National Law University Jodhpur

COURSE: Research Methodology Semester: 2nd LL.M.; Stream: Banking & Finance

Project Title:FOREIGN INSTITUTIONAL INVESTMENT IN SPAIN

Submitted To:Mr. Ritu Parnadas

Submitted by-Divanshu Songara

Table of ContentsForeign Institutional Investment In Spain3Introduction3Chapter 1 Spanish financial crisis41.1Advantages of investing Spain61.2 Importance and barriers to FDI9Chapter 2 Foreign Institutional Investment in Spain92.1Legal Aspects11Amendments to indirect taxation in Spain12Investment sector regulator- Spain13Purpose and functions14Structure15Spain Investors Day(SID)15SRI in Spain16Role of Institutional Investors17Spain: foreign direct investment on the rise18Chapter 3 Openness to, and Restrictions Upon, Foreign Investment213.1.Dispute Settlement223.2The Central Government233.3merger control regulations24Conclusions25

Foreign Institutional Investment In Spain Introduction The term foreign institutional investment denotes all those investors or investment companies that are not located within the territory of the country in which they are investing. These are actually the outsiders in the financial markets of the particular company. This is the prime reason behind the growing interests of the foreign investors. The promise of rapid growth of the investable fund is tempting the investors and so they are coming in huge numbers to these countries. The money, which is coming through the foreign institutional investment is referred as 'hot money' because the money can be taken out from the market at anytime by these investors. The foreign investment market was not so developed in the past. But once the globalization took the whole world in its grip, the diversified global market became united. Because of this the investment sector became very strong and at the same time allowed the foreigners to enter the national financial market. A foreign direct investment (FDI) is a controlling ownership in a business enterprise in one country by an entity based in another country. According to the Financial Times, "Standard definitions of control use the internationally agreed 10 percent threshold of voting shares, but this is a grey area as often a smaller block of shares will give control in widely held companies. Moreover, control of technology, management, even crucial inputs can confer de facto control."Foreign direct investment is distinguished from portfolio foreign investment, a passive investment in the securities of another country such as public stocks and bonds, by the element of "control.Foreign direct investment incentives may take the following forms: low corporate tax and individual income tax rates tax holidays other types of tax concessions preferential tariffs special economic zones EPZ Export Processing Zones Bonded warehouses Maquiladoras investment financial subsidiesChapter 1 Spanish financial crisisThe Great Recession in Spain began in 2008 during the world financial crisis of 200708. In 2012 it made Spain a late participant in the European sovereign debt crisis when the country was unable to bailout its financial sector and had to apply for a 100 billion rescue package provided by the European Stability Mechanism (ESM). The main cause of Spain's crisis was its enormous housing bubble and the accompanying artificial and unsustainably high GDP growth rate. One side effect was that ballooning tax revenues (from the artificially high GDP growth rate) concealed the Spanish government's expenditures, which were unsustainably high, until 2007. The Spanish government supported the critical development by relaxing supervision of the financial sector and thereby allowing the banks to violate International Accounting Standards Board standards. So the banks in Spain were able to hide losses and earnings volatility, mislead regulators, analysts, and investors, and thereby finance the Spanish real estate bubble. The results of the crisis were devastating for Spain, including a strong economic downturn, a severe increase in unemployment, and bankruptcies of major companies.[footnoteRef:1] [1: Emma Ross-Thomas and Simone Meier (30 April 2012). "Spain Slips Back Into Recession In First Quarter: Economy". Bloomberg.]

Even though some fundamental problems in the Spanish economy were already evident far ahead of the crisis Spain continued the path of unsustainable growth when the ruling party changed in 2004. In these early times Spain had already a huge trade deficit, a loss of competitiveness against its main trading partners, an above-average inflation rate, house price increases, and a growing family indebtedness. During the third quarter of 2008 the national GDP contracted for the first time in 15 years, and, in February 2009, Spain (and other European economies) officially entered recession. The economy contracted 3.7% in 2009 and again in 2010 by 0.1%. It grew by 0.7% in 2011.[footnoteRef:2] By the 1st quarter of 2012, Spain was officially in recession once again. The Spanish government forecast a 1.7% drop for 2012. The provision of up to 100 billion of rescue loans from eurozone funds was agreed by eurozone finance ministers on 9 June 2012. As of October 2012, the so-called Troika (European Commission, ECB and IMF) is in negotiations with Spain to establish an economic recovery program required for providing additional financial loans from ESM. In addition to applying for a 100 billion bank recapitalization package in June 2012, Spain negotiated financial support from a "Precautionary Conditioned Credit Line" (PCCL) package. If Spain applies and receives a PCCL package, irrespectively to what extent it subsequently decides to draw on this established credit line, this would at the same time immediately qualify the country to receive "free" additional financial support from ECB, in the form of some unlimited yield-lowering bond purchases.[footnoteRef:3] [2: Christopher Bjork (28 November 2012). "EU Clears Spanish Bank Rescue". Wall Street Journal.] [3: Supra note 2]

After having completed substantial improvements over the second half of the 1990s and during the 2000s, which put a few regions on the brink of full employment, Spain suffered a severe setback in October 2008, when it saw its unemployment rate surging to 1996 levels. Between October 2007 and October 2008, Spain had its unemployment rate climb 36%, exceeding by far the unemployment surge of past economic crises like 1993. In particular, in October 2008, Spain suffered its worst unemployment rise ever recorded and, the country has suffered Europe's biggest unemployment crisis during the 2008 crisis. Spain's unemployment rate hit 17.4% at the end of March 2009, with the jobless total now having doubled over the past 12 months, when two million people lost their jobs.[49] In this same month, Spain had over 4 million people unemployed,[50] By July 2009, it had shed 1.2 million jobs in one year and was to have the same number of jobless as France and Italy combined.[footnoteRef:4] [4: David Roman and Nicholas Winning The Spanish bail-out: Going to extra time". The Economist. 16 June 2012.]

