SEC independence, nominee shareholders, and public confidence in Thai securities regulation
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
 |
Today's article discusses yesterday's conference on corporate governance and the Shin Corp sale. The conference was hosted by the Thailand Development Research Institute and Thammasat University.
The conference focused on issues such as the use of nominees in the purchase of Shin Corp and also on the issue of SEC independence from political influence.
The article looks at some of the issues that the Thai securities industry faces in providing a regulatory environment with clear and equitable rules for all participants in the market, both local and foreign.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What should improvements in the regulation of financial markets focus on, according to a former SEC chief?
2. Who is the SEC currently chaired by?
3. What important event with relevance to securities markets regulation took place last week?
4. In what kinds of cases is enforcement ineffectual, according to the president of a major bank?
5. How might confidence in securities regulation be restored?
6. What was the SEC criticised for earlier this year?
7. What actions did the SEC finally take on the case?
8. Why has public confidence in the SEC fallen recently?
9. How does lack of confidence in the SEC prevent the SEC from doing its regulatory job effectively?
10. What other problems make the SEC ineffective?
Article
Market regulators need more freedom
Current enforcement cited as 'ineffectual' NUNTAWUN POLKUAMDEEMarket reforms should focus on strengthening the independence of securities regulators, with the Securities and Exchange Commission freed from political intervention, says a former SEC chief.
The SEC, the primary regulator of the capital market, is currently chaired by the finance minister.
But speakers at a conference on corporate governance last week agreed that regulatory independence was crucial for a well-functioning market, and suggested that the SEC board should be appointed by either the legislative branch or the courts and transformed into a fully independent body.
Prasarn Trairatvorakul, the president of Kasikornbank, said current enforcement was ineffectual, particularly in sensitive cases involving political figures or the government.
Overhauling the structure of the SEC board to remove possible conflicts of interest and strengthen independence would lift confidence in the regulators, he said.
''One ex-finance minister never attended SEC meetings. Issues that were particularly urgent or complex hardly received the attention they should have, even though each announcement must be signed by the board chairman,'' said Dr Prasarn, a former SEC secretary-general.
The SEC was roundly criticised earlier this year for its investigation of Ample Rich Investments, an offshore holding vehicle set up by the family of caretaker prime minister Thaksin Shinawatra.
Regulators eventually fined Panthongtae Shinawatra, Mr Thaksin's son, 5.98 million baht for violating disclosure and tender offer regulations related to his shareholdings in Shin Corp from September 2000, many of which were managed through Ample Rich. The transactions were discovered only after the Shinawatra family sold its 49% stake in Shin to Singapore's Temasek Holdings.
Opposition politicians say the SEC failed to probe deeper into whether share transfers violated other laws.
Dr Prasarn said public confidence in the SEC had fallen due directly to the agency's lack of political independence.
''If the SEC considers a case as a violation, some might say this represents harassment [of a firm] due to political intervention,'' he said. ''On the other hand, if the SEC says a case involves no wrongdoing, society might ... say this too is political interference, regardless of the fact that consideration was made properly.''
Other legal reforms are also needed because government agencies often fail to set strict deadlines to review cases, resulting in failed prosecutions.
''In reality, the SEC Act is quite good. But we suffer from over-regulation and under-enforcement,'' said Dr Prasarn.
The Shin case has prompted numerous questions regarding the use of offshore holding vehicles and nominees, and the practicality of foreign shareholding limits in today's globalised economy.
A growing number of experts argue that, given the widespread use of nominees, foreign limits should be scrapped in favour of tougher supervision by state agencies, particularly in sectors deemed critical to national security.
The Shin case raised questions about whether Kularb Kaew was a nominee for Temasek to bypass the 49% foreign limit, and also if Panthongtae Shinawatra was a nominee of his father to bypass asset disclosure laws. While Mr Panthongtae is of legal age, few believe the decision to sell family holdings in Shin was his alone.
Nipon Poapongsathon, an economist with Chulalongkorn University, said state regulators were perceived as weak and lacking in the expertise needed to monitor developments in the private sector, resulting in lost benefits for the public, particularly to foreign investors.
''If the civil service does not improve, and the political leadership continues to interfere, the entire bureaucracy will eventually collapse,'' Dr Nipon said.
Tithiphan Chuerboonchai, the dean of law at Chulalongkorn University, said the Shin deal was a clear example of poor governance, with complicated holding structures used to skirt tax regulations.
The Shinawatra family's share sale to Temasek netted 73.3 billion baht tax-free by using a long-standing exemption on capital gains for transactions made through the SET.
Critics noted that the family had made many offshore transactions in Shin stock prior to the final Temasek sale, which the Revenue Department ruled later did not involve tax liability despite the fact that they were done outside of the SET.
Mr Tithiphan noted the initial structure of Kularb Kaew included Pong Sarasin and Supadej Poonpipat as Thai shareholders.
But both Mr Pong and Mr Supadej held only preferred shares stipulating returns of 3%, or lower than yields on government bonds.
''Why would these two people, both businessmen with a close knowledge of finance and investment, agree to make an investment with such low returns and higher risk than, say, government bonds?'' Mr Tithiphan asked.
