GERMANY - The German government has approved a new regulatory regime for corporate investors such as hedge funds and private equity firms, to increase transparency and prevent ‘collaborative action' among investors.
To achieve these aims, the regime envisages closer supervision of these investors - through their prime brokers - by both German financial services regulator BaFin and the Bundesbank.
Moreover, corporate investors who accumulate more than a 10% stake in a firm will have to clearly state their intentions with that firm. Another more minor measure is a requirement under which these investors must disclose how they acquired their capital.
If a corporate investor violates any part of the new regime - such as "acting in concert" under the rule of international law - the German regulator can withdraw the investor's voting rights for a period of six months.
The regime will now go to the German parliament, and if approved, will take effect next spring.
The government's move is not only as a result of the recent discussions among G8 finance ministers on how to boost transparency of hedge funds but also follows the failed takeover bid of the London Stock Exchange by Deutsche Börse, the operator of Frankfurt's exchange, two years ago.
In this event, ex-Deutsche Börse chief executive Werner Seifert was thwarted in his bid for the LSE by hedge funds who had sizeable stakes in Deutsche Börse. Seifert subsequently resigned and Deutsche Börse was forced to pay out much of its cash pile to its investors.
Although it was never proven, the BaFin investigated the hedge funds invested in Deutsche Börse to establish whether they had acted in concert to defy Seifert.
Along with the new regime, the government intends to enact a sweeping private equity and venture capital law early next year.
The law includes tax exemption for venture capital firms which invest in German companies no older than 10 years and whose base capital does not exceed €20m. In this case, taxation will happen at the shareholder level.
Berlin has not, however, provided any tax breaks to private equity companies, leading the European Private Equity and Venture Capital Association to warn this could impede private equity investment in Germany.