Spain, as in other southern European nations, relies heavily on the inter-generational family structure for a significant portion of the social safety net. Employment expectations should be adjusted for this cultural ethos. The unemployment rate for the "principal breadwinner" is 12.4% less than the 25% overall rate (June 2012.)[57] Employment is also found in the underground economy, which is estimated to be as large as 20% of the economy during the boom years.[footnoteRef:5] [5: Ibid]

The turning point for the Spanish sovereign debt crisis occurred on July 26, 2012, when ECB President Mario Draghi said that the ECB was "ready to do whatever it takes to preserve the euro". Announced on September 6, 2012, the ECB's Outright Monetary Transactions (OMT) program of unlimited purchases of short-term sovereign debt put the ECB's balance sheet behind the pledge. Speculative runs against Spanish sovereign debt were discouraged and 10-year bond yields stayed below the 6% level, approaching the 5% level by the end of 2012. 1.1Advantages of investing Spain INVEST IN SPAIN is the government agency dedicated to promoting and attracting foreign investment. It forms part of the Secretariat of State for Foreign Trade at the Ministry of Industry, Tourism and Trade. Its mission is to promote, attract and encourage foreign investment in Spain, as well as re-investment by foreign companies already doing business there. It serves as the reference point for foreign investors and the point of contact for all state, regional and local institutions engaged in promoting and attracting investment. Capital values are falling more rapidly than rental values, enabling investors to benefit from increasing yields. Secured assets in prime locations at unusually high yields are currently available and create opportunities for investors seeking to exit in three to five years, when recovery pushes up property prices. The growing non-performing loans market should also benefit value-added funds adopting a short-term strategy of portfolio management and sale of discounted portfolios to institutional funds.[footnoteRef:6] [6: Laura Stevens and Eyk Henning (24 September 2012). "State of Europe's Banks: Safe and Stressed". Wall Street Journal.]

Spain has a favourable legal framework for foreign investors as the Spanish law has adapted its foreign investment rules to a system of general liberalisation, without distinguishing between EU residents and non-EU residents. the stability of the Spanish legal institutions, combined with the investment opportunities currently available, should be attractive to investors considering diversification of their portfolios in Spain and the rest of southern Europe.[footnoteRef:7] [7: David Roman and Nicholas Winning The Spanish bail-out: Going to extra time". The Economist. 16 June 2012]

current reforms include cutting spending, privatizing industries, and boosting competitiveness through labour market reforms. with the restructuring of the savings bank sector in 2010, the bank of Spain is now seeking to boost confidence in the financial sector by commanding banks to come clean about their losses and consolidate into stronger groups.The extensive road and rail network, and the number and location of ports and airports endow Spain with an exceptional communication network that directly promotes trade and tourism. In2012, the high-speed network is 20 years old and an European leader, with over 2,900 kilometres of tracks and becoming a model of reference worldwide. to this must be added the efficient and renewed public transport in the major cities.Due to its strategic location and its historical and linguistic bonds, Spain has played a key role in trade relations between Europe and latin america. It also serves as a bridge to north Africa and a gateway to the Mediterranean sea trade. the ports of Algeciras, Valencia and Barcelona are among the main European ports in terms of maritime traffic, and will soon benefit from the construction of the various corridors that will boost the rail transport system.Spains economy is the 14th largest in the world and the 5 in the EU. Its per capita income roughly matches that of Germany and France, and its level of public debt ranks below that of countries like Italy, France, Germany and the UK. In terms of foreign direct investment received, Spain ranks 7th globally, and 10th in terms of outgoing FDI.Its climate, beaches, gastronomy and cultural offerings, as well as the quality and competitiveness of its hotel industry, which has increased activity in recent years, have made Spain one of the main tourist destinations worldwide in terms of arrivals and second in terms of income from tourism, which amounted to 55,6 billion in 2012. The balearic and canary Islands, the Mediterranean coast, andalusia and Madrid constitute the main tourist destinations, both domestically and internationally.Spain has become a world leader in the field of renewable energy, infrastructure, telecommunications and water, among others. as an example, Spanish companies are currently involved in the construction and management of roads, airports and hospitals in north america, latin america,Europe and the Middle East. In addition, large textile groups monopolise the top positions as international retailers, expanding their stores worldwide.Most of the working population has completed higher education. Engineering, medical and tourism professionals are highly recognised and have made their sectors world leaders. In addition, three Spanish schools rank among the best business schools worldwide. Competition to attract FDI is increasing every year, both in intensity and in the number of countries competing to attract it. This is demonstrated by 287 reforms being carried out to improve the investment climate in 131 countries between June 2008 and May 2009, according to the Doing Business report. The measures taken include simplifying business legislation, strengthening property rights, reducing tax burdens, facilitating access to credit and decreasing import and export costs.FDI Confidence Index 2010, A.T. Kearney. The purpose of this report is to monitor the impact of possible political, economic and regulatory changes on the FDI intentions and preferences of the leaders of major global multinationals. This index is obtained through an entirely qualitative study based on surveys of the 1,000 largest global companies, which are asked about their plans for future investment in the countries which make up the index. Although the report details that the 10 leading countries account for approximately 40% of FDI flows which take place the next year, the correlation between positions in the index and FDI flows is not very highWorld Economic Forum (WEF)This Index analyses the competitiveness position and performance of 139 economies which account for 98% of global GDP. The competitiveness of economies is measured through over 110 variables, some of which are quantitative and some of which are qualitative, with the latter being obtained from a survey of over 13,500 managers. This index is the sum of the Growth Competitiveness Index, which focuses mostly on macroeconomic aspects, and the Business Competitiveness Index, which focuses more on productivity and competitiveness[footnoteRef:8]. [8: http://www.imd.org/wcc/news-wcy-ranking/]

