The International Capital Markets Review: Taiwan
i Financial market and regulation overview
In Taiwan, there are two public securities markets, the Taiwan Stock Exchange (TWSE) and the Taipei Exchange (TPEx). TWSE is operated by the Taiwan Stock Exchange Corporation. Products listed on the TWSE include Taiwan depository receipts (TDRs), call (put) warrants, shares, and exchange traded funds (ETFs). Currently, the most heavily traded product is shares. The TWSE is the flagship market for larger, more established companies. According to information released by the TWSE, as at the end of July 2021, there were 952 listed companies with total market capitalisation of NT$52.9 trillion. In 2019, the market capitalisation of domestic and foreign companies was NT$35.32 trillion and NT$1.09 trillion, respectively. Furthermore, as at the end of June 2020, there were 119 ETFs listed on the TWSE, with assets of NT$534.8 billion. These assets include stocks, overseas bonds, commodities (oil, gold, silver, copper, soybean), exchange rates (US dollars, Japanese yen) and REITs, in addition to trading products such as leveraged, inverse and futures products. The indices tracked encompass the United States, Europe, Japan, China, Hong Kong, India and many other markets.
The Mainboard of the TPEx offers a listing market for smaller companies that may not meet the criteria for listing shares on the TWSE. TPEx also operates an Emerging Stock market, which is generally a market for pre-listing preparation but can also serve as a trading platform for public companies that do not yet meet the criteria for listing on the TWSE and the TPEx Mainboard. In addition, under TPEx, there is a Go Incubation Board for Start-up and Acceleration Firms (GISA) for the small-sized innovative companies with creative ideas and great potential.
According to the information released by the TPEx, as at the end of July 2021, there were 788 listed companies on its Mainboard, with a market capitalisation of NT$5248.9 billion, 271 listed companies on the Emerging Stock market with a market capitalisation of NT$1186.53 billion and 184 listed companies on the GISA with the capital raised in the amount of NT$4.13 billion. The TPEx is also the platform for bond trading in Taiwan. Almost all bonds publicly issued in Taiwan, including government bonds, corporate bonds, financial debentures and international bonds, are listed on the TPEx bond market.
Taiwan's capital market legislation includes several fundamental laws, the most important of which are the Company Act and the Securities and Exchange Act, followed by a series of rules promulgated by the Financial Supervisory Commission of the Republic of China (FSC), the main regulator of the financial industry, and the Ministry of Economic Affairs of the Republic of China. The Company Act applies to companies incorporated in Taiwan and foreign companies operating within Taiwan, and it sets out the principle rules for matters including:
- company organisation and establishment;
- company wind-ups and liquidations;
- company governance and management;
- corporate bonds and shares; and
- mergers and demergers.
While the Company Act applies to all companies, the Securities and Exchange Act applies only to public companies; however, the Securities and Exchange Act provides the principle rules for the issuing and trading of securities and the responsibilities of securities issuers, market discipline, and securities firms operation, among others.
ii Regulatory bodies and the central bank
The regulator of the financial market in Taiwan is the FSC, which is empowered by law with the authority to promulgate and pass regulations, and to issue rulings or interpretation letters. The FSC is in charge of comprehensive reviews of the development, supervision, management and examination of the financial market and services offered, and aims to establish an ideal financial market by improving the operation of financial institutions, maintaining financial stability and promoting the development of the financial market. Four agencies operate under the FSC: the Banking Bureau, the Securities and Futures Bureau, the Insurance Bureau and the Financial Examination Bureau, which are responsible for banking, securities and futures, insurance industries and markets, and the supervision and examination of financial institutions, respectively. Among these agencies, the Securities and Futures Bureau has jurisdiction over the financial market and has main functions such as:
- regulating public companies and the offering, issuance, listing and over-the-counter trading of securities;
- regulating investment in Taiwan securities and futures markets;
- regulating securities investment trust funds and securities margin transactions; and
- protecting securities investors and futures traders.
In addition, the chief monetary authority in Taiwan is the Central Bank of the Republic of China (Taiwan) (CBC). One of the CBC's functions is to meet public demand for money and safeguard the purchasing power of the national currency. In general, its main role is to promote financial stability, ensure sound banking operations, maintain the stable internal and external value of the currency and foster economic development. Therefore, it works closely with the government, banks and financial institutions in Taiwan. The CBC is also the competent authority for foreign exchange control. To complete transactions for inward and outward remittances exceeding a certain amount, applications must be filed with the CBC.
iii Structure of courts
Taiwan's legal system is established under the jurisdiction of the Judicial Yuan, one of the five branches of government. However, it enjoys complete independence in judicial matters. The court system in Taiwan can be divided into the following three levels.
