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“77100”,”9/5/2006 6:25″,”06BANGKOK5424″,

“Embassy Bangkok”,”UNCLASSIFIED”,””,



DE RUEHBK #5424/01 2480625


R 050625Z SEP 06












E.O. 12958:N/A




1. Summary: The Ministry of Commerce is wrapping up an

investigation into possible illegal foreign ownership structures

arranged for the sale by Prime Minister Thaksin of

telecommunications giant Shin Corporation, an investigation which at

least in theory could have far-reaching effects on foreign

investment in Thailand. The use of holding companies and nominee

firms to skirt foreign ownership restrictions is common practice,

though of questionable legality, and both new and established

investors may also come under scrutiny. Most U.S. investors are not

affected as their investments were arranged under the U.S.-Thailand

Treaty of Amity or under investment promotion privileges by the

Board of Investment, both of which allow for majority foreign

ownership. Although foreign investors risk being dragged into the

fray, U.S. investors here discount that risk, reasoning that the

Shin deal is indeed a very special case, and that both the

government and its opponents have made it clear that they recognize

the value of foreign investment and are substantially more

interested in legalizing and making transparent foreign ownership

rather than further restricting it. The issues raised by the Shin

sale have led to a renewed interest here in modernizing foreign

investment rules, a development we may be able to leverage in our

FTA talks. While our concerns have been allayed somewhat by the

calm reaction from many investors, we still plan to seek

clarification on investment rules from the Ministry of Commerce.

End Summary.

Shin under the microscope again


2. In a controversial January 2006 deal, Singaporean investment

firm Temasek Holdings purchased a 49 percent share of Shin

Corporation from caretaker Prime Minister Thaksin Shinawatra (see

reftels). The sale of Shin sparked an outcry among PM Thaksin\’s

critics as details of the USD 1.9 billion deal emerged, including

that Thaksin structured the sale in such a way that he was not

required to pay tax.

3. Opposition Democrat Party members requested the Ministry of

Commerce to investigate the ownership structure of the Shin deal,

alleging that the Thai majority shareholders of Shin were in fact

stand-ins for Temasek, or \”nominees\”, a possible violation of

Thailand\’s Foreign Business Act (FBA) which restricts foreign

business ownership in service sectors to 49 percent. On paper the

deal seemed to comply with the law. Typical of nominee structures

here, the Shin transaction was effected via a bewildering series of

shell companies: Temasek\’s purchase of Shin involved several

holding companies created specifically for this transaction, with

Temasek maintaining a minority position in many of them. The

majority holder of Shin is Cedar Holdings, a Thai-owned firm thanks

to its ownership by yet another holding company, Kularb Kaew, which

lists a number of Thai businessmen as controlling partners.

Technically this makes Shin Corp. Thai-owned; however, Kularb Kaew\’s

Thai partners reportedly have limited voting rights and dividends

from Shin and may not be full partners in the venture.

4. In a widely reported but unreleased preliminary decision, the

Ministry\’s Department of Business Development found that Kularb Kaew

was indeed a nominee, holding shares for Temasek to help it avoid

foreign ownership limits. Article 36 of the FBA prohibits Thai

nationals from acting as a nominee, though crucially the Act fails

to define precisely what constitutes a nominee firm. Under the Act,

if Kularb Kaew is found to be a nominee its Thai owners are subject

to fines and a maximum of three years imprisonment, and the company

can be dissolved.

Umm, wasn\’t that Pandora\’s Box?


5. Scrutiny into Temasek\’s use of nominees in the purchase of Shin

has unnerved other investors in Thailand, worried that their own

opaque arrangements could be called into question. Although Thai

law has clearly restricted majority foreign ownership since 1972,

the ample presence of foreign businesses suggests otherwise. In

practice, foreign investors have long used nominee companies to

skirt these limitations. The use of nominee companies for this

purpose has been obvious to everyone, including successive Thai

governments, which have tolerated — and, it is argued, implicitly

endorsed — the practice. This solution is \”very Thai:\” the

political attractiveness of a law that severely limits foreign

participation in a large part of the economy is maintained, while at

the same time the practical need for foreign capital and expertise

is accommodated. Business analysts estimate that thousands of

foreign businesses potentially would be affected by a stringent

BANGKOK 00005424 002 OF 003

application of the regulations. A recent study by economic think

tank Thailand Development Research Institute concluded that nominees

held 24.1 percent of shares in all listed companies on the SET,

about one trillion baht (USD 26 billion) in share value.

6. Ownership restrictions have led investors to create patchworks

of ownership vehicles to comply with the letter, if not the spirit,

of the law. A typical business arrangement involves a Thai firm

holding a majority share in the operating company with a foreign

investor holding a minority share. However, the Thai firm is

typically owned in part by the foreign investor, giving the foreign

investor a majority economic interest, but still providing the

appearance of Thai majority ownership. Nominees often control 51

percent of a company on paper, but in practice the shares they hold

have limited voting rights and no entitlement to dividends. In some

cases the foreign investor lends money to the Thai firm to purchase

the majority share, and then holds the shares as collateral for the

loan, effectively controlling all shares. For many smaller deals,

the law firm that structures the deal acts as nominee; small law

firms can be majority partners in literally hundreds of businesses.

7. In the past, the Ministry of Commerce interpreted ownership

nationality by actual shareholdings, and did not consider the level

of economic interest or control. In a number of challenges to

nominee structures over the years, the RTG consistently amended

foreign ownership regulations to define a company\’s nationality by

shareholdings rather than control.