World Competitiveness Yearbook 2010, IMDWorld Competitiveness Yearbook 2010, IMDWorld Competitiveness Yearbook 2010, IMDWorld Competitiveness Yearbook 2010, IMD. Since 1989, this annual report has been analysing and classifying the capacity of countries to create and maintain an environment which facilitates the competitiveness of its companies and generates increased wealth for its inhabitants. The study uses over 300 quantitative (65%) and qualitative (35% - surveys of managers) criteria, grouped into 4 factors, to classify the 58 countries in the index from best to worst.[footnoteRef:9] [9: http://www.imd.org/wcc/news-wcy-ranking/]

As a result, Spain will have to continue making progress on each of the indicators, reforming and implementing policies to accelerate changes to all of these, if it wants to improve, or simply to maintain, its seventh position in FDI flows.[footnoteRef:10] These reforms are even more necessary at a time of global recession in which FDI is strongly decreasing; this will have greater impact on those economies which are less attractive for foreign investment. [10: Ibid]

In this regard, in this context of economic crisis, greater regulatory emphasis is being placed on implementing a set of initiatives designed to consolidate the macroeconomic situation and the business climate in Spain. The various measures taken range from labour market reform to policies to reduce public spending to return to budget balance, without prejudicing the incentives and support measures for the activities and investments with the highest value-added.[footnoteRef:11] [11: Supra note 9]

For years, the rate of entrepreneurial activity in Spain has remained high. the working population, especially young people with education and training, undertake new businesses. these new companies are the very ones innovating in new technologies and renewable energies.1.2 Importance and barriers to FDIThe rapid growth of world population since 1950 has occurred mostly in developing countries. This growth has been matched by more rapid increases in gross domestic product, and thus income per capita has increased in most countries around the world since 1950. While the quality of the data from 1950 may be of question, taking the average across a range of estimates confirms this. Only war-torn and countries with other serious external problems, such as Haiti, Somalia, and Niger have not registered substantial increases in GDP per capita. The data available to confirm this are freely available. An increase in FDI may be associated with improved economic growth due to the influx of capital and increased tax revenues for the host country.[footnoteRef:12] Host countries often try to channel FDI investment into new infrastructure and other projects to boost development. Greater competition from new companies can lead to productivity gains and greater efficiency in the host country and it has been suggested that the application of a foreign entitys policies to a domestic subsidiary may improve corporate governance standards. Furthermore, foreign investment can result in the transfer of soft skills through training and job creation, the availability of more advanced technology for the domestic market and access to research and development resources. The local population may be able to benefit from the employment opportunities created by new businesses[footnoteRef:13] [12: "Foreign direct investment, net inflows (BoP, current US$) | Data | Table". Data.worldbank.org. Retrieved 17 November 2012.] [13: UNCTAD (2010). "Foreign direct investment, the transfer and diffusion of technology, and sustainable development (2010)".]

Chapter 2 Foreign Institutional Investment in SpainMadrid is the main business and financial centre in Spain, as well as the most international city in the country. the most attractive areas for offices are the traditional Paseo de la castellana recoletos (CBD), as well as the office developments in decentralised zones such as the business parks of la Moraleja (Motorway: A1) and las rozas (Motorway: A6), the area of campo de las naciones (Motorway: M40, close to Barajas International Airport), and the avenida de burgos (Motorway: A1). With regard to the retail sector, classical areas are the so called Madrid Golden Mile (Calle Serrano and Calle de Jos Ortega y Gasset), as well as calle Gran Va and calle Preciados (both in central Madrid and with a constant flow of international tourists). the main industrial areas are located in Getafe (south of Madrid) and the logistics ones are based in coslada (east of Madrid), near the international airport of Madrid barajas.[footnoteRef:14] When the current economic turmoil, the Spanish economy will be back on a sound footing, with a balanced growth between the different production sectors, deleveraged households and autonomous regions, and a financial system ready to start a new credit cycle. We expect these adjustments to take place at a slow pace and the first signs of recovery to be observable from 2014 onwards. In the meantime, windows of opportunities remain for investors, and more are expected to arise.[footnoteRef:15] [14: Spain: Still in the Throes of the Great Recession - The Spanish Economy Sinks Further". European Economic Snapsho] [15: "TWO-TIER LABOUR MARKETS IN THE GREAT RECESSION: FRANCE VERSUS SPAIN". The Economic Journal. 2012. Retrieved 2012.]

The economic cycle is anticipated by most economic players to return to moderate growth by 2015. at that point, occupier markets will start recovering, with a likely impact on rents and capital values.[footnoteRef:16] [16: Ben Sills (14 August 2012). "Spanish Banks ECB Loans Rise as Rajoy Mulls Second Bailout Call". Bloomberg Business.]

In recent years, the low economic activity and consequent business closures or regroupings have increased the supply of commercial real estate and provoked a decline in rental and capital values in two phases. First, between 2008 and 2012, rents declined substantially, reflecting weakened occupier markets, while capital values displayed less sharp a drop. Since 2011, capital values have decreased more rapidly while the fall in rental values has slowed its pace. this situation, characterised by increasing yields, creates opportunities for investors seeking to exit in three to five years, when recovery pushes up property prices.The weak aggregated demand and high need for liquidity forces corporates to release properties to the investment market at discounted prices. This should provide unique opportunities for investors to acquire secured assets at high yields. In particular, many corporate divestments adopt the sale and-leaseback strategy, and in most cases with an intention to re-acquire the previously sold assets.[footnoteRef:17] [17: Ambrose Evans-Pritchard (28 September 2012). "Spain's crisis flares again as AAA club scuppers bank rescue deal". UK Telegraph.]

