Old foreign shareholding laws, new interpretations?
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
 |
What if business people have been interpreting laws in ways that make it easier to attract foreign investment?
What if they've been doing this for years, maybe even decades?
What if they're actually breaking the law?
What if the government has not enforced this law for years?
But now they are enforcing the law.
Clearly, suddenly enforcing a law, a law that hasn't been enforced for years, maybe even never enforced, might disrupt business.
Why should the law suddenly be enforced now? Why wasn't it enforced several years ago?
If public opinion suddenly demands enforcement of the law, as it apparently does in the Shin case, should the law be enforced?
Should an exception be made for companies that ignored the law in the past because everyone else was ignoring it?
To see how such a situation might arise, consider the following real-life situation. A foreigner wants to buy a condo in Jomtien, let's say. The foreigner does some research and discovers that Thai law says that she must have a certain form that proves the money used to buy the condo came from outside the country. The foreigner asks the bank for this form, but the bank says she doesn't need the form. The foreigner says she doesn't want to break the law. The bank tells the foreigner that no one fills out that form anymore; don't worry about it. So the foreigner doesn't worry about it. Should she?
These are all difficult questions to answer. Foreign investment is hard to attract. It takes a lot of work over a long period of time to build it up. If Thailand makes sudden radical changes in the laws that are enforced, a sort of revolution, if you will, and if this capital takes flight, it may take a long time to build it up all over again. This is the sort of argument that the conservative political philosopher Edmund Burke made against revolutions in his masterwork Reflections on the Revolution in France. This argument may be applicable to the Shin sale also.
The graphics in today's article give you enough information to calculate total foreign shareholdings, direct and indirect, for four large foreign corporations doing business in Thailand: Tesco-Lotus, Carrefour, Holcim, and Cemex.
The graphics on the sides of this article describe the shareholding structures for these companies. Can you calculate their total shareholdings, direct and indirect?
Who seems to hold most of the preferred shares in Tesco and Carrefour? Thai nationals or foreigners? Why do you think?
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What does the government report on the Shin sale reportedly decide about the sale?
2. When will the report be released to the public?
3. What techniques are used by Thailand's largest foreign investors to avoid the 49% limit?
4. How does Thai law determine the nationality of a company?
5. How does international accounting practice determine the nationality of a company?
6. What is the main concern of the Commerce Ministry panel conducting the Shin sale inquiry?
7. What total percentage of Shin Corp does Temasek hold, both directly and indirectly?
8. How might a loan guarantee from a foreign bank be a form of foreign ownership?
(Inference and thought required here)
9. Have indirect shareholdings through shell companies been considered as contributing towards the 49% limit?
10. How have Japanese shareholders traditionally gotten around the 49% limits?
11. What effect is the unresolved Shin sale issue having on financial markets?
12. Why will it be difficult for the foreign companies that might be investigated to restructure their shareholdings?
13. What eventual compromise might be made to keep existing foreign shareholders happy?
14. How might Thai laws be liberalised a bit to accomodate foreign investment?
15. Is getting rid of some of their Thai investments one option that foreign investors might be looking at?
Bangkok Post Article - September 13, 2006
FOREIGN SHAREHOLDING LEGAL LIMITS
Shin probe generates panic
Local law firms flooded with queries POST REPORTERSThai and international law firms are receiving a flood of new business inquiries as foreign companies grapple with the possible need to change their shareholding structures in the wake of an ongoing investigation into nominee companies.
The Business Development Department has reportedly concluded that the Singapore government's investment arm, Temasek Holdings, had violated the Foreign Business Act and telecom laws by controlling more than 49% in the local telecom giant Shin Corp.
But the report has remained sealed pending a broader inquiry into the use of nominee companies by foreign investors.
|
Thai law defines the nationality of a firm based on the nationality of its shareholders - if a majority of capital is controlled by Thais, then the company itself is considered Thai.
International accounting practice, however, typically takes a broader view, and considers not only the surface nationality of the shareholders, but also issues such as management control and the rights to financial benefits from the investment.
Yanyong Phuangrach, a deputy permanent secretary of the Commerce Ministry, said authorities were examining the broader implications of the issues raised by the Shin case and how they related to the law and foreign investment.
