Thailand Moves Against Foreign Firms

Daniel Ten Kate
10 January 2007

Stock market is battered by the military government’s changes to ownership law

As if a coup, capital controls and random bombings in Bangkok weren’t enough to scare away foreign investors, the military-appointed government raised the specter of protectionism Tuesday when it acted to halt the longstanding practice of using nominee firms to bypass the 49% foreign ownership restriction.

The nationalist-inspired move appears aimed largely at punishing Singapore-government run Temasek Holdings, which purchased telecommunications giant Shin Corp from deposed prime minister Thaksin Shinawatra’s family a year ago this month.

Brokers and other analysts were not surprised but they were dismayed, seeing the regulations as a case of politics intervening to hurt the economy. “I had hoped that a compromise would prevail and prevent this from coming out of the Cabinet today, but no. This to me is the worst case,” wrote Andrew Stotz, head of Thailand research at Citicorp Securities in Bangkok, in an email with the subject line exclaiming “THEY DID IT!”

And while the damage to foreign firms isn’t as bad as initially feared, the action still sparked a steep 17 point drop on the Stock Exchange of Thailand after the cabinet announcement. Many analysts expect things to only get worse for the bourse, which has been battered with bad news in the past three weeks.

Fortunately for many, the new rules will not be applied retroactively for the thousands of companies using nominee shareholding structures that are not operating in sectors supposedly vital to national security or Thai culture.

Companies that fall under so-called “List Three” of the Foreign Business Act, which designates sectors in which Thailand is supposedly not ready to compete, will merely need to apply for an Alien Business License to continue operations. This list includes everything from rice milling and construction to accounting, legal services, hotel management and brokerages.

“The good news is that major investments will not be affected, although the revision will hurt foreign direct investment to some degree,” said a Western diplomat who monitors economic activities. “It’s not terrible, but it’s not good either. It’s like staring into the abyss and realizing you’ve still survived.”

Even so, the measures appear to achieve the potent political goal of hitting Temasek’s Shin Corp deal, which was done using a complex structure of holding companies and sparked considerable outrage, both because a foreign firm grabbed a blue chip telecommunications asset and Thaksin’s family avoided paying taxes on the deal.

Complaints by the main opposition Democrat party at the time led to a Commerce Ministry investigation on whether one of the holding companies, ostensibly owned by Thais, was actually controlled by Temasek. Turns out it was nothing unusual – just like the nominees set up used by thousands of other foreign-run companies in Thailand.

Although the Democrats and others sought to vilify Temasek, Shin and Thaksin, the 73.3 billion baht tax-free deal actually followed standard operating procedure in Thailand for the past 30 years. Any attempt to single out Temasek as a villain would be impossible.

When the generals took out Thaksin by force last September, some thought the political fight against Temasek would fade into the background. But the uproar over the Shin deal made it impossible for the generals to do nothing.

The old law said that a company’s nationality is determined by its shareholders, not its voting structure. Thus, a company could be majority owned by Thais but still controlled by foreigners, ala the kind of holding companies Temasek used.

Pending a mandatory legal review, the new law passed by the cabinet Tuesday will say that a company will be considered foreign-owned if offshore investors control more than 50 percent of either shares or voting rights. That would make Temasek the owner of those holding companies in which it controls more than 50% of votes, even if it holds less than half of the company’s shares.

Finance Minister Pridiyathorn Devakula said companies operating in sectors which deal with national security, culture and other “special” businesses, have one year to reduce shareholdings and two years to reduce voting rights.

But, in another twist, the government also said the rules “don’t apply to any company under investigation.” That includes Kularb Kaew, one of the holding companies in the Shin deal that was already ruled a nominee of Temasek. It also includes Norway’s Telenor, which indirectly owns mobile phone operator DTAC, the major rival of market leader Advanced Info Service, a Shin subsidiary acquired by Temasek.

At some point, Temasek will also have to sell down its holdings in iTV, Thailand’s sole independent television station born out of the 1992 pro-democracy protests that fell first into the hands of Thaksin and then the Singapore government. Running a television station is on the list, along with putting out a newspaper, rice farming, land trading and making images of Buddhas.

The property sector is due to be hit hard. Many foreign run companies buy and sell land in resort areas like Phuket and Koh Samui, and they will now be forced to sell down their holdings. That could spark a massive exodus as firms struggle to comply with the new requirements.

“How can you trust anyone with more than half of your business?” Larry Cunningham, managing director of Phuket One Real Estate, said in a recent interview.

Kitti Nathisuwan, head of research at Macquarie Securities in Bangkok, told Asia Sentinel: “The nationalistic elements are running through the room. They are basically telling foreigners: ‘We don’t want your money.’”

