M.R. Pridiyathorn critiques proposed changes to foreign investment policy
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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Sasin Business School at Chulalongkorn University held a seminar on proposed changes in the Foreign Business Act (FBA) yesterday.
In the past, complicated and non-transparent nominee shareholding structures were used by foreign investors to get around legal limits on ownership. (See complicated example on right)
Thaksin's sale of Shin Corp to Singapore's sovereign wealth fund Temasek last year put the public spotlight on nominee shareholding structures.
Changes to the FBA have been proposed to make nominee structures more transparent and eliminate loopholes in the law.
In the Sasin seminar yesterday, M.R. Pridiyathorn, former Finance Minister and Central bank Governor, warned of possible fallout from these proposed changes.
He warned of a possible "mass exodus of foreign investors" to countries that have opened up recently and liberalised their investment laws such as neighboring China, India, Vietnam, Malaysia, and Indonesia.
The reality is actually that: "investors can go anywhere they like."
Which could mean "a lot of companies in Thailand close and move out."
Not a good thing at all for the Thai economy.
Participants in the seminar included the Commerce Ministry, the Joint-Foreign Chambers of Commerce (JFCC), the law firm Baker & McKenzie, and Fitch Ratings, a credit ratings firm .
In all likelihood the current unelected NLA will never get around to passing a bill to change the FBA before the elections scheduled for December when their term expires.
This would be in line with the desire of many to have the whole FBA issue handled by a democratically elected government accountable to the public.
For further reading, read more Bangkok Post articles about the Foreign Business Act.
Read interview with the head of the Joint-Foreign Chambers of Commerce (JFCC).
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What were M.R. Pridiyathorn's suggestions regarding the proposed Foreign Business Act (FBA) changes?
2. What impact could the proposed FBA have on foreign investment?
3. Which Thai sector is continued foreign participation especially important in? Why?
4. What steps have been taken on the proposed FBA bill by the government so far?
5. What three ways was the law expanded?
6. Which of these expansions of the law fall into the category of: a. shareholder control of businesses, b. management control of businesses? (Express your opinion)
7. What "single case" is being referred to in the following sentence? "What we want to stress is that one single case should not be used as a benchmark to disturb the entire structure" (Express your opinion)
8. Does the government need a new FBA to punish Shin Corp ?
9. What intended effect would the "grandfather clause" have on the enforcement of the FBA? (Use inference)
10. What actual effect would "grandfather clauses" have?
11. Why is the proposed FBA law not likely to come into effect under the current interim government?
Bangkok Post Article August 23, 2007
INVESTMENT / LEGAL RESTRICTIONSForeign Business Act attacked by experts
UMESH PANDEYOfficials in charge of amending the Foreign Business Act (FBA) should either suspend the process or amend the contentious "List 3" to avoid a mass exodus of foreign investors, local experts say. "Whatever the government does, its next step is going to be crucial and all I can do is to advise them two ways. First is that we hope that the government drags its feet and lets the bill die its own death, and second it is that the government revises 'List 3' down to zero or near zero," said M.R. Pridiyathorn Devakula, a former finance minister and central bank governor.
"The new revised version of the FBA is going to scare investors away, especially the services sector - a sector where Thailand continues to need the expertise of foreign partners," he said at a seminar on the FBA at the Sasin Institute of Business Administration at Chulalongkorn University on Tuesday.
The FBA was passed by the cabinet and needed NLA approval but it was withdrawn after some NLA members proposed a stricter version.
On Aug 8 a majority of the NLA voted in favour of expanding the definition of foreigners to include: a) the power to appoint or remove a majority of directors, b) the power to determine the company's future direction, and c) in the case of multi-tier holding company structure, a proposal to categorise each tier in the structure as foreign.
"What we want to stress is that one single case should not be used as a benchmark to disturb the entire structure, because if the Commerce Ministry wants it can use the existing rules and regulations to punish and catch those who are breaking the law," said Deepak Mittal, the vice-chairman of the Joint-Foreign Chambers of Commerce.
