Rift in Myanmar over draft investment law

* Draft law limits foreign investment in 13 sectors

* Myanmar tycoons seen benefiting from changes

By Martin Petty and Aung Hla Tun

YANGON, Aug 29 (Reuters) - Protectionist clauses introduced by Myanmar's parliament to a long-awaited foreign investment law have sparked concern the legislation will scare off foreign companies and benefit the crony capitalists who have long dominated its economy.

Two sources with direct knowledge of the law say President Thein Sein wants to make it attractive to foreign investors and his office has been working behind the scenes to convince lawmakers to ease restrictions introduced by parliament, which could approve the draft this week.

The law, crucial to foreign investment in one of Asia's last frontier markets, has been stuck in Myanmar's bicameral parliament for five months. Sources involved in the issue say 94 changes have been recently introduced, ostensibly to help domestic small and medium-sized enterprises compete.

New requirements for as much as $8 million in start-up capital and barriers for foreign joint ventures in 13 restricted sectors could ultimately force some foreign firms to reconsider investing in Myanmar, say officials with ties to the president.

"It will just benefit a handful of the businessmen who had already made a fortune," said a senior industry official with close knowledge of the drafting process, who requested anonymity because of the sensitivity of the issue.

Since the suspension of most Western sanctions as a reward for economic and political reforms, many foreign businesses have held off committing to investments despite praising Myanmar's potential in sectors from tourism to timber, oil and gas.

Coca-Cola Co, hotelier Marriott International Inc , automakers Suzuki Motor Corp and Ford Motor Co and tech firms Panasonic Corp and Toshiba Corp have expressed interest in entering Myanmar.

Many multinational executives say they want regulatory clarity in a market dominated for decades by tycoons with ties to well-connected generals - a tightly knit circle of cronies who face competitive threats as the government seeks to liberalise the economy and introduce greater transparency.

The overhaul of the law puts restrictions on 13 sectors, limiting foreign firms to a maximum 49 percent investment. The restricted sectors include manufacturing, farming, agriculture and fisheries.

The law would require foreign firms to put up between $5 million and $8 million in start-up capital for a 35-49 percent stake in joint ventures with a Myanmar partner.

The revised law also requires that local companies match or contribute more capital than their foreign partner, a clause that could play into the hands of Myanmar's cronies, some of whom remain blacklisted by Western governments because of ties to the former military junta.

"FLEXIBLE" APPROACH URGED

Sean Turnell, an expert on Myanmar's economy at Australia's Macquarie University, said the draft's changes represented a backlash to the reform process by entrenched vested interests, which had prevailed in some other post-transition countries.

"Instead of moving to a more liberal economic environment, some within the country seem to be pushing towards an outcome that could see the effective 'oligarchisation' of Burma's economy," he said.

Another source familiar with the law said the President's Office was being kept informed of the work of parliamentary committees tasked with handling the legislation and had relayed to lawmakers concerns about the impact of proposed changes.

In consultation with his advisers, Thein Sein had urged a more "flexible" approach. That would include dropping the $5 million start-up capital requirement and increasing foreign shares in joint ventures in the restricted sectors, the source said on the condition of anonymity.

The investment law is one of the biggest pieces of legislation handled by a parliament that has become increasingly vocal under the leadership of lower house speaker, Shwe Mann, a decorated former general and an influential powerbroker.

Like Thein Sein, Shwe Mann was a heavyweight in the former junta who has won international praise for his role in driving reforms in the 17 months since the military ceded power.

Changes to the draft legislation, which initially allowed 100 percent investments by foreigners in any sector, followed a June 30 meeting in Yangon between Shwe Mann and Myanmar businessmen who urged an immediate review of the law.

According to parliamentary sources, lower house members discussed the bill with local businesses between July 6 and 11 and then asked the upper house to send it back. The bill was returned to the upper house recently with 94 points for amendment, which included the new restrictions.