The district courts are usually the courts of first instance and have jurisdiction over civil and criminal cases. The district courts also have jurisdiction over a company's bankruptcy, reorganisation, company dissolution and liquidation. Most resolution of commercial disputes will therefore commence in the district courts.
The high courts are usually the courts of second instance and have jurisdiction over civil, criminal and administrative cases. In principle, appeals from the district courts will be brought to trial in the high courts. Similarly to district courts, the high courts also have the power to review all alleged facts and evidence presented by the parties concerned.
The Supreme Court is the venue in which final and binding decisions are rendered in this three-tier legal system. The court is located in Taipei. It hears appeals from the high courts under limited circumstances, such as when a judgment is made based on the improper application of a law or regulation. To appeal a civil case to the Supreme Court, the value of the claim must exceed NT$1,500,000. Since the Supreme Court will not decide on the factual matters of a case, in general, Supreme Court proceedings are based on the relevant documentation, without oral hearings.
iv Scope of jurisdiction
Under the current regime in Taiwan, no offshore entity is allowed to engage in any financial services business in Taiwan without obtaining prior approval from the FSC. In general, it is understood that Taiwan laws and regulations do not apply to activities by foreign companies outside Taiwan and the scope of jurisdiction is considered to be limited to the Taiwanese territory. In this regard, transactions or activity undertaken on an offshore basis might not fall within the remit of the FSC. In contrast, if the transaction or the activity involves onshore elements, such as soliciting investors resident in Taiwan to buy offshore financial products without a permit, or where the communication and document execution for offshore products are conducted in Taiwan, Taiwanese laws and regulations might apply and the FSC may take enforcement actions.
The year in review
In the years since December 2013, because the FSC has aggressively promoted Formosa bonds by deregulating the issuance process, Formosa bonds have been issued in substantial amounts. According to the information released by the TPEx, as at August 2021, there have been 6,126 tranches of bonds issued by foreign entities.
Moreover, since 2008, the Taiwan regulator has sought to internationalise the capital markets by encouraging foreign companies and Taiwanese-owned businesses based overseas to be listed in Taiwan. According to the information released by the TWSE and the TPEx, as at the end of July 2021, there were 78 foreign companies listed on the TWSE and 34 foreign companies listed on the TPEx Mainboard. The remainder of this chapter will therefore focus on introducing these two channels.
i Developments affecting debt and equity offerings
Formosa bonds market
Formosa bonds are bonds issued in Taiwan but denominated in a currency other than the New Taiwan dollar. They are issued by foreign entities meeting certain requirements under the Taipei Exchange Rules Governing Management of Foreign Currency Denominated International Bonds (the TPEx International Bond Rules). For instance, governments with a credit rating of BBB or above, or foreign companies listed on stock exchanges or with total assets exceeding the amount of US$200 million, may issue Formosa bonds in Taiwan.
Depending on the investors targeted, Formosa bonds can be divided into two types: professional Formosa bonds and retail Formosa bonds, and different procedures will apply respectively when listing. Professional Formosa bonds are listed in the professional section of the TPEx and can only be sold to qualified professional investors by local securities firms or other financial institutions (such as banks) with a securities underwriting licence. Accordingly, such local securities firms or financial institutions are responsible for conducting reasonable investigations to verify whether an investor meets the criteria for a professional investor. If the investor is a corporate or an individual (other than a professional institutional investor), the underwriter must deliver a risk disclosure statement to the investor for execution.
The first Formosa bond was listed on the TPEx on 1 November 2006. In the beginning, the Formosa bond market was dominated by foreign banks from Europe and the United States, and most bonds are denominated in US or Australian dollars, with a three-year tenor. Because of the influence of the global financial crisis of 2008, the Formosa bond market ceased making progress until 2013. As noted above, since December 2013, the FSC's aggressive promotion of professional Formosa bonds through the gradually liberalising of issuance criteria and simplification of the application process to meet insurance companies' demand for investment in foreign currency, mean that professional Formosa bonds have been issued in substantial amounts. The application process for issuing professional Formosa bonds is quite straightforward. After the bonds have been priced, the underwriter (with a securities underwriting licence in Taiwan) will normally act as filing agent and submit the listing application to the TPEx with the required documents. Generally, it takes three to five business days for the TPEx to grant listing approval.
The Formosa bond market has started growing vigorously more recently. According to information released by the TPEx, 142 tranches of Formosa bonds were issued as of July 2021, of which 113 are denominated in US dollars, 13 are in Chinese yuan, seven are in South African rand and nine are in Australian dollars.