Another analyst, Vikas Kawatra of Kim Eng Securities, wrote in a research note that “Imposing restrictions on FDI is simply wrong—even though the intention behind the move is to punish the deposed PM Thaksin Shinawatra. I think these two steps aren’t the last silly moves expected from this government.”

Pridiyathorn claimed that the revised law simply brings Thai law in line with global standards. He plans to make the rounds of foreign business associations in the coming days to further explain what the government has in mind.

But no matter what, the move is seen as a clear retreat into protectionism at a time when the rest of the region is opening up. Peter van Haren, chairman of the Joint Foreign Chamber of Commerce in Thailand, which represents more than 10,000 businesses, has said that protected lists should be eliminated altogether.

The argument is simple. The lists were drawn up in 1972 to protect sectors in which Thai companies are not competitive. Yet 35 years later, those companies are still not competitive.

“We wonder how long it would be protected?” he told the Bangkok Post last month. “With no free competition, the winners are the ones who control business, but the losers are the end users or consumers.”

This longer term thinking may contain more vision than an appointed government slated to serve for just one year is required to come up with. Many of the new leaders, including the prime minister, are ex-soldiers bent on preserving the status quo and hurting Thaksin, whose economic policies were hailed by foreigners, rural Thais and many businessmen.

At some point, the country’s leaders will need to stop looking to the past and start looking at where they want Thailand to go in the future. At the present, many think it’s only moving backward.

“The foreign content of the Thai economy is very important,” said Sompob Manarangsun, an economist with Chulalongkorn University. “We can’t just say we don’t need foreign capital anymore because the baht is strengthening. The global economy is becoming more and more open. Even emerging countries like Vietnam and India are opening up. We cannot do the opposite and start retreating.”

Thailand braced for business clampdown

By Amy Kazmin in Bangkok

Published: January 10 2007 22:03 | Last updated: January 10 2007 22:03

Foreign businesses in Thailand were braced for further turbulence on Wednesday as the government insisted it would press ahead with changes to foreign investment laws, even as trading partners warned these could breach Bangkok’s World Trade Organisation commitments.

Pridiyathorn Devakula, the government’s top economic policymaker, sought to play down the changes, saying foreign manufacturers, exporters, or companies with investment privileges would be unaffected.

But as more details of the amendments were released, it appeared that Thailand’s military installed government would have greater power over foreign businesses in the service sector than thought. Foreign executives said it was too early to assess whether the changes, which will extend the definition of a “foreign company” to include voting rights, would force them to divest some Thai holdings.

“It is impossible to know what this will mean in practice,” said Sigve Brekke, chief executive of Total Access Communications, Thailand’s second-largest mobile phone operator, which is owned by Norway’s Telenor.

Authorities indicated on Tuesday that foreign-controlled companies in many service businesses would be permitted to operate without restructuring, although they would be required to report to the ministry.

But the British Chamber of Commerce on Wednesday said all foreign investors would be “forced to divest shares currently held by nominees”. That would leave some firms with a choice of selling down their holdings to be truly Thai-owned, or of restructuring and applying for licenses to operate as a foreign-owned company.

Kanissorn Navanugraha, director general of the commerce ministry’s Business Development Department, said issuance of licences for such firms “is not automatic”.

Western diplomats complained that the legal overhaul, while giving Bangkok greater control over foreign companies, would violate Thailand’s pledge to the WTO, of which it has been a member since 1995, to consider only nominal shareholding levels, as opposed to voting rights, to determine whether a firm is Thai or foreign-owned.

“They are playing with matches,” said one diplomat. “They pretend they want to clean up the table, but in fact they are adding a new condition.”

The diplomat added that, “it is a clear policy decision that at least in the service sector, Thailand will be a closed market and foreign capital will only be authorised if it is a minority both in shareholding, and in control.”

However, Mr Pridiyathorn denied that the government wanted to curb inward investment. He insisted the government was forced reluctantly to overhaul the laws after the furore that surrounded Temasek Holdings’ takeover of Shin Corp, the telecommunications empire founded by ousted former prime minister Thaksin Shinawatra.

Last year, the commerce ministry ruled that Temasek had violated Thai foreign equity restrictions and asked police to investigate – alarming other foreign companies using similar structures for their Thai holdings. Mr Pridiyathorn insisted Bangkok was acting to protect other foreign investors from the Temasek fallout. “We had no choice,” he said.

As the military regime sought to soothe investors, an attorney for Mr Thaksin, now effectively in exile, declared that the former telecommunications mogul was quitting politics and would not contest the next general election. The news came as the army prohibited all broadcast media from airing any statements by Mr Thaksin, or leaders of his former Thai Rak Thai party. The foreign ministry also revoked his diplomatic passport.



  1. It seems as though things will revert back to normal by the end of the year


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