2.1Legal Aspects The most common type of ownership in Spain is absolute ownership (similar to the Anglo-Saxon concept of a freehold). It grants the title holder the absolute right to transfer, use and mortgage the property. there are other types of ownership or real estate rights which are often used in the retail and office property market, such as (a) surface rights, which are similar to anglo-Saxon ground leases, and (b) administrative concessions, which are in rem rights granted by public authorities to private entities over public land (e.g., sea and river areas,harbours, docks, and green areas) and which entitle the holder of the concession to use, develop and operate the public land for a limited period of time, as a full beneficiary rather thanthe owner of the property, in exchange for consideration.[footnoteRef:18] [18: A great migration: Spain needs its young people to create new businesses". The Economist. 2013-06-01.]

In practice, the transfer of real estate is always carried out through a transfer deed executed before a notary public, as only a public deed can be recorded at the land registry. the land registry is a government agency that provides information on the legal status of all properties, such as ownership or charges (e.g. surface rights, easements, concessions) or charges.[footnoteRef:19] [19: Barriers to Foreign Direct Investment Under Political Instability Marina Azzimonti and Pierre-Daniel G. Sarte]

Except for mortgages or surface rights, which are only effective and enforceable once they are registered, the registration of a transfer deed or charges is not mandatory. however, buyers are strongly advised to register their title, as recording grants protection to good-faith third-party purchasers who acquire a title from a registered owner in exchange for consideration. costs and expenses related to transfer and registration are the following: (a) notaries fees which are calculated as a percentage of the amount of the deal (except for transactions in excess of 6 million, the fees for which can be negotiated and agreed upon beforehand); (b) registry fees, which although calculated on the basis of the transaction, they are capped at 2,200 per registered plot and are not negotiable; and(c) Stamp duty at a rate of 0.25% to 2% (depending on the autonomous community where the building is located) on the real value of the asset payable by the acquirer.[footnoteRef:20] [20: Gustav Sandstrom (24 September 2012). "Nordic Banks Gain New Status: Haven". Wall Street Journal]

The Spanish Parliament has recently approved the anticipated amendment to the act regulating listed Investment companies in the real Estate Market (Sociedades Annimas Cotizadas de Inversin en el Mercado Inmobiliario - SOCIMIs), favouring the creation of (Real Estate Investment Trust) vehicles as of the first quarter of 2013. The approval of this amendmentwill incentivise both residential and non residential real estate investment in Spain, with fiscal conditions comparable to other European rEIts (under certain prerequisites, the amendment reduces Corporation Tax levied.[footnoteRef:21] [21: Laura Stevens and Eyk Henning (24 September 2012). "State of Europe's Banks: Safe and Stressed". Wall Street Journal.]

Amendments to indirect taxation in SpainThe Spanish government has just approved a series of structural measures designed to overcome budget constraints and reduce the countrys public deficit. In addition to the reform of the banking system and the labour reform, one of the key features of the new programs is the tax reform approved in 2012. Although some of the amendments which have entered into force are aimed at increasing the Spanish treasurys revenue in order to reduce the public debt, two of which may be of great interest to Spanish real estate investors:[footnoteRef:22] [22: http://www.diariodeavisos.com/2012/06/comunicado-integro-del-eurogrupo-sobre-el-rescate-a-la-banca-espanola/]

Modification of the transfer tax on Spanish real estate companies: as a consequence of the approval of an amendment to article 108 of the Securities Market law, the transfer of more than 50% of the shares of a company which main asset consist directly or indirectly of Spanish real estate will no longer be subject to non-recoverable transfer tax (at a rate of between 6% and 11%) when the real estate assets are directly linked to carrying out an economic activity. From now on, the transfer of shares is only subject to Vat or transfer tax when the shares are transferred to avoid the payment of taxes on the transfer of real estate assets owned by the company whose shares are being transferred. [footnoteRef:23] [23: Matina Stevis (6 July 2012). "Doubts Emerge in Bloc's Rescue Deal". Wall Street Journal.]

- Vat reverse charge mechanism: the Spanish Vat law has been amended to include two new scenarios where a reverse charge mechanism will apply to the transfer of real estate assets: (i) where there is an exemption from Vat on the transfer of a real estate asset (second and subsequent transfer of commercial real estate assets and transfer of rustic plots) and the exemption is waived; and (ii) where there is an assignment in the payment of a real estate asset (debt-to-asset swaps, or acquisition of an asset by means of the subrogation of the buyer in the mortgage backed debt of the seller).[footnoteRef:24] [24: "A great migration: Spain needs its young people to create new businesses". The Economist. 2013-06-01.]

The Investing Across Borders (IAB) indicators measure FDI regulation in 4 specic policy areas. They aim to complement existing measures of the quality of business environments. Quantitative data and benchmarking can be useful in stimulating policy debate and action, both by exposing potential challenges and by identifying where policy makers might look for lessons and good practices.[footnoteRef:25] Indicators can also provide a basis for analyzing how different policy approachesand different policy reforms contribute to broader desired outcomes such as FDI, competitiveness, and growth. The following examples illustrate how the areas of regulation measured by IAB can be reected in foreign investors decision making.[footnoteRef:26] A company seeking to expand its global presence will assess its options before deciding on a location for its investment. One of the rst determinants of location is whether the company is allowed to enter and operate in a specic market. Though most economies have liberalized and opened most sectors to foreign investment, some industries continue to be protected from foreign competition. IABs Investing Across Sectors indicators nd that while primary and manufacturing sectors are mostly open, some industries such as media, transportation, energy, and telecommunicationsremain restricted in many economies. [footnoteRef:27] [25: Ibid] [26: Ibid] [27: Stephen Fidler (September 28, 2012). "How Europe's Currency Survived 2012 Intact". Wall Street Journal]

