**Table 111.1 Investor Protection in Asia and Latin America**

||_Investor_<br>_Protection_|_Creditor_<br>_Protection_|_Judicial_<br>_Enforcement_||_Investor_<br>_Protection_|_Creditor_<br>_Protection_|_Judicial_<br>_Enforcement_|
|---|---|---|---|---|---|---|---|
||_(1)_|_(2)_|_(3)_||_(1)_|_(2)_|_(3)_|
|India|2|4|6.1|Argentina|4|1|5.6|
|Indonesia|2|4|4.4|Brazil|4|1|6.5|
|Malaysia|4|4|7.7|Chile|4|2|6.8|
|Pakistan|_5_|4|4.3|Colombia|I|0|5.7|
|Philippines|4|0|4.1|Mexico|0|0|6.0|
|Sri Lanka|2|3|_5.0_|Venezuela|I|na|6.2|
|Thailand|3|3|5.9|Average|2.2|0.8|6.1|
|Average|3.1|3.1|5.4|||||

- (1) An index of how well the legal framework protects equity investors. It will equal six when (1) shareholders are allowed to vote by mail; (2) shareholders are not required to deposit share in advance of a meeting; (3) cumulative voting is allowed; (4) when the minimum percentage of share capital required to call a meeting is less than 10%; (5) an oppressed minority mechanism is in place; and (6) when legislation mandates one vote per share for all shares (or equivalent).

- (2) An index of how well the legal framework protects secured creditors. It will equal four when: (I) there are minimum restrictions, e.g., creditors' consent, for firmns to file for reorganization; (2) there is no automatic stay on collateral; (3) debtor looses control of the firm during a reorganization; and (4) secured creditors are given priority during a reorganization.

- (3) An index measuring the quality of judicial enforcement ranging from I to 10 (best) equal to the average of five sub-indexes measuring: (1) efficiency of the judicial system; (2) rule of law; (3) corruption; (4) risk of expropriation; and (5) risk of contract repudiation.

Source: La Porta et al. (1997 and 1998).

- **Accounting Standards and Practices.** Accounting and auditing standards in the region are generally consistent with those issued by the International Accounting Standards Committee,<sup>3</sup> and Malaysia and Thailand have strong reporting standards.<sup>4</sup> The Philippines' standards, however, appear weaker. There is strong anecdotal evidence, however, that accounting practices in the region were not yet up to international standards. Compliance with accounting rules was furthermore hampered by weaknesses in industry self-regulatory organizations. In Indonesia, for instance, in the absence of strong professional associations, the official capital market regulatory agency licenses legal and accounting professionals to work in the securities areas. An additional problem has been a shortage of well-qualified accountants and auditors, especially in Indonesia, the Philippines and Thailand. The impact of this shortage of well-qualified accountants was compounded by restrictions on the activities of foreign accounting firms in many countries in the region (e.g., Indonesia).

# **Incentives to Borrow Abroad**

Macroeconomic conditions prevailing in 1994-96, together with the policy mix the authorities chose in response, created incentives for firms to borrow abroad on an unhedged basis. Micro-factors further added to this. There were considerable differences, however, 3 Malaysia, for instance, has adopted 24 of the 31 international accounting standards without alteration, while the others are generally consistent with international standards (World Bank, 1997).

4 The Center for International Analysis and Research is an investment advisor located in the United States. The index is based on the reporting practices of major domestic corporates with regard to 85 disclosure variables.

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