"Usage of nominees is not permitted even under the current structure."
Kanissorn Navanugraha, a Commerce Ministry official, said the amendments under the proposal approved by the cabinet were made in order to clarify the definition of who was a "foreigner".
He said that businesses in the manufacturing, export and some other industries were not affected and that investors should not panic. Instead the laws were being drafted to create greater transparency and accountability.
He said companies that were already operating in Thailand should not worry as most could seek to "grandfather" their operations by applying for a permit from the ministry within a year after the law is passed and restructuring their operations within two years.
Other panelists disagreed, saying that applying for the grandfather clause would mean that the company was admitting it had breached the law.
"What happens if the next government says that it is getting rid of the grandfather clause? The companies that admitted to the breach of law would then be in clear violation of the law," Mr Mittal said.
Mr Kanissorn said that his agency was already working to amend the rules but was not sure if they can be passed during this government's tenure, as new elections are set for late December.
"What we are drafting is legislation that would give fair treatment to both Thai and foreign investors, and thus create a level playing field for all parties," he said.
Kittipong Urapeepatanapong, a partner at Baker & McKenzie, was opposed to the law, arguing that nearly all companies listed on the Stock Exchange of Thailand could need restructuring, adding that no country in the region had such restrictive laws.
"If these laws passed by the NLA are put into force, we could see a lot of companies in Thailand close and move out," added M.R. Pridiyathorn, who was a proponent of the FBA in its earlier form.
"Those who proposed the new amendments are living in a different world, thinking that by closing Thailand they still can attract investments, but the on-the-ground realities are different. Other countries such as China, India, Vietnam, Malaysia, and Indonesia have all opened up and investors can go anywhere they like."
Vincent Milton, managing director of Fitch Ratings Thailand, said it was Thailand's own decision on where it wanted to go in the long term and policies needed to be drafted in line with those goals.
Vocabulary (in discussion above)
M.R. Pridiyathorn Devakula - former finance minister and central bank governor
Sasin Institute of Business Administration, Sasin Business School - Thai business school offering MBA and PhD degrees founded by Chulalongkorn University with the support and collaboration of the Kellogg School of Management and the Wharton Business School (See website and Wikipedia)
Foreign Business Act (FBA) - Thailand's current law that regulates how foreign businesses can conduct business in Thailand, teh current law came into effect in 1999
List 3 - businesses from which foreign companies are excluded because "Thai nationals are not yet ready to compete with foreigners," service businesses excluded include banking, insurance, hotels, tours, selling food and beverages, wholesale, small scale retail, and most construction, professional services excluded include accounting and legal services, advertising, architecture, and auctions, agricultural businesses excluded include rice milling, flour production, fisheries, forestry and the production of various kinds of wood, and plant cultivation (See summary)
nominee shareholding structures, nominee structures - different ways of organising the shareholding of a company with holding companies so that nominees can hold shares indirectly for the real owners
holding company - a company that owns other companies (only "holds" stock, does not carry on business operations)
nominees, nominee shareholders - Thai nationals who hold shares in a company for the real foreign owners
nominee companies - companies that use Thai nominees so that foreigners can own more than 49% of the company
sovereign wealth funds - large government investment funds that invest the collective savings of a country in overseas investments (See Wikipedia)
transparency - visibility of government operations and policy, being visible not hidden (See glossary)
accountability - being responsible for one's actions and able to justify these actions (See glossary)
put the public spotlight on - when the media or an event directs public attention to a certain issue
fallout - the bad things that happen after an event, because of the event
a mass exodus - large movement of people out of a place
Joint-Foreign Chambers of Commerce (JFCC) - an umbrella organisation for 22 foreign chambers of commerce and 3 business associations in Thailand
Baker & McKenzie - one of the largest international law firms in the world with offices in many countries (See website and Wikipedia)
Fitch Ratings - an international credit rating agency dual-headquartered in New York City and London. It was one of the three Nationally Recognized Statistical Rating Organizations (NRSRO) designated by the U.S. Securities and Exchange Commission in 1975 (See Wikipedia and website)
in line with - agrees with, compatible with
contentious - causing argument
drags its feet - go slowly in doing something, so it never actually happens
a tier - level
multi-tier - has many levels
* multi-tier holding company structure
a benchmark - something known that can be used to compare and measure other things with
* used as a benchmark
clarify - make clear, remove ambiguity and confusion
grandfather clause, grandfather - a clause in a law that permits a business to continue even though it is now illegal under a new law
breach a law - violate a law
* admitting it had breached the law
tenure - the official period of time of holding an important job
* this government's tenure
legislation - laws passed by a government
a level playing field - everyone has equal opportunity, rules are the same for all
parties - people involved in an acticity or agreement
a partner at a law firm - one of the people who own and run a law firm
* partner at Baker & McKenzie
laws put into force - enforce the laws
on-the-ground - actively involved in a situation (with the events, decisions, and people, rather than viewing it from afar as intellectuals and high level managers or government officials often do)
* on-the-ground realities
Answer Key:
