Sovereign wealth fund regulation starts here, as Australia sets a precedent for international guidelines on government-backed investors.
The country has unveiled a set of screening criteria governing sovereign wealth fund investments, which will be used by regulators to judge foreign, namely sovereign wealth fund, bids. Among the six guidelines is whether the investors "are independent from the relevant foreign government," including the extent to which they operate at arm's length from its government and whether they are controlled by a foreign government, including funding arrangements.
Others include whether the fund follows common standards of business behaviour showing clear commercial objectives and good corporate governance practices.
As a member state of the OECD, the body responsible for designing a code of conduct for recipient countries, it is likely that Australia's set of six principles will be similar to the organisation's final suggestions. And although the announcement is the first solid piece of regulation on the matter, the six principles are little more than official statements on current practices.
"This seems to be the beginning of a very long process for sovereign wealth fund regulation. The Australian government appears to be saying that this isn't the last word but the beginning of the conversation," said Stephen Harder, a China partner at Clifford Chance. "Also, calling them six principles makes them sound more tangible than they are. We have to remember that [the Australian government] is reiterating several powers that it already has," said Harder.
Harder also believes that through a cumulative process of failed and successful bids investee countries and the corresponding foreign sovereign wealth funds will develop an almost common law-style set of precedents for which types of transactions go forward and which do not. "But once we start seeing really large investments, very few countries will not reserve the right to consider political issues raised by the target's new ownership structure," he added.
The timing of this announcement is telling. It comes just days before the country's Foreign Investment Review Board is set to decide on a A$16.5 billion ($15 billion) investment in Rio Tinto by the Chinese government-owned company Chinalco. As previously reported in IFLR, a degree of controversy already surrounds Australia's relationship with such investments, after China's State Administration of Foreign Exchange bought small stakes in three of Australia's largest banks in late December.
Canada has also issued guidelines, though these are purely limited to investments by state-owned enterprises.
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