Investment sector regulator- Spain The Comisin Nacional del Mercado de Valores (CNMV) is the Spanish government agency responsible for the financial regulation of the securities markets in Spain. It is an independent agency that falls under the Ministry of Economy and Finance of Spain. The CNMV was established in 1988 as part of a major reform of Spanish financial sector with the passing of law 24/1988 also known as the "Stock Market" act. Laws 37/1998 and 44/2002 have updated the powers and responsibilities of the agency establishing a regulatory framework to meet the requirements of the European Union. It also allowed for the development of the Spanish stock market in the European environment, incorporating new measures for the investor protection.[footnoteRef:28] [28: Knack, Stephen, and Philip Keefer. 1995. "Institutions and Economic Performance: Cross-Country Tests Using Alternative Institutional Measures," 7 Economic and Politics 207-227]

On 23 May 2008, the then second vice-president and finance minister, Pedro Solbes, announced in the Economic and Financial Committee of Congress that the government was planning a realignment of responsibilities for the regulation of the financial system as agreed by finance ministers of the European Union (ECOFIN). The project was expected to separate prudential and supervisory regulation to improve efficiency in monitoring the solvency and competitiveness of financial intermediaries as well as market transparency. [footnoteRef:29] [29: Ibid]

The Bank of Spain, would have taken over some of CNMVs responsibilities and would be required to ensure the creditworthiness not just of banks and savings banks, but also from other financial institutions, including insurance companies and investment institutions. However almost a year and half after the announcement, on 19 September 2009, a digital newspaper that echoes the forecast said that the law on the unification of financial supervisors was due to reach Parliament in early 2010, but neither parliamentarians nor the bodies concerned had any time on their agenda to perform such a reform.[footnoteRef:30] According to sources from the Ministry of Economy, the restructuring will have to wait for a decision in the European Union, which is studying the matter with a view to adopting a common format that could actually be more similar the current system. [30: Supra note 5]

Purpose and functionsThe aim of the CNMV is to ensure stability and transparency of financial markets, protect investors and make sure that brokers and intermediaries behave correctly. In exercising its powers the CNMV received a significant amount of information, much of which is contained in official records. This is considered public information. Action by the CNMV as a supervisory body is mainly focused on:[footnoteRef:31] [31: Asiedu, Elizabeth. 2006. Foreign Direct Investment in Spain: The Role of Natural Resources, Market Size, Government Policy, Institutions and Political Instability. World Economy 29 (1): 6377.]

companies issuing securities to be placed publicly on the primary market participants in the secondary securities markets companies providing investment services and collective investment institutionsIn addition the CNMV exercises prudential supervision by seeking to ensure that the system is solvent and transactions are secure. The CNMV is also responsible for assigning the ISIN codes for all securities issued in Spain.[footnoteRef:32] [32: United Nations. 1996. World Investment Report. NewYork and Geneva: The United Nations. ]

StructureThe CNMV consists of a Council, an advisory committee and an executive committee. In addition there are three general managers: one for monitoring entities, one for other market supervision and one for legal service.[footnoteRef:33] [33: Knack, Stephen, and Philip Keefer. 1995. "Institutions and Economic Performance: Cross-Country Tests Using Alternative Institutional Measures," 7 Economic and Politics 207-227]

Council of the CNMVThe CNMV is governed by a Board and consists of the following members:A President and Vice-Chairman who is appointed by the Government based on advice from the Finance Minister, from among persons of recognized competence in matters relating to the securities market.The Director General of the Treasury and Financial Policy and the Deputy Governor of the Bank of Spain, which have the role of Trustees ex officio. Three members appointed by the Minister of Economy among persons of recognized competence in matters relating to the securities market. The Secretary, who can advice but cannot vote, they are the Director General of Legal Service. Appointments lasts four years, following which may be renewed once.Spain Investors Day(SID)Founded in 2008, Spain Investors Day (SID) is the most relevant summit in Spain for investors and local companies. For two days in a row, institutional investors from all over the world have the opportunity to hold B to B encounters with top managers from Spains largest companies, those among the IBEX 35 listed companies, in order to gather crucial information that help them decide on future investments or agreements.SID gives Spanish listed companies a unique opportunity for letting the market know their reality, future plans, strategy, business plan in order to attract investors and get the financial resouces needed to supporting their activity and growth.[footnoteRef:34] [34: Knack, Stephen, and Philip Keefer. 1995. "Institutions and Economic Performance: Cross-Country Tests Using Alternative Institutional Measures," 7 Economic and Politics 207-227]

Blas Calzada, Chairman of SIDs Governing Council, defined this meeting as a unique opportunity for the international promotion of Spanish Companies.SIDs first edition took place in Madrid. It gathered together up to 33 IBEX companies and more than 200 international investors, who held a total of 451 meetings. The SIDs second edition exceeded the previous figures with almost 500 meetings, both one to many and one to one encounters. It also counted with a high participation of foreign investors from the U.S.A., Great Britain, France, Germany, Netherland, Italy, Portugal, Denmark and Norway, among others.[footnoteRef:35] [35: Stephen Fidler (September 28, 2012). "How Europe's Currency Survived 2012 Intact". Wall Street Journal]

The third edition was the consolidation of Spain Investors Day as an international finance forum to foster foreign investment in Spain. During this edition 35 Spanish Companies held more than 800 one to one meetings and nineteen plenary sessions. Due to the interest it generates among stakeholders from very different fields, SID has become Spains financial annual kick-off event. It also generates plenty of Media coverage.SRI in SpainIn Spain, a considerable number of the funds known as socially responsible investment funds are also sharing funds. A fund is a socially responsible investment fund when it screens the companies for inclusion in its portfolio using criteria based on social responsibility. However, social investment funds allocate part of their management fees for donation to various social bodies (charities, NGOs, co-ops, communities, etc.) but do not use any mechanisms for fi ltering or screening its portfolio. In the latter case, the funds in question designate benefi ciaries, usually Non-Governmental Organisations (NGOs), to receive the relevant part of their fees. There are also a few pure sharing funds that do not use social responsibility criteria.[footnoteRef:36] [36: Stephen Fidler (September 28, 2012). "How Europe's Currency Survived 2012 Intact". Wall Street Journal]