1. What were M.R. Pridiyathorn's suggestions regarding the proposed Foreign Business Act (FBA) changes?
a. Don't pass the proposed bill.
("we hope that the government drags its feet and lets the bill die its own death")
b. Reduce or eliminate "list 3," the list of businesses barred to foreign participation.
("we hope that...the government revises 'List 3' down to zero or near zero")
2. What impact could the proposed FBA have on foreign investment?
a. Foreign investors that are already operating in Thailand might leave. ("mass exodus of foreign investors")
b. New foreign investors may invest in other countries like Vietnam instead of Thailand. (Scare investors away, Other countries such as China, India, Vietnam, Malaysia, and Indonesia have all opened up and investors can go anywhere they like, we could see a lot of companies in Thailand close and move out )
3. Which Thai sector is continued foreign participation especially important in? Why?
The services sector, because Thailand needs the expertise of foreign joint venture partners in this sector.
4. What steps have been taken on the proposed FBA bill by the government so far?
a. Passed by cabinet.
b. Put up for NLA approval.
c. Some NLA members proposed a stricter version.
d. FBA bill withdrawn from NLA.
5. What three ways was the law expanded?
a) Board Appointment: The power to appoint or remove a majority of directors
b) Mission Statement: The power to determine the company's future direction
c) Nominee Shareholding Structure: categorising each tier in a multi-tier holding company as foreign or not
6. Which of these expansions of the law fall into the category of: a. shareholder control of businesses, b. management control of businesses? (Express your opinion)
a. Shareholder control of businesses: (Nominee Shareholding Structure)
b. Management control of businesses: (Board Appointment, Mission Statement)
7. What "single case" is being referred to in the following sentence? "What we want to stress is that one single case should not be used as a benchmark to disturb the entire structure" (Express your opinion)
Probably Shin Corp which Thaksin founded and sold, apparently using a complicated nominee shareholding structure to get around FBA restrictions.
8. Does the government need a new FBA to punish Shin Corp ?
No according to Deepak Mittal, vice-chairman of the Joint-Foreign Chambers of Commerce: "if the Commerce Ministry wants it can use the existing rules and regulations to punish and catch those who are breaking the law...Usage of nominees is not permitted even under the current structure."
9. What intended effect would the "grandfather clause" have on the enforcement of the FBA? (Use inference)
It is meant to give foreign investors who are currently violating the law time to adjust.
("He said companies that were already operating in Thailand should not worry as most could seek to 'grandfather' their operations by applying for a permit from the ministry within a year after the law is passed and restructuring their operations within two years.")
10. What actual effect would "grandfather clauses" have?
Foreign investors will not apply for them because it would be effectively admitting that they broke the law. This would make the foreign investor vulnerable to prosecution in the future under future Thai government policy changes.
11. Why is the proposed FBA law not likely to come into effect under the current interim government?
Because elections are scheduled for December.
("Mr Kanissorn said that his agency was already working to amend the rules but was not sure if they can be passed during this government's tenure, as new elections are set for late December.")