In 2019, to encourage and solicit issuers from Muslim countries, the FSC further permitted the issuance of sukuk. Under the TPEx International Bond Rules, sukuk is defined as an international bond issued in accordance with international financial market practice and recognised by the Shariah Advisory Council or consultants who verify that the sukuk meets shariah criteria. The first sukuk, a special purpose vehicle established by Qatar Islamic Bank (QIB), was issued by QIB Sukuk Ltd on 7 February 2020.
Initial public offerings by foreign companies
As indicated above, the Taiwanese regulator has made a concerted effort since 2008 to internationalise the capital markets by encouraging foreign companies and Taiwanese-owned businesses based overseas to list locally through initial public offerings (IPOs) or secondary listings via Taiwan depositary receipts. As at 2021, of the 78 foreign companies listed on the TWSE, 29 are tech companies and 49 come from various industries such as food, transportation, construction and motor vehicles; and the 34 foreign companies listed on the Mainboard of the TPEx come from various industries such as technology, biotechnology, food, construction, the internet and motor vehicles. Although most of them are Taiwanese-owned businesses based overseas, the number of shareholders from the United States, Hong Kong and Singapore is increasing.
Over the years, the government has relaxed the listing requirements for foreign companies on the TWSE and the TPEx. For example, foreign companies with net worth of NT$600 million and pre-tax income of NT$250 million for the three years prior to listing (with its profit before tax for the most recent fiscal year in the amount of at least NT$120 million) are eligible to be listed on the TWSE, while foreign companies with a net worth of NT$100 million and pre-tax income of NT$4 million for the previous year are eligible to be listed on the TPEx. Furthermore, the government has also lifted restrictions on the use of proceeds raised in the listing, which can now be remitted for investment in any offshore territory, including China. As commerce and investment in the Asia-Pacific area flourish, it is likely that more and more companies will make Taiwan their first choice for a successful share listing.
Under the current regime, a company that is incorporated in a foreign territory and meets the requirements can be listed on the TWSE or TPEx. However, as the Taiwan regulator places emphasis on shareholder protection, for the company planning to be listed on the TWSE or TPEx, its articles of incorporation should be amended to incorporate certain protection mechanisms required by the Company Act of Taiwan, including in relation to share issuance, shareholders' meetings, minority shareholder protection and directors' duties and responsibilities. These mechanisms may conflict with the mandatory provisions of the company laws of the company's place of incorporation. In practice, most foreign companies listed in Taiwan are incorporated in the Cayman Islands because the flexibility of the Company Act of the Cayman Islands allows a Cayman company to accommodate in its articles of incorporation the protection mechanisms required by the Taiwanese regulator. In this regard, the listing group will normally incorporate a Cayman company and will proceed with the restructuring of the group so that the Cayman company acts as the vehicle to be listed on the TWSE or TPEx.
Moreover, to assist the development of innovative industries, improve fund raising channels and expand the scope of the capital market, starting from 2021 Q3, the TWSE will establish the Taiwan Innovation Board (TIB) and the TPEx will establish the Pioneer Stock Board (PSB) under the ESM respectively. TIB is established to accommodate start-ups that focus on the Internet of Things or artificial intelligence, biotech firms that have conducted Phase 1 clinical trial for experimental products and firms with key component technologies, while PSB provides an opportunity for the companies to be listed if they receive recommendations from two securities brokers.
ii Developments affecting securitisations and other structured products
After the global financial crisis in 2008, the FSC adopted a conservative attitude towards securitisations and structured products, which led to a low approval rate for these financial products. For example, according to information released by the FSC, from 2003 to 2008, there were up to 71 cases of securitisations approved by the FSC. However, after the financial crisis, from 2009 to 2020, only seven securitisations were approved. Because of this governmental attitude, the development of securitisation and structured products has made little further progress, therefore they are not popular with Taiwanese investors.
iii Cases and dispute settlement
Disputes related to Formosa bonds
As Formosa bonds are issued by foreign issuers, the dispute settlement mechanism set out in the dealer agreement or subscription agreement (signed between the issuer and underwriters) will mostly be governed by the laws of the place where the issuer is incorporated. Therefore, it is rare to involve the Taiwanese legal system in this type of dispute.
