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New restrictions and divestiture orders send clear warning to foreign SOE investment in Canada’s critical minerals sector – Osler, Hoskin & Harcourt LLP

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Author(s):
Shuli Rodal, Michelle Lally, Kaeleigh Kuzma, Danielle Chu, Chelsea Rubin, Reba Nauth, D’Arcy White

Nov 3, 2022

On October 28, 2022, the Honourable François-Philippe Champagne, Minister of Innovation, Science and Industry (the Minister), together with the Honourable Jonathan Wilkinson, Minister of Natural Resources, issued a new policy relating to the treatment of foreign state-owned enterprise (SOE) investment in Canada’s critical minerals sector (Policy) under the Investment Canada Act (ICA).

The Policy is effective immediately. It identifies minerals that the government has determined are essential to Canada’s prosperity in emerging low-carbon and other technology sectors or that contribute to Canada’s national security as vital inputs to defence and high technology. The Policy is intended to preserve Canada’s access to critical minerals and to support the government’s Critical Minerals Strategy, which in turn is designed to position Canada as the global supplier of choice for critical minerals.

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The Policy applies to any direct or indirect investment by a foreign SOE in a Canadian business engaged in the “critical minerals” sector value chain, regardless of the size of investment or whether such investment is reviewable under the general net benefit framework of the ICA. In summary, the Policy states that, where the Minister is required to determine whether an investment of this nature is of “net benefit to Canada” that will be the finding on an exceptional basis only. Further, all foreign SOE investment in the critical minerals sector, regardless of size or value, will be subject to enhanced scrutiny under the discretionary national security review provisions.

Less than one week after issuing the Policy, the Minister announced that the federal government has ordered the divestiture of three separate investments in Canadian critical mineral companies involved in (among other things) lithium mining activities, both within and outside of Canada. The divestiture orders are a significant change in both approach and tone relative to recent cases such as the recent acquisition by Zijn Mining (a state-owned Chinese mining company) of Neo Lithium (a Canadian-headquartered lithium mining company with assets in Argentina), which was allowed without consideration of a full national security review. While the questions raised (including before the Standing Committee on Industry and Technology) about that decision may have played a role in the formalizing of a harsher approach towards investment in the critical minerals sector, the Canadian government has viewed such investment as an area of strategic importance for some time. The Policy also builds on the enhanced scrutiny that has been applied by the government under the revised Guidelines on the National Security Review of Investments since early 2021, as discussed in our earlier Update.

The divestiture announcement is also significant in its transparency about government actions under the national security review provisions. Historically, the federal government has not routinely disclosed the outcome of a Cabinet-level national security review. The announcement includes a statement that in order to ensure transparency, the federal government will announce the outcomes of final Cabinet orders (i.e., non-approvals or approvals subject to conditions) on a going-forward basis.

Type of foreign investment impacted by the policy

The Policy applies to any investment by a foreign SOE in a Canadian business engaged in the “critical minerals” sector value chain, regardless of the size of investment or whether such investment is reviewable under the general net benefit framework of the ICA. To understand the implications of the Policy, it is important to unpack some of the key terms.

  • A foreign SOE includes not only an enterprise that is owned or controlled directly or indirectly by a foreign government, but also an entity that is “influenced directly or indirectly” by a foreign government. Moreover, the ICA provides that the Minister may determine whether an entity is controlled in fact by a SOE.
  • Furthermore, the Policy also applies to investments from private foreign investors assessed as being closely tied to subject to influence from, or who could be compelled to comply with, extrajudicial direction from foreign governments, particularly non-likeminded governments.
  • The direct foreign investor need not be an SOE itself. Rather, indirect ownership in the investor by a foreign SOE is also captured.
  • While the focus is clearly on non-likeminded governments, the Policy is not limited in its application to only certain countries.
  • Canadian businesses for purposes of the ICA and the Policy do not need to be Canadian-owned and do not need to have their operations based in Canada.
  • Critical minerals refers to those minerals “critical for the sustainable economic success of Canada and its allies” as set forth on Canada’s Critical Minerals List, published on March 11, 2021. It includes the following 31 minerals:

Critical Minerals List

  • Aluminum
  • Antimony
  • Bismuth
  • Cesium
  • Chromium
  • Cobalt
  • Copper
  • Fluorspar
  • Gallium
  • Germanium
  • Graphite
  • Helium
  • Indium
  • Lithium
  • Magnesium
  • Manganese
  • Molybdenum
  • Nickel
  • Niobium
  • Platinum group metals
  • Potash
  • Rare earth elements
  • Scandium
  • Tantalum
  • Tellurium
  • Tin
  • Titanium
  • Tungsten
  • Uranium
  • Vanadium
  • Zinc

The critical minerals sector includes all stages of the value chain (e.g., exploration, development and production, resource processing and refining, etc.).