The most common methodology applied to Spanish funds, and funds of Spanish origin, is negative screening, with some reference to positive screening. In Spain the most popular screening criteria for ethical funds are environmental (positive screening), which is used by 92% of funds; and arms (negative screening), which is used by 75% of funds. The best-in-class approach is rarely used.[footnoteRef:37] [37: Asiedu, Elizabeth. 2006. Foreign Direct Investment in Spain: The Role of Natural Resources, Market Size, Government Policy, Institutions and Political Instability. World Economy 29 (1): 6377.]

The Spanish presidency of the European Commission (first six months of 2002) completely ignored commitments already made in the field of sustainability. Likewise, the presence of the Spanish Government at the World Summit in Johannesburg was largely symbol ic. However, Spain has an array of instruments for corporate governance that follow the lines established by the EC (the Winter Report): the white book, the Aldama Committee, and the Olivencia code. More recently, these issues have also begun to be debated at national level under various policy initiatives:The motion of 4 February 2003, urging the Government to take the necessary measures to introduce an obligation to inform that is directed at mutual investment institutions and pension funds about their use of ethical or social responsibility and environmental criteria in the selection of its investments. Presented in the Senate by the parliamentary Group of the Catalan party, Convergencia i Uni. Ministry of Employment and Social Affairs: A Technical Committee of Experts has been created with the remit of preparing a report on corporate social responsibility. The group met for the first time in July 2003.[footnoteRef:38] [38: Asiedu, Elizabeth. 2006. Foreign Direct Investment in Spain: The Role of Natural Resources, Market Size, Government Policy, Institutions and Political Instability. World Economy 29 (1): 6377.]

Role of Institutional InvestorsIn Spain, the appearance and subsequent development of SRI really began to gather speed in the late 1990s. This firmed up with the entry in 1999 of the first ethical investment funds for small investors and some community banking projects. We are looking at a very young movement, still in its very early stages of development.It should also be said that socially responsible investments have not appeared as a response to a clear demand from Spanish society. On the contrary, they are due to the initiative of minority individuals and groups familiar with the movement in Europe who considered it vital to initiate this type of activity in Spain. In addition, the promotion of SRI has entered Spain in the wake of corporate social responsibility, which has played its part in spreading the idea that companies in Spain should better understand the workings of SRI.There have been other important changes during the movements five years of existence: First and foremost, raising awareness of ethical banking and socially responsible investments among members of Spanish society, the majority of whom knew nothing about this movement, Secondly, the consolidation of projects aimed at developing methodologies of work. In Spain, SRI is already a well-known concept in some business circles. However, the most problematic aspect still to be addressed is how to turn this concept into concrete projects. In order for this to happen, portfolio screening techniques need to be applied and people need to have access to proper research on management behaviour.Spain: foreign direct investment on the riseForeign direct investment (FDI) has long played a prominent role in the Spanish economy, particularly since the 1959 Stabilisation Plan, which ended the policy of autarky that followed the 1936-39 Civil War and began to open up the economy. The inward FDI stock stood at US$634.5 billion at the end of 2012 (latest comparative figure according to UNCTAD), up from US$110.2 billion in 1995 (see Figure 1). Among the worlds 15 largest economies, Spains FDI stock in GDP terms (47%) is higher than the USs, Frances, Germanys and Italys (see Figure 2). FDI inflows have ranged from a high of 26.4% of gross fixed capital formation in 2000, when the economy was in the middle of a long boom period, to a low of 3% of GDP in 2009 (10.8% in 2012), when the economy entered a five-year recession that ended in 2014.Figure 1. Inward FDI stocks by selected countries (US$ billion), 1995-2012Figure 1. Inward FDI stocks by selected countries (US$ billion), 1995-2012

Source: World Investment Report 2013, UNCTAD.Source: World Investment Report 2013, UNCTAD.Figure 2. Inward stock of FDI (% of GDP), 1995-2012

Source: World Investment Report 2013, UNCTAD.

