Finance ministry to relax venture-capital restrictions

FINANCING: The government hopes that by freeing up the capital market, venture capitalists can broaden their scope to include things like corporate restructuring

By Joyce Huang  /  STAFF REPORTER

Fri, Nov 21, 2003 - Page 11

The Ministry of Finance said yesterday that it plans to revise regulations to allow the nation's venture capitalists to operate merchant banking businesses.

"Some of the nation's venture capitalists should transform themselves into merchant banks so as to expand their business scope to include managing corporate revitalization and restructuring," Vice Minister of Finance Yang Tze-kaing (楊子江) told reporters.

The ministry is expected to finalize changes by the end of the year that would deregulate venture capital companies' sources of capital and what they can invest in, Yang said.

Without elaborating, Yang said the ministry is overseeing inter-ministerial discussions on whether the nation's pension funds should be allowed to invest in venture capital firms.

Pension funds, which usually invest in fixed-income investment projects, are prohibited from investing in the higher-risk venture capital companies.

According to Yang, most of the nation's venture capitalists are bound by the Development Fund's (開發基金) rules and refrain from making investments in industries other than manufacturing-based high-tech startups.

However, the to-be-announced relaxation of the rules will allow venture capitalists to invest in the service sector, he said, adding that the deregulatory move can be enacted quickly since it requires no legislative approval.

Yang predicted that "investment banking businesses will be the driving force behind the nation's financial service industries."

After coming to office in mid-July, Yang, a former banker, vowed to build the nation into a capital-raising hub in the Asia-Pacific region by developing its investment banking sector.

He said that the ministry would be aggressive in transforming the nation's securities firms and trust units under commercial banks, which enjoy advantages in their financial talent and professional expertise, into investment banks.

Last month, Yang announced that securities rules would also be relaxed to scrap the minimum 10-day underwriting requirement with the aim of beefing up stockbrokers' international competitiveness.

Other than the China Development Financial Holding Corp (中華開發金控), Yang urged banking units under the nation's 13 financial holding companies, most of which have focused on consumer banking businesses, to develop investment banking businesses.

As direct financing, such as fundraising in the capital markets, gradually overtakes indirect financing, such as bank loans, the commercial banking sector will come under increasing pressure, since corporate lending generates less revenue than it used to.

The crowded local banking sector, with 52 commercial banks, leaves few niches for commercial banking activities apart from the emerging consumer banking markets.

Yang, however, expressed concern that the commercial banking sector will likely face similar difficulties in the future, with too many competitors vying for the same client base, which may later trigger cutthroat price competition.

He urged commercial banks to stress the importance of innovation in financial products and business differentiation.