Change of Policy on FIRB Approval for Foreign State-Owned Enterprises


Change of Policy on FIRB Approval for Foreign State-Owned Enterprises

Brian Wilson, the Chairman of the Foreign Investment Review Board (FIRB), told a Senate Committee on 16 August 2012 that FIRB will publish guidelines to clarify requirements for FIRB approval for investments in Australian entities by foreign state-owned enterprises.

Ethiad’s acquisition of shares in Virgin Australia

The publication of the new guidelines is triggered by the recent acquisition of shares in Virgin Australia by Etihad Airways. Etihad is the national airline of the United Arab Emirates. It entered into a 10-year strategic alliance with Virgin in August 2010.

In June this year, Etihad announced that it had acquired a 3.96% stake in Virgin Australia on the market. Etihad did not obtain FIRB approval before the acquisition, but merely informed FIRB as a step prior to its subsequent successful application to FIRB for approval to acquire 10% of Virgin. Meaning of “direct investment”

Under Australia’s Foreign Investment Policy, all foreign governments and their related entities should notify FIRB and get prior approval before making a direct investment in Australia, regardless of the value of the investment. According to the Policy, a direct investment has the objective of establishing a strategic long-term relationship with a target enterprise. It may allow a significant degree of influence by the investor in the management of the target. It is common international practice to consider an investment of 10% or more as a direct investment. However, it is clearly stated in the Policy that FIRB considers that interests below 10% may also be direct investments and must also be notified if the acquiring foreign government or related entity can use that investment to influence or control the target. It is possible that Etihad might have taken an interpretation that the particular purchase did not establish a strategic long-term relationship with Virgin (which would have made it a direct investment), since they already had that kind of relationship with Virgin since August 2010.

FIRB’s view

When the Treasury and FIRB were questioned on this matter by the Senate Rural and Regional Affairs and Transport References Committee on 16 August 2012, they acknowledged that the Policy was a little unclear in terms of direct and portfolio investments and could be misinterpreted.

It is worthwhile noting that Jim Murphy (Executive Director, Markets Group, Treasury) told the Senate Committee that “For clarity’s sake, with the policy, we are now trying to explain to everyone that if they are a state-owned enterprise they should notify FIRB of any investment in Australian entities”. This seems to go beyond a mere clarification of the meaning of direct investment, and suggests that any investment by foreign state-owned enterprises in Australian entities will have to be notified to FIRB. It remains to be seen whether the new guidelines will actually reflect a change of government policy in that regard. We can advise on FIRB approval issues and can assist foreign investors considering making an investment in Australia to determine whether they need foreign investment approval.