Legal impediments to foreign investment

Widespread legal limitations exist on the holding of foreign securities by institutional investors, together with other forms of discrimination against foreign bonds. The impediments to the sale of foreign bonds, typically dating from the inter-war period of default and bankruptcy, were often designed to protect savers from mismanagement by the trustees of their savings. Some of these safeguards are now outmoded in the light of new priorities, especially in Europe where a restructuring of capital markets is being encouraged. Such impediments may take the form of discriminatory taxes; unnecessary restrictions on portfolio selection by savings banks, insurance companies and other institutional investors; or prohibitory laws regarding countries which defaulted many years ago.

Although some of these impediments are technically non-discriminatory, they may effectively discourage or even exclude foreign bond issues by certain less developed countries, by requiring detailed information on prospectuses for any new public issue. Even without taxes or controls, countries may effectively restrict access to their capital markets simply by maintaining a level of interest rates that discourages new foreign issues. These different regulations are not aimed particularly at the developing countries, but in combination with the limitations of the capital markets themselves and with balance of payments restraints on capital outflow, they impose a formidable barrier to new bond issues by developing countries in many national capital markets.