Disputes related to IPOs
If the activity of a foreign company listed on the stock exchanges in Taiwan constitutes inappropriate conduct, the regulator may take certain action to correct or punish it. For example, if a foreign company listed on the TWSE submits a false financial report or misrepresents other information, the TWSE may suspend the trading of its shares. However, as the foreign company is incorporated outside Taiwan, the responsible person or the assets of the company are generally located somewhere that cannot be reached by the Taiwanese regulator or courts. In this regard, when a foreign company forges its financial reports or misrepresents other material information, causing significant damage to its investors, it is difficult for the damage inflicted upon the Taiwan investors to be compensated through the Taiwanese legal system. In other words, even if the investors take action and bring a lawsuit against the company in the Taiwanese courts, the court judgment will only be meaningful if it can be enforced in the other jurisdiction, which will face issues such as recognition of the Taiwanese court judgment by the other jurisdiction and the additional costs incurred when pursuing a lawsuit outside Taiwan.
In 2020, a foreign company listed on the TWSE named Pharmally International Holding Company Limited (Pharmally) allegedly forged its financial reports and the prosecutor failed to detain the responsible person from Pharmally because he was located in Singapore. As Pharmally has certain assets in China, the FSC has tried to initiate a cross-border investigation to determine the company's financial situation. In the meantime, the Securities and Futures Investors Protection Center (a non-profit organisation established under the Securities Investor and Futures Trader Protection Act that files class actions on behalf of investors) is collecting evidence and may take action against Pharmally. This case has raised concerns about misconduct by foreign companies and the limited powers of the regulator in cross-border cases. There is a possibility, therefore, that the FSC and the TWSE and TPEx will enhance disclosure requirements and cross-border cooperation to rebuild investor confidence in foreign companies listing in Taiwan.
iv Role of exchanges, central counterparties and rating agencies
TWSE and TPEx
As mentioned in Section I, there are two main stock exchanges in Taiwan: the TWSE and the TPEx. Although they are stock exchanges, they also play the role of regulator in the financial market to a certain extent. This can be observed in the application process for the listing of Formosa bonds and IPOs. In both processes, the approvals from the TWSE and TPEx need to be obtained before shares or Formosa bonds are listed. Furthermore, all these issuers must fulfil the disclosure obligations required by the TWSE and TPEx, such as filing financial reports, prospectuses or other material information.
Taiwan Depository and Clearing Corporation
The Taiwan Depository and Clearing Corporation (TDCC) was established under government policy. It is an institution providing services that include book-entry of securities transactions, clearing and settlement of securities traded on the TWSE and the TPEx, computer processing for futures market clearing, registration of securities issued in dematerialised form and computer processing of book-entries for market participants. Since 29 July 2011, all shares in TWSE-listed companies and TPEx-listed companies have had to be kept in dematerialised form through the TDCC. Accordingly, the trading of such shares will be settled through the TDCC, which means it is an important central counterparty when trading on Taiwan's stock exchanges.
Crediting rating agencies plays a certain role in the issuing of bonds on Taiwan's financial market. There is no requirement regarding the crediting rating of foreign issuers when issuing Formosa bonds to professional investors. If the Formosa bonds are issued to retail investors, the credit rating of the bonds should be BBB or above, unless the bonds are guaranteed by a financial institution in Taiwan or the foreign issuer has a credit rating of BBB or above. In contrast, there is no crediting rating requirement for foreign issuers wishing to list their shares either on the TWSE or the TPEx.
Normally, a credit rating assigned by the big three agencies (Standard & Poor's, Moody's and Fitch) is recognised by the FSC. In addition, the FSC also adopts credit ratings assigned by the Taiwan Ratings Corp (TRC). TRC is the first credit rating agency incorporated in Taiwan and half of its shares are held by Standard & Poor's International, LLC. Therefore, TRC is associated with S&P Global Ratings (formerly Standard & Poor's), which distributes high-quality financial news and analysis across the global markets.
Outlook and conclusions
Taiwan's financial market has been doing relatively well despite the onslaught of the covid-19 pandemic. In July 2020, the Taiwan Stock Exchange Corporation's Taiwan Capitalisation Weighted Stock Index, or TAIEX, which is the main stock market index in Taiwan, reached an all-time high, its highest point since the index was first launched in 1967. The stock movements underlying this record may be the result not only of financial policies, but also of the fact that the fundamental elements of Taiwan's economy remain sound. To utilise this advantage and attract more foreign issuers, the Taiwanese regulator further relaxed the qualifications for foreign companies to be listed on the TWSE by lowering the criteria of, among other things, profitability, from NT$250 million to NT$150 million. We have noticed recently that, thanks to the above policy, the TWSE and TPEx are more open-minded to companies that intend to apply for listing in Taiwan and are more willing to discuss with an applicant company its issues relating to the listing application. As such, a healthy increase in activity in Taiwan's financial market is expected in 2021.
1 Abe Sung and Mark Yu are partners at Lee and Li, Attorneys-at-Law.