New rules for foreign SOE investment in the critical minerals sector

Net benefit regime – exceptional basis only

Where an investment by a foreign SOE (or a foreign-influenced private investor as described above) results in a direct “acquisition of control” of a Canadian business and exceeds the applicable threshold for pre-closing Ministerial review under the general net benefit framework of the ICA, approval will only be issued on “an exceptional basis”. Factors to be considered to determine whether a proposed investment would be of likely net benefit to Canada include

  • the extent to which a foreign state is likely to exercise direct operational and strategic control over the Canadian business as a result of the transaction
  • the degree of competition that exists in the sector, and the potential for significant concentration of foreign ownership in the sector as a result of the transaction
  • the corporate governance and reporting structure of the foreign SOE
  • whether the Canadian business to be acquired is likely to continue to operate on a commercial basis

The reference to approval being issued on “an exceptional basis” is reminiscent of the language in the 2012 SOE Guidelines as they relate to foreign SOE investment in the oilsands, and is similarly clearly intended to discourage and restrict significant acquisitions of control in the critical mineral sector by foreign SOEs.

National security regime – heightened risk

The Policy states that all investments by foreign SOEs (or foreign-influenced private investors as described above) that involve a Canadian business or entity operating in a critical minerals sector in Canada will form the basis for a finding that the investment could be “injurious to national security”. The use of this phrase suggests that any foreign investors with direct or indirect SOE investment making an investment of any size in the critical mineral sector in Canada should expect to receive a notice, pursuant to section 25.2 of the ICA, that a Cabinet-level national security review of the investment may be ordered. This is an interim step in the national security review process and in many cases no further action is taken. However, the issuance of a 25.2 notice serves as a bar to closing if that has not yet occurred until confirmation from the government that no further action will be taken.

While a pre-closing filing may result in delay, the government’s recent divestiture orders highlight the risk of post-closing review and possible remedial action to address national security concerns in circumstances where an investor chooses to submit a mandatory notification on a post-closing rather than pre-closing basis (for acquisitions of control where net benefit review is not triggered) or opts not to voluntarily notify the investment (for investments that do not involve an acquisition of control, as discussed in our earlier Update).

The Policy includes a list of factors that may be considered by the government as part of its national security review:

  • the size, scope and location of the Canadian business
  • the nature and strategic value to Canada of the mineral assets or supply chain involved
  • the degree of control or influence an SOE would likely exert on the Canadian business, the supply chain and the industry
  • the effect the transaction may have on the ability of Canadian supply chains to exploit the asset or access alternative sources (including domestic supply)
  • the current geopolitical circumstances and potential impact on allied relations

For further information regarding the Policy or other questions relating to Canada’s foreign investment review regime, please contact the members of Osler’s Competition and Foreign Investment Group.

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FP Answers: What is a 'behavioural edge' in investing and how does it affect returns? – Financial Post

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Temperament is the unsung hero of investing success

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By Julie Cazzin with Felix Narhi

Q: What is a “behavioural edge” in investing? How does it potentially enhance returns? How can an investor develop it? — Giovanni

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FP Answers: Giovanni, the term behavioural edge is just another way of saying “temperament,” which refers to the habitual way a person behaves in each situation. For example, one person may be easygoing and relaxed while another is more likely to be impatient and assertive.

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Temperament is the unsung hero of investing success. Gaining insight about our innate emotional temperament and learning how to work with it gives investors an edge.

The common misconception is that you need a high level of intelligence to be a successful investor. No doubt, that can be helpful, but based on many years in the industry, I’ve seen it is not always the most important differentiator.

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Once someone has at least an average level of intelligence, it is temperament that often provides the investing edge in leading to better returns over the long term. “Investing is not a business where the guy with the 160 IQ beats the guy with the 130 IQ,” famed investor Warren Buffett has pointed out.

Having the right temperament can potentially enhance investment returns in several ways. An investor who is very reactive to external events is likely to fare poorly over the long term because, quite simply, the world is full of uncertainty and always will be. Markets are highly reactive, abetted by algorithmic trading and automatic rebalancing by exchange-traded funds. Individual investors should not be.

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Research shows that investors who trade frequently or try to time the market underperform. On the other hand, those investors who can remain calm and patient throughout market cycles do better because markets historically trend upwards. Hands down, being calm, cool and collected is the right temperament for an investor to have.

The concept of “homo economicus” — or economic man — describes a hypothetical person who consistently makes rational decisions. In real life, our decisions are coloured by our formative experiences, moods, external circumstances, what we ate for lunch and a host of other factors. These influences drive our behaviours, but they often operate below conscious awareness (even artificial-intelligence apps “hallucinate”).