Inward FDI surged after Spain joined the European Economic Community (EEC) in 1986; at times it seemed as if the country was up for sale. Liberalisation opened up opportunities for foreign companies in a country with a sizeable domestic market, growth potential and the possibilities of using Spain as a platform for exports. These factors assumed as much if not more importance than wage levels, where the gap relative to the then EEC-15 had been narrowing fast until devaluations in 1992 and 1993 began to restore competitiveness.Spains motor industry, the worlds 8th-largest producer of cars, which generated 14.5% of merchandise exports in 2013, has been entirely owned by multinationals since 1986 when Seat, founded in 1950 with Fiats assistance, was sold to Volkswagen (see Figures 3 and 4). Multinationals are also strong in cement (Portland and Lafarge Asland), an industry in the doldrums since 2008 because of the collapse of the property sector, steel (ArcelorMittal), electrical appliances (Sony, Philips and Electrolux), electronic components (Siemens and Robert Bosch), electronics (Philips and Honeywell), information technology (IBM and HP) and some consumer products (Unilever and Procter & Gamble). Barclays, Citibank and Deutsche Bank have retail networks, but their share of the market is small. The foreign presence in insurance (Allianz, Axa, Aviva and Generali) is larger than in banking. The French Auchan (known in Spain as Alcampo) and Carrefour groups led a revolution in Spanish retailing, opening hypermarkets that lured customers away from traditional corner shops.Improved international confidenceInternational investor confidence in the Spanish economy has improved significantly. This is reflected in the sharp drop in the risk premium on 10-year government bonds over the benchmark equivalent German bonds to below 200 bp this year (177 bp on 24 March), down from a peak of 637 bp in July 2012, and the exit in January from the 41 billion bailout of some banks by the European Stability Mechanism. Government bond yields are at less than half the level they reached in 2012. The current account was in surplus last year (0.7% of GDP) for the first time in 27 years, thanks to a significant degree, to the continued growth in exports.[2] The deficit reached 10% in 2007. In recognition of the re-balancing of the economy, Moodys upgraded Spains sovereign credit rating one notch to Baa2 in February with a positive outlook.There have been several landmark investments in recent months: the acquisition by Berkshire Hathaway, run by Warren Buffett, of Caixabanks life insurance business for 600 million, the purchase by Bill Gates, the co-founder of Microsoft, of a 6% stake in the construction giant FCC for 113.5 million and the 7.2 billion purchase of the broadband company ONO by Vodafone, the worlds second-largest wireless carrier.Emilio Botn, the chairman of Banco Santander, the euro zones largest bank by market capitalisation, told reporters while on a visit to New York last autumn, We are living a fantastic time, money is arriving from everywhere.The labour market is more flexible, as a result of the governments reforms in 2012. Spains staggeringly high unemployment rate of 26% (more than double the euro zone average) is due not only to an unsustainable economic model, excessively based on the construction and property sectors, but to higher firing costs and the dual and dysfunctional labour market split between insiders (those in a privileged situation on permanent contracts) and outsiders (those on fixed-term contracts). The reforms have lowered firing costs for workers on permanent contracts and given companies greater flexibility to negotiate their own deals with their workers and not be bound by centralised sector-wide collective bargaining agreements, A new permanent contract has also been introduced for companies employing fewer than 50 people (95% of total employment in Spain.Chapter 3 Openness to, and Restrictions Upon, Foreign InvestmentForeign direct investment (FDI) has played a significant role in modernizing the Spanish economy over the past 35 years. Attracted by Spain's large domestic market, export possibilities and growth potential, foreign companies in large numbers set up operations. Spain's automotive industry is almost entirely foreign-owned. Multinationals control half of the food production companies, a third of chemical firms, and two-thirds of the cement sector. Several foreign investment funds acquired networks from Spanish banks, and foreign firms control close to one third of the insurance market. The Government of Spain recognizes the value of foreign investment and the economic importance of attracting more of it, particularly to help spur recovery from the economic crisis. Prime Minister Mariano Rajoy repeatedly states that it is the governments goal to make Spain increasingly attractive to foreign investors. Spain offers investment opportunities in sectors and activities with significant added value. There have not been any major changes in Spains regulations for investment and foreign exchange under the Popular Party (PP) administration that took office in December 2011. Spanish law permits foreign investment of up to 100% of equity, and capital movements are completely liberalized. Due to its degree of openness and the favorable legal framework for foreign investment, Spain has received significant foreign investments in knowledge-intensive activities in the past few years. Spain is now the eleventh largest and one of the fastest growing investors in the United States. Spains business sector is actively seeking to increase ties with the United States, and the Spanish government is eager to work with the U.S. Government to continue expanding bilateral economic ties. In 2013, gross new foreign direct investment was 19.484 billion euros, a drop of 0.7% compared to 2012 (19.629 billion euros). The six main investors in Spain (defined as the ultimate owner of the investment) in 2013 (the Netherlands, UK, France, Germany, U.S., and Luxembourg) represented 62.1% of total gross investment. The largest increases came from France (+104%), and the UK (+86.3%). U.S. investment in Spain decreased by 43% in 2013. Strong increases of investment came from Hong Kong (241 million, +497%), Japan (176 million, +375%), and Mexico (487 million, +273%). The autonomous community of Madrid continued to be the primary recipient of foreign investment, with 54.6% of the investment, and the region of Catalonia attracted 22.2%. Companies invested especially in activities related to finance and insurance, manufacturing, real estate activities, and construction. Disinvestments decreased by 82% compared to 2012, dropping from a capital flow of 22.72 billion in 2012 to 4.085 billion in 2013. Net investment reached 15.398 billion euros in 2013.[footnoteRef:39] [39: "Opposition wanes to Spanish aid request". Financial Times. 16 October 2012. Retrieved 16 October 2012.]

Although Spain continues to face high unemployment rates (26%), significant household and public indebtedness, and depressed domestic consumption, the country emerged from recession in the third quarter of 2013. The government attributes this turn-around in part to the reform program it implemented during the past two years, the largest in the countrys democratic history. As part of this effort, the government undertook sharp public budget cuts that have helped to stabilize the fiscal situation. Major economic imbalances have been corrected, and competitiveness and flexibility are being restored. The government also implemented a series of structural reforms such as a labor market reform and the restructuring of the banking system, all measures aimed at improving the efficiency in the allocation of resources, whose full effects are likely to be more visible by the end of 2014. Spain has regained access to affordable financing from international financial markets, which has improved Spains credibility and solvency, generating investor confidence.[footnoteRef:40] However, the Spanish government has yet to improve access to financing for small and medium enterprises (SMEs), which still suffer from an important credit crunch. The government will need to take additional steps in 2014 to provide a clear, stable and fair legal, regulatory and policy framework if it wants to attract more foreign investment. For example, in implementing its fiscal consolidation program, the government has taken actions which negatively affect U.S. and other investors on a retroactive basis. Fostering a positive investment climate to encourage FDI will require the Spanish government to maintain a longterm perspective that prioritizes investmentand economic growth. [40: https://www.cnmv.es/portal/home.aspx?lang=en]