The shareholding structure of Kularb Kaew was changed in March following the tender offer for outstanding Shin shares, with Thai businessman Surin Uptakoon holding a 68% stake and Temasek the remainder.
Mr Surin told the Bangkok Post last week that his holdings offered equal voting and financial rights as those of Temasek, and denied he was acting as a nominee.
Ammar Siamwalla, an economist with the Thailand Development Research Institute, said authorities should focus on the impact and need when reviewing the suitability of foreign investment in Thai industries rather than only at set shareholding limits.
''In enacting laws, we should be considering the behaviour [of investors] more than just the shareholdings themselves,'' he said.
Vocabulary (in discussion above)
the SEC - the Securities Exchange Commission, this is the name used in the United States government for the agency that regulates the trading of stocks, bonds, and options and enforces laws on insider trading, fraud, and other securities laws (See the Thai SEC website and Wikipedia on the American SEC)
equitable - fair
reforms - changes that make improvements
political intervention - when politicians influence the decisions of a government agency that is supposed to be independent of political parties and politicians
regulatory independence - when making decisions about regulations, independence from the influence of politicians and political parties
overhauling - thoroughly checking something and then making repairs and improvements
offshore - outside of one's own country
holding vehicle - a legal way to hold shares in a company
disclosure - making private information into public information
outstanding - still exists, still out there, "outstanding debts" are debts that haven't been paid yet, "outstanding problems" are problems that have not been resolved yet
tender offer - an open public offer by one company to buy stock from the shareholders of another publicly traded company, the offer is only good for a limited period of time (See Wikipedia on tender offer)
harassment - annoying someone (causing trouble and problems for someone who doesn't deserve these problems)
regardless of the fact that x - even though x (x usually means that it isn't true, but it is)
nominees - named owners who actually hold the asset for someone else
scrapped - eliminate, get rid of, stop (throw away like garbage or scrap)
civil service - career government employees (civil servants are usually protected from being fired when control of the government passes to a different political party, See Wikipedia on civil service)
to skirt x - to avoid x, to go around or bypass x
netted - made a profit
x has an exemption on y - y is a rule or obligation, but it does not apply to x
capital gains - profit made from buying something at a low price and then later selling it at a higher price
preferred shares - stock that has additional rights beyond common stock" such as paying dividends first (See Wikipedia on preferred stock)
stipulating - clearly stating that something must be done or that a condition must be met
Thailand Development Research Institute - Thailand's first policy research institute established in 1984, focuses on research in Human Resources and Social Development, International Economic Relations, Macroeconomic Policy, Natural Resources and Environment, and Science and Technology Development (See website)
corporate governance - the goals and policy set for a company by its board of directors (who try to maximize the value of the company's shares as well as look after the interests of other stakeholders such as suppliers, employees, creditors, customers and the community where the company is located)
(See Wikipedia on corporate governance)
ineffectual - not effective, failure to do what they are trying to do or what people expect them to do
conflicts of interest - when "someone in a position of trust, such as a lawyer, a politician, or an executive or director of a corporation, has competing professional and/or personal interests. Such competing interests can make it difficult to fulfill his or her duties fairly. Even if there is no evidence of improper actions, a conflict of interest can create an appearance of impropriety that can undermine confidence in the ability of that person to act properly." (See Wikipedia on conflict of interest)
Answer Key:
1. What should improvements in the regulation of financial markets focus on, according to a former SEC chief?
Improvements should focus on increasing the independence of securities regulators and eliminating "political intervention."
2. Who is the SEC currently chaired by?
The finance minister.
3. What important event with relevance to securities markets regulation took place last week?
There was a conference on corporate governance last week.
4. In what kinds of cases is enforcement ineffectual, according to the president of a major bank?
Cases that involve political figures or the government.
5. How might confidence in securities regulation be restored?
By removing conflicts of interest from the SEC board.
6. What was the SEC criticised for earlier this year?
The SEC was criticised "for its investigation of Ample Rich Investments, an offshore holding vehicle set up by the family of caretaker prime minister Thaksin Shinawatra."
7. What actions did the SEC finally take on the case?
"Regulators eventually fined Panthongtae Shinawatra, Mr Thaksin's son, 5.98 million baht for violating disclosure and tender offer regulations related to his shareholdings in Shin Corp from September 2000, many of which were managed through Ample Rich."
8. Why has public confidence in the SEC fallen recently?
Because it appears that the SEC lacks political independence.
9. How does lack of confidence in the SEC prevent the SEC from doing its regulatory job effectively?
People or companies with cases before the SEC always feel there is political intervention,
even when there is not:
"If the SEC considers a case as a violation, some might say this represents harassment [of a firm] due to political intervention," he said. "On the other hand, if the SEC says a case involves no wrongdoing, society might ... say this too is political interference, regardless of the fact that consideration was made properly.''
10. What other problems make the SEC ineffective?
a. When there is a failure to "set strict deadlines to review cases," prosecutions fail.
b. There is over-regulation, but under-enforcement.