Mr Yanyong, who is chairing an inquiry panel into Shin shareholding structure, declined to comment on the reported conclusion by the Business Development Department that Shin was in violation of the law.
''What is of concern to us is the impact [the ruling] will have on business,'' he said. ''The conclusion from the investigation could be different from the one that [has been reported].''
|
Thanong Bidaya, the caretaker finance minister, acknowledged that the Shin investigation had raised widespread concerns among foreign companies, adding that the definition of a nominee was a contentious one.
''If a Thai investor borrows funds to purchase shares in a Thai company, with the loan guaranteed by a foreign bank, who has actual ownership? This is a practice that has gone on for 20 to 30 years in Thailand, and it is debatable whether you can say this is a clear case of a nominee,'' Mr Thanong said.
He said authorities needed to consider whether chain shareholdings across different levels of shell companies should be combined together for the purposes of the law. A foreign investor holding minority stakes across several shell companies has previously been classified as under the 49% limit, despite the fact that total shareholdings, direct and indirect, might exceed the limit.
''In the past, Japanese companies, for instance, invested heavily in Thailand and sought prominent Thais as partners. Many investors basically purchased shares on behalf of the Thai directors and we have never assumed that this was a violation,'' Mr Thanong said.
But the inquiry into the issue has made the business community nervous.
''The market is panicking and most of the companies are already looking at restructuring their shareholding structure,'' said a lawyer, who declined to be named but admitted that his office had received many inquiries about such deals.
Lawyers and investment bankers say that the problem is not just Shin, but the fact that the verdict could establish a principle that would catch hundreds of other companies in violation of the law.
''Our firm is having a problem now as foreign investors want to buy out a company, but, with the outcome of Shin still not out, the buyers are not willing to put up the funds for the acquisition,'' said one investment banker currently involved in a merger and acquisition deal involving a listed Thai company.
|
''We are restructuring our shareholding in the aftermath of the Shin deal,'' said a senior executive at a multinational firm that has invested billions of baht in its Thai operations.
Legal experts say they expect that eventually, they will receive some sort of accommodation from the authorities, with one possibility being a grandfather clause to give existing companies time to comply with the changes.
While few expect the government to agree to full liberalisation of foreign ownership, another option would be to revamp the Foreign Business Act to restrict its application to key sectors deemed critical to national interest. The act's so-called ''List 3'' covers a broad range of industries, including services, construction, engineering, law, trading, retail and tourism.
One foreign executive said that if Thailand decided to expand its enforcement of the 49% rule with a new definition of nominee, he would have no choice but to divest his shareholdings to comply.
''The laws have always been there. The companies have been trying to circumvent them and now they are realising that it is not the right way to go about it. So many will look to sell some of their shares in the proxy companies back,'' he said.
Vocabulary (in discussion above)
panic, panicking - acting without thinking carefully because of fear and worry
receiving a flood of - receiving a lot of
grapple with - try to solve a problem
in the wake of - after a big event (like the waves following a big ship)
nominee companies - companies that use Thai nominees so that foreigners can own more than 49% of the company
an investment arm - a part of the company that does investments
the Foreign Business Act - Thailand's laws regarding foreigners doing business in Thailand
report has remained sealed - no one can read the report yet (it is in a closed (sealed) envelope)
prominent - important, well-known, VIP
multiple share classes - besides plain common shares in the company, there are other kinds of stocks with different rights
voting rights - when the stock gives you the right to vote for members of the board of directors (and thereby influence the company's policy)
nominee structures - different ways that that nominees can hold shares indirectly for the real owners (See diagrams with today's article)
bypass a restriction - avoid the restriction, find a legal wat to go around the restriction
broader implications - the impact on the whole economy and society
holds outright - owns shares directly, not through someone else (a nominee)
a stake - a share in ownership
an indirect stake - indirect ownership (via owning another company that owns the company)
in compliance - following a rule or regulation
majority owned - owned by more than 50%
contentious - causing disagreement and argument
loan guaranteed by x - if the borrower fails to pay back the loan, then x will pay back the loan
debatable - not certain (you could have a debate about this)
chain shareholdings - indirect shareholdings, holding shares in company x by holding the shares of another company y that holds shares in x (like a chain)
shell companies - companies that have no real assets or operations (often used as fronts to conceal real purpose)
on behalf of x - doing something for x (not for yourself)
preferred shares - stock that has additional rights to the normal common stock (See Wikipedia)
scrutinised - examine carefully (to determine something)
in the aftermath of - happening after a
a multinational firm - a company having branches and operations in many countries also known as a "multinational corporation" (MNC) or a "transnational corporation" (TNC) (See Wikipedia on Multinational Corporation)
an accomodation - a change to help someone (changing what you are doing a little bit so that it doesn't have have a negative impact on them)
a grandfather clause - an exception to a new rule (so as to not upset a well-established situation that might currently be violating the rule; See Wikipedia on grandfather clauses)
comply with - follow a rule or regulation (make changes so that you do not violate)
liberalisation - when laws or attitudes become less strict and people are allowed more freedom of action
revamp - make changes to improve
divest - sell, get rid of
circumvent - bypass, avoid, go around
proxy - acting for someone else
proxy companies - companies whose named owners are not the real owners, the named owners are acting for a real owner
Answer Key:
1. What does the government report on the Shin sale reportedly decide about the sale?
That Temasek violated Thai laws by controlling more than 49% of Shin Corp.
2. When will the report be released to the public?
After a "broader inquiry into the use of nominee companies by foreign investors."
3. What techniques are used by Thailand's largest foreign investors to avoid the 49% limit?
Multiple share classes, different voting rights, nominee structures, and preferred shares.
4. How does Thai law determine the nationality of a company?
By the nationality of the shareholders. If a majority of the shares are held by Thais, then the company is Thai.
5. How does international accounting practice determine the nationality of a company?
The "surface nationality of the shareholders" is not the only factor. Other issues such as "management control" from voting rights or "financial benefits" such as the amount of dividends received compared to other owners (e.g. Thai owners) are also taken into account.
6. What is the main concern of the Commerce Ministry panel conducting the Shin sale inquiry?
The panel is concerned about the impact that the ruling will have on business and foreign investment.
7. What total percentage of Shin Corp does Temasek hold, both directly and indirectly?
It holds 96% of Shin Corp, 44% directly and 52% indirectly.
8. How might a loan guarantee from a foreign bank be a form of foreign ownership?
(Inference and thought required here)
If a Thai buys shares in a Thai company with a bank loan from a foreign bank and the loan is also guaranteed by the foreign bank, then the Thai could be acting as a nominee.
The Thai owner is contributing neither the capital, nor is he assuming the risk of the loan. Chances are the Thai owner isn't making real interest payments on the loan either. In other words, the whole thing is a fictional creation to allow the bank or someone else to hold shares in a Thai corporation.
9. Have indirect shareholdings through shell companies been considered as contributing towards the 49% limit?
No. ("A foreign investor holding minority stakes across several shell companies has previously been classified as under the 49% limit, despite the fact that total shareholdings, direct and indirect, might exceed the limit.")
10. How have Japanese shareholders traditionally gotten around the 49% limits?
Japanese have purchased shares on behalf of prominent Thais who have held the shares for the Japanese. Trust is obviously an important factor here.
11. What effect is the unresolved Shin sale issue having on financial markets?
There is panic and uncertainty. Foreign investors are not putting up the funds to complete acquisitions because the Shin sale decision has not been made yet. The law has not been clarified yet.
12. Why will it be difficult for the foreign companies that might be investigated to restructure their shareholdings?
Most of the foreign companies that might be investigated use preferred shares to control Thai companies. Thai law prohibits the changing of voting rights for preferred shares after the formation of a company.
13. What eventual compromise might be made to keep existing foreign shareholders happy?
A grandfather clause might be added to give foreign companies that might be in violation of the law, time to comply with the law.
14. How might Thai laws be liberalised a bit to accomodate foreign investment?
Thailand's Foreign Business Act might be restricted to sectors critical to national interest.
15. Is getting rid of some of their Thai investments one option that foreign investors might be looking at?
Yes, according to the article, "many will look to sell some of their shares in the proxy companies back."