Given that behaviour is some combination of cognitive and emotional inputs, an investor can create an edge by developing a disciplined investment process that overrides temperament, especially during highly volatile periods.

The term “active patience” means being clear about your investment principles and what you are looking for, and practicing active patience until the right opportunity arises.

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In contrast, regular patience is making an investment decision and sticking with it no matter what, even if it was the wrong decision. The latter approach is unlikely to bring financial success, which is the major goal of investing.

Active patience is what Buffett would call the “fat pitch,” which occurs when the market (occasionally) presents a very attractive opportunity. It is easy to spot a great opportunity and take full advantage of it when an investor has clear principles on what they are looking for.

Can we change our temperament? Recent studies show that personality traits and moods are subject to change, sometimes within the hour, so temperament may not be as fixed as we’ve been led to believe.

Becoming a better investor starts with self-knowledge — and lots of practice. The behavioural traits associated with good investment outcomes are patience, discipline, emotional control and risk awareness. It so happens, these qualities lead to good life outcomes, too. A calm temperament is the bedrock of making sound investment decisions.

Every investor must determine for themselves how to achieve greater equanimity and there is no shortage of books, videos and TikTok tutorials on that evergreen topic. I would also add the importance of staying humble.

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In investing, as in life, the learning never stops. Staying open to new information and having the courage to challenge our own and others’ beliefs and habitual behaviours are the keys to future success.

Felix Narhi is chief investment officer and portfolio manager at PenderFund Capital Management Ltd.

Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters here.

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Lenders Rally After India’s Central Bank Eases Investment Curbs – BNN Bloomberg

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(Bloomberg) — Indian banks and shadow lenders rose Thursday after the country’s central bank eased capital requirements for a unique type of investment, a move that may free up more funds for loans.

The gains came after the Reserve Bank of India issued Wednesday modified rules on lenders’ required provisions for exposure to alternative investment funds, or AIFs, that invest in the lenders’ borrowers. Under the new policy, a lender needs to set aside capital only for the amount the AIF invested in the debtor company, and not the entire investment of the lender in the AIF.

Shares of Piramal Enterprises Ltd., which reported among the biggest provisions for such investments, closed 1% higher after rising as much as 6% during the day. A gauge of financial services firms climbed 1%, the most since March 1.

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Lenders led the rally in the broader market, with the NSE Nifty 50 Index registering its best day since beginning of the month.

The RBI’s softening stance came after industry players raised concerns over clarity and uniformity after it announced in December restrictions on lenders’ exposure to AIFs that hold stakes in their borrowers. The latest move will likely help firms including Piramal, HDFC Bank Ltd. and IIFL Finance Ltd. reverse some of their relevant provisions made previously, according to analysts at Citigroup Inc. and Jefferies Financial Group Inc.

Read more: India’s Crackdown on Financial Risks Puts Industry on Watch

“Select private banks and NBFCs like Piramal had provided for their entire AIF exposure during 3Q and could see some write-backs in 4Q if they decide to reverse the excess provision,” Jefferies analyst Bhaskar Basu wrote in a note.

Regulators introduced a flurry of new rules last year to prevent a buildup of financial stress at a time when India’s economy remained resilient in the face of rising interest rates, slowing global growth and unabated geopolitical tensions.

©2024 Bloomberg L.P.

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What is Islamic halal investment and why is it on the rise?

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The global Islamic halal economy is set to reach a market value of $7.7 trillion by 2025, more than double the $3.2 trillion it reached in 2015 and significantly higher than the $5.7 trillion it was valued at less than three years ago in 2021, according to industry experts.

A report by the General Council for Islamic Banks and Financial Institutions revealed last year that the global Islamic funds market has grown by more than 300 percent over the past decade, with nearly $200bn now under management globally.

The statistics depict a rise in both demand for halal – or “sharia compliant” – investments and opportunities.

Investing is permitted under Islam, but certain aspects of investment practice – such as charging or paying interest – are not. This has traditionally meant a lack of opportunities for Muslim savers and investors in the past.

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What is halal investment?

Halal is an Arabic term meaning “permitted” and stipulating that:

  • Transactions cannot involve “riba” (interest).
  • Investments must not be made in “haram” (unlawful) assets or commodities such as pork products, alcohol or military equipment, among others.
  • Investments cannot be made based on “gharar”, which has been described as “highly uncertain transactions or transactions that run contrary to the idea of certainty and transparency in business”.

“Halal investment is basically managing your money and finances in line with your faith,” Omar Shaikh, director of Islamic Finance Council UK (UKIFC), told Al Jazeera. “Muslims believe that earning money in a way which is halal is better than earning money (even if that is more) in a way that is harmful to society and against the morals of the religion.”

Umar Munshi, co-founder and managing director of Islamic finance group Ethis, said sharia compliance is key, but institutions and investors looking for ethical investments need to go even further to ensure a business is completely ethical.