8. To crack down on the use of nominees the Ministry is

implementing new regulations. Effective August 15, the Ministry

requires registrants of new partnerships and limited companies that

include foreign shareholdings of more than 40 percent to submit six

months of bank statements as evidence that the Thai partners have

sufficient capital to undertake the investment. The Ministry also

has authority to examine existing businesses to verify that their

ownership complies with the law, but limited manpower in the

Ministry virtually guarantees that investigations will not be

widespread. In a related move, the Ministry of Interior notified

all provincial governors on May 15 that land purchases involving

foreigners be examined for illegal use of nominees. The SET has

also announced that it plans to require public disclosure of the

identity of shareholders who have at least a five percent stake in a

listed company.

9. The new Commerce regulations have yet to prevent new investors

from using nominees. Local lawyers noted that the regulations

applied to companies with more than 40 percent foreign ownership;

one law firm submitted two new business registrations last week with

39 percent foreign ownership that were approved without further

scrutiny. In addition, Commerce intends to examine initial business

registrations closely, but is not clear on how it will handle

recapitalizations. In theory a foreign investor could initially set

up a structure with genuine Thai investment, then recapitalize with

foreign money giving him majority control without raising any

eyebrows at Commerce.

U.S. Saved by the Treaty


10. Nearly all U.S. investors have managed to legally acquire

majority control by setting up their investments under the

U.S.-Thailand Treaty of Amity and Economic Relations (AER) or by

using investment promotion privileges granted by the Board of

Investment (BOI). The AER offers national treatment for U.S.

investors, allowing majority ownership in all but six protected

sectors, including inland communications, inland transportation,

fiduciary and depositary operations, domestic agricultural trade,

and land and resource exploitation. Land ownership is also

restricted, with some exceptions for industrial estates,

BOI-promoted investment, and petroleum concessionaires.

11. While a theoretical case can be made that U.S. investment in

Thailand could be harmed by the fall-out from the Shin deal, U.S.

investors here seem unconvinced that, in practice, there is any

problem. In response to our inquiries, local lawyers and the

American Chamber of Commerce have been unable to name a single U.S.

company that in their view could be affected by more stringent

application of foreign ownership limits (though we continue to

canvass the U.S. business community). Amcham speculates that

smaller companies that wished to own land (which under Thai law is

illegal) may have entered into a nominee ownership structure and

could be subject to review. Even in these few cases, however,

precedent suggests that these companies would be given without

penalty an opportunity to change their structures to bring them into

compliance with Thai law.

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Commerce pulls back the reins


12. Soon after the Ministry of Commerce reportedly made a

preliminary ruling that Temasek had indeed used nominees to purchase

Shin, officials announced that a new committee would be formed to

consider the broader implications of the investigation. The

committee includes members from the Securities and Exchange

Commission, Finance Ministry, Bank of Thailand and the Council of

State. The committee\’s main task will be to more precisely define

\”nominee\”, a task that Deputy Minister Preecha Laohapongchana said

could take two to three months.

Democrats kick the political football


13. The opposition Democrat party has made hay on both Temasek\’s

alleged use of nominees and the Ministry of Commerce\’s suppression

of the investigation\’s findings, calling for a prompt disclosure of

the Ministry\’s report. At the same time, party leaders say they

recognize the value of foreign investment and have called for

liberalization of foreign ownership limits, thus obviating the need

for complex, non-transparent nominee structures.

14. In a meeting with Embassy officers, MP Kiet Sittheeamorn said

the Democrat Party was pursuing the Shin case because it was a

\”particularly egregious\” example of the use of nominees, so blatant

that it could not be overlooked. He implied that the party had no

interest in initiating investigations into other businesses and

criticized Thai Government officials for resorting to what he

regards as scare tactics in suggesting that other foreign

investments may be in jeopardy.

The way out


15. Business observers say Commerce will likely drag out the Shin

investigation as long as practicable while searching for an

acceptable conclusion to the case. One possible scenario suggested

to us by a major property developer is that Commerce will simply

declare that the Shin deal was not in compliance originally, but

post-deal shifts in ownership have met legal requirements. This

short-term non-compliance would be subject to a modest fine. In the

meantime, Commerce would amend the FBA to clarify the definitions of

nominee and foreign ownership in such a way as to reassure investors

while still protecting sensitive sectors.

16. The upside of the Shin investigation is that it has sparked a

salutary debate on foreign investment in Thailand. Driving through

Bangkok, the most casual observer will see ample evidence that

foreign investment in \”Thai-only\” sectors is rampant. Overly broad

restrictions have spawned a web of complicated ownership structures

across many sectors and have not provided the control over key

sectors that the law intended. Many here are calling for a

realistic reappraisal of Thai investment law, with changes including

dismantlement of blanket restrictions on foreign ownership. In

place of current restrictions, analysts recommend a more confined

list of protected sectors together with a structure to more closely

analyze investments in these specific sectors.

17. Comment: Temasek\’s non-transparent but not uncommon ownership

arrangement for its takeover of Shin Corporation has provided yet

another opportunity for PM Thaksin\’s opponents to criticize his

personal and public policies. Although foreign investors risk being

dragged into the fray, U.S. investors here discount that risk,

reasoning that the Shin deal is indeed a very special case, and that

both the government and its opponents have made it clear that they

recognize the value of foreign investment and are substantially more

interested in legalizing and making transparent foreign ownership

rather than further restricting it. We believe the renewed interest

here in services liberalization may facilitate progress in this area

in the context of our FTA talks.

18. The level of concern varies among individual investors, with

many respected observers holding sharply diverging opinions on how

the Shin investigation will affect the overall investment climate.

We are reassured that many U.S. investors feel their businesses will

be unaffected, but nevertheless plan to seek clarification from the

Ministry of Commerce on how foreign ownership regulations will be

interpreted or amended. We also will continue to canvass the U.S.

business community on this issue and report their concerns.



Written by thaicables

July 13, 2011 at 5:35 am

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