the ruling National League for Democracy (NLD), a long awaited Companies Law will take effect on Aug. 1, bringing with it hopes of more foreign investment, greater transparency and improved regulation.

“The Myanmar Companies Law will create equal opportunity for both local and foreign investors. Generally, the law is more positive than negative,” said U Zaw Phay Win, an economic adviser.

Approved by Parliament on Nov. 23, the law is seen as one of the NLD government’s major legislative achievements, replacing and incorporating elements of the 1914 Companies Act and the 1950 Special Companies Act.

State Counselor Daw Aung San Suu Kyi’s government has made economic reform a key goal, viewing it as a means to help complete Myanmar’s democratic transition after nearly six decades of isolation under military dictatorship.

According to the Directorate of Investment and Company Administration (DICA), the Companies Law includes important reforms that will allow local companies to accept foreign capital and expertise via joint ventures and make business regulation more efficient and effective.


Number of foreign companies with local branches by year. (Source: DICA)

Key Changes

A review of the new law, DICA’s public records and a report by the London-based international law firm Berwin Leighton Paisner reveals a number of key changes that will affect foreign investments.

The 1914 Companies Act defines a foreign company as any company with one or more shares owned by a foreign investor. A local company has to be 100 percent owned and controlled by Myanmar citizens. It also lets foreigners invest only in select sectors such as automobiles, fertilizers and construction materials.

The new Companies Law lets local companies have up to 35 percent of their shares owned by foreigners and expands foreign investment to other sectors including the export and import of finished goods, industrial equipment, pharmaceuticals, and retail and wholesale businesses. It also lets foreign investors trade on the Yangon Stock Exchange.

In its report, Berwin Leighton Paisner notes that the new law maintains a distinction between a “Myanmar company” and a “foreign company” and it says investors should note that foreign investment in certain sectors is still regulated through other laws addressing property ownership and the Myanmar Investment Law.

Until now, foreign companies applying for a certificate of incorporation had to obtain a “permit to trade” that by itself did not actually let them engage in trade with Myanmar. The new law abolishes that permit requirement.

The 1914 Companies Act stipulates that a private company must have at least two directors and that they reside in Myanmar. The new law allows for a single director who is an ordinarily resident — either a permanent resident or a resident for at least 183 days over a 12-month period beginning on the day the new law takes effect or the day the company is incorporated under the new law. If a private company has more than one director, only one of them has to follow the residency requirement.

“It is a completely open door for foreign investment. The economic environment will be more competitive and attractive to investment. More importantly, we need to prepare for the change,” said U Than Lwin, senior adviser at Kanbawzaw Bank and a former deputy governor of the Central Bank of Myanmar.

“We need to be ready for modern technology,” he said.

It also used to take at least seven people to set up a company with more than one investor, which it defines as a “public” company. Only three people will be required under the new law, one of whom must still be a Myanmar citizen and ordinary resident.

Memorandums and articles of association will also be replaced with company constitutions, charters and other forms.

The new law also includes a set of duties for directors, including the duty to act with care and diligence and in good faith in the company’s best interests, not abuse their positions or misuse information, abide by the law and the company’s constitution, and to avoid reckless trading.

The 1914 Companies Act requires companies wanting to reduce their share capital to secure permission from the courts first. The new law does away with the requirement, but the level of approval needed from shareholders will depend on the type of capital reduction.

Relative size of investment by Myanmar citizens by sector as measured by value in 2018. (Source: DICA)

Reregistration

Under the new Companies Law, all existing companies need to re-register electronically with Myanmar Companies Online (MyCO), the company affairs divisions of DICA.

In order to set up the electronic registry system, DICA closed down the divisions on Saturday and will reopen it on July 31.

If a company fails to re-register electronically, it will be struck from the official enterprises list, DICA Director General U Aung Naing Oo said during a press conference on Monday.

All company registration and filing processes will resume on Aug. 1 through MyCO, and companies will have until January to re-register.

According to DICA, there are more than 50,000 local companies and 7,000 foreign companies currently registered.

The NLD government has made earlier efforts to attract foreign investment, including legal reforms that have liberalized the banking sector, loans for small and medium enterprises and new transparency rules.

“The government is working very hard to bring in foreign investment to save our economy. But politics is more important than the economy. The Rakhine and Kachin conflicts have already prevented some potential foreign investment,” said U Zaw Phay Win, the economic adviser.

“If we want to improve the country’s economy, we must have a decent political image. So I don’t expect investment to increase enormously in the short term,” he said.

International human rights groups have been urging foreign investors to shun Myanmar both over the violence in Rakhine State and the country’s long-running civil war with various armed ethnic groups.

“The civil war is a part of the problem when we expect foreign investment,” said U Myo Min, the CEO of PS Business School.

“If we want foreign investment, we need to promote the country’s image, including stopping the civil war in Kachin and Shan states,” he said.

In 2017 the Asia Foundation published research that said the civil war was inherently linked to economic development and that peace was essential to developing a national economy under a government pushing for more foreign investment.

Some of the country’s most ethnically diverse states are also the richest in natural resources, but decades of fighting has kept many potential investors at bay.

Herzfeld Rubin Meyer & Rose closed its Yangon office in February after five years of business here. Eric Rose, who headed the office, told Asia Times that the Rakhine crisis was one reason for the decision to shut down. He said it had ruined Myanmar’s reputation and scared off Western investors.

U Kyaw Kyaw Hlaing, chairman of the Smart Group of Companies, said the Companies Law would attract new investment but added that it was too late for some, nothing that friends of his from Taiwan had already pulled their investments out of Myanmar after losing hope.

“When we talk about investment, we need to think about all the factors including the crisis. Under the current government, Myanmar fell in rank for ease of doing business. For some investors, Myanmar is no longer a place to do business. The Rakhine crisis is one of the reasons they cited,” he said.

In the World Bank’s 2018 ease of doing business ranking Myanmar fell one place compared to the year before to 171st out of 190 countries. Fellow ASEAN members Cambodia and Laos ranked 141st and 125th, respectively. Vietnam ranked 68th.

“Because of the Rakhine crisis, I don’t expect Western and European investment. Under the new law, only China will come,” Soe Tun, a central committee member of the Myanmar Rice Federation, told The Irrawaddy.


Value of total approved investment by country from 1988 to 2018. (Source: DICA)

As of Dec. 31, actual foreign direct investment for the current fiscal year stood at $3.7 billion, with approved foreign direct investment at $5 billion, according to DICA. The largest investor was China.

“The Rakhine crisis is hurting our economy and foreign investment. If the political climate is not good, China will be the winner under the new law,” said U Than Lwin. “Although the law is perfect, we need a good political climate.”