3.1.Dispute SettlementLegislation establishes mechanisms to solve disputes if they arise. The judicial system is open and transparent, although sometimes slow-moving. The Spanish judicial system is independent of the executive. Judges are in charge of prosecution and criminal investigation, which permits greater independence. The Spanish prosecution system allows for successive appeals to a higher Court of Justice. The European Court of Justice can hear the final appeal. In addition, the Government of Spain abides by rulings of the International Court of Justice at The Hague. Spain is a member of both the ICSID and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. Contractual disputes between American individuals/companies and Spanish entities are normally handled appropriately. There is no U.S.-Spain agreement on the mutual recognition of judgments,[footnoteRef:41] so U.S. citizens seeking to execute American court judgments in Spain must follow Spanish law, in this instance a complicated procedure known as the "exequator" process. In light of the Embassy's past experience in attempting to assist American citizen claimants with the process, the Embassy recommends that Americans who conclude contracts with Spanish entities specifying the United States as the venue for adjudicating disputes also obtain an agreement regarding how a possible U.S. judgment will be executed in Spain. [footnoteRef:42] [41: https://www.cnmv.es/portal/home.aspx?lang=en] [42: "Opposition wanes to Spanish aid request". Financial Times. 16 October 2012. Retrieved 16 October 2012.]

Spain has a fair and transparent bankruptcy regime. Bankruptcy proceedings are governed by the Bankruptcy Law of 2003 that entered into force on September 1, 2004. It applies to individuals and companies. The main aim of the law is to ensure the collection of debts by creditors, to promote consensus between the parties and, if possible, to enable the survival and continuity of the company. On March 7, 2014, the government approved a reform of the bankruptcy law to promote Spains economic recovery. The new decree-law that entered into force the day after its approval aims to avoid the bankruptcy of viable companies and preserve jobs by providing for refinancing agreements to be reached through debt write-off, capitalization and rescheduling.3.2The Central GovernmentSpains central government provides numerous financial incentives for foreign investment, generally designed to complement EU financing. The Ministry of Economy and Competitiveness (MINECO) runs the Directorate General for Trade and Investments and Directorate General for Innovation and Competitiveness to assist businesses seeking investment opportunities.[footnoteRef:43] [43: "Spain: Still in the Throes of the Great Recession - The Spanish Economy Sinks Further". European Economic Snapshot.]

1. They provide support to foreign investors in both the pre- and post investment phases. Most grants are aimed at encouraging the development of certain economic sectors, but often for a given subsidy, there may be sectors that are not exclusive but are preferential. 2. Spain is emphasizing support for small and medium-sized enterprises (SMEs) with a national program for innovative cluster networks to strengthen innovative business groups and competitiveness. [footnoteRef:44] [44: ]

3. The central government provides financial aid and tax benefits for activities carried out in certain industries which are considered to be priority sectors in view of their growth potential and their impact on the nations overall economy.[footnoteRef:45] [45: ]

4. In addition, the regional governments provide similar incentives for most of these industries. Financial aid includes both nonrefundable subsidies and interest relief on the loans obtained by the beneficiaries, or combinations of the two. Companies are classified according to the size of business, which is a limiting factor in accessing certain types of public aid.[footnoteRef:46] [46: Jonathan Weil (14 June 2012). "The EU Smiled While Spains Banks Cooked the Books". Bloomberg.]

5. The state-owned corporate entity (Instituto de Crdito Oficial, ICO) attached to the Ministry of Economy and Competitiveness, has the status of State Financial Agency. Its activity seeks to boost small and medium companies and to encourage technological innovation and renewable energy projects as well as help to alleviate critical situations. ICO direct financing programs are aimed at financing large-scale investment projects in strategic sectors in Spain, backing large-scale investments by Spanish companies abroad, and supporting projects that are economically, financially, technologically and commercially sound and involve a Spanish interest. [footnoteRef:47] [47: Id.]

3.3merger control regulations Takeovers in Spain may be subject to competition legislation at both a Spanish and European level. If European merger control does not apply, Spanish merger control may apply if the transaction meets any of the two alternative legal thresholds set out in the Spanish Antitrust Law:1. Market share threshold: The transaction entails the acquisition of a market share equal to, or higher than 30%. In relation to this market share threshold, there is a de minimis rule: the threshold would not be met if the joint market share of the parties resulting from the transaction is below 50%, and the targets aggregate turnover in Spain is below EUR 10 million.[footnoteRef:48] [48: Emma Ross-Thomas and Lukanyo Mnyanda. Spain, France Bond Sales Take On EU Crisis, Bloomberg 1 December 2011. Accessed: 1 December 2011.]

2. Turnover threshold: The global turnover in Spain for all the undertakings concerned in the previous accounting year exceeded EUR 240 million, provided that at least two of them achieved an individual turnover in Spain higher than EUR 60 million.[footnoteRef:49] [49: Ibid]

Under this regime, any transaction meeting any of the legal thresholds must be notified and authorized by the National Competition Commission (NCC) prior to its implementation. The merger control procedure formally begins by providing notification of the transaction to the NCC. Before the formal opening of the procedures, the parties are encouraged to initiate pre-notification discussions of the draft notification with NCC officials. This stage is not subject to any legal deadline. The submission of the notification opens the first phase of the procedure. From this date, the NCC has one month in which to decide whether the transaction should be cleared or if a more detailed assessment is required. If the transaction raises competition concerns, the NCC will open a second phase of the procedure in which to conduct further assessment.[footnoteRef:50] If a transaction proceeds to the second phase the NCC must reach a final decision within the two months following the decision to conduct a second phase analysis.[footnoteRef:51] [50: Supra note 18 at 22] [51: La burbuja inmobiliario-financiera en la coyuntura econmica reciente (1985-1995). ISBN 978-84-323-0913-7.]

Conclusions: The good foreign investment news follows record exports in 2014, helping to put Spain back on the road to recovery. The challenge is to maintain the momentum and remain competitive.