“The actions of a business must not have a negative impact on society or the environment,” Munshi told Al Jazeera. “So it’s not only compliant, but refraining from having a negative impact. Investing in a tobacco company, for example, may be sharia compliant, but it’s not good for society.”

How does halal investment work?

One example of halal investment is Islamic business financing, which works using new models of profit-sharing, sharia-compliant insurance and sukuk, an Islamic financial certificate that represents a share of ownership.

Unlike with conventional bonds – a form of IOU that investors can buy in order to receive interest payments – sukuk investors receive partial ownership of a business and then receive profit payments, which are generated over time. These payments are made instead of interest in order to ensure sharia compliancy.

“Islamic finance as a sector is barely 30 years old, with the past 15 years seeing the most development,” Shaikh from UKIFC said. “It takes time to educate and create awareness and as this has happened, more banks have focused on servicing the demand for halal investing. This in turn helps to create more products, which then creates more demand.”

Stock markets used to be the traditional modes of investment for many [Marcin Nowak/Anadolu via Getty Images]

A Goldman Sachs report published in December 2022 estimated that by 2075, five of the world’s 10 largest economies – India, Indonesia, Nigeria, Pakistan and Egypt – will have Muslim populations amounting to more than 850 million people.

As the population rises, so does its demand for financial products. According to the State of the Global Islamic Economy Report 2023, published by research group DinarStandard, some $25.9bn was invested into sharia-compliant investments in the financial year 2022-23, marking a 128 percent year-on-year growth.

“In general, it [halal investment] is on the rise. People are a lot more educated and more aware of how their dollar impacts the socioeconomic landscape globally,” said Siddiq Farid, co-founder of SmartCrowd, a real estate investment platform based in Dubai.

“They are a lot more cautious, too, hence leading to more ethical investing, which halal investing is a big component of. It’s on the rise, particularly around the younger generation. The millennials, they are a lot more aware socially. People realise exactly where their money is going and how it’s being used.”

An increase in opportunities for halal investing and their ease of access are also cited as reasons driving the rise in demand.

Israel’s war on Gaza and its impact

More recently, the rise in demand for halal investments has received an additional boost as consumers boycott brands seen as supporting Israel and its war on Gaza.

The war, which has seen more than 32,000 Palestinians killed by Israeli attacks in Gaza, has “adjusted” the mindset of these investors, Farid said.

“Halal investment has been increasing steadily and it has accelerated further in the past six months, mostly among millennials and people under 40,” he said.

“But in the past, it’s more of these people just looking for something halal. As long as it’s not haram, it’s fine. Now, there’s more awareness of not only halal, but halal aligned with values and faith. All these boycott movements have got people much more aware that something may be halal, but you might not necessarily want to use it, be associated with it or invest in it.”

bds
The Boycott, Divestment and Sanctions (BDS) movement has made many people consider where their money goes before they spend or invest it, say experts [Martin Pope/SOPA Images/LightRocket via Getty Images]

How has technology contributed to the rise of halal investing?

FinTech Magazine reported in December last year that while Muslims make up nearly a quarter of the world’s population, barely one percent of financial assets qualify as sharia compliant. This is set to change, say experts, with the arrival of “fintech” – financial technology that can make investing much more accessible for ordinary consumers and individual investors.

“Muslims are generally not as well educated when it comes to investing, and this is partly due to a lack of available options for them as Muslims. Even basic information pertaining to sharia-compliant investments is often not available to most of the Muslim population,” said Ibrahim Khan, co-founder of the online financial platform Islamic Finance Guru, in an interview with FinTech Magazine.

However, the rise of social media has contributed to an increased awareness and significant growth in sharia-compliant finance. In addition, fintech has made halal investment options, which are often much more convenient and easy to use with a smartphone or laptop, more accessible.

Consultancy group McKinsey & Company published research in January this year showing that “revenues in the fintech industry are expected to grow almost three times faster than those in the traditional banking sector between 2023 and 2028”.

“Your phone is often physically the closest thing to you. Fintechs are able to start from this paradigm and build solutions that are efficient and enhance transparency and choice for retail customers. This is where a lot of the action is at. Many banks are now creating fintech-based solutions or acquiring fintech players,” said UKIFC’s Shaikh.

Munshi added the selling point for fintechs is the age of the target audience.

“The younger generation is more open to investing online,” said Munshi, whose company operates an online platform and community for alternative finance and investment opportunities.

The same research by McKinsey & Company showed that the fintech industry raised record capital in the second half of the 2010s. Venture capital funding grew from $19.4bn in 2015 to $33.3bn in 2020, a 17 percent year-over-year increase.

As of July 2023, publicly traded fintech companies had a combined market capitalisation of $550bn, double that of 2019, the research said.

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