Widespread use of Thai nominees in foreign ownership
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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Business people will always find loopholes around laws that are not clear.
Foreign companies and individuals doing business in Thailand have been using Thai proxy or nominee owners for a long time to get around laws that limit levels of foreign ownership in Thai businesses to 49%.
Nominees are usually used by foreigners with a legitimate reason for owning land or running a business in Thailand. Usually, they work, are retired, have family members in Thailand, or are just a big company with a lot of spare cash to invest in Thailand, like Temasek. However, nominee ownership is also sometimes used to conceal tax evasion or money laundering. The recent controversy over land ownership in Koh Samui provided examples of this.
The use of Thai nominee shareholders by foreigners who want to own businesses in Thailand is part of a developing issue in Thai business. In the wake of the Temasek sale, many are calling for greater clarity in these laws. Keep an eye out for articles on this topic in the next few weeks.
Nomi....what? : The Latin etymology of English words that use "nom" in them
Today's article is tricky, not because the words are very difficult.It is difficult because words such as "nominee" and "nominal" are used as legal terminology so they have very special and precise meanings as far as the law is concerned.
Both words basically mean "in name only" meaning they are named owners, but actually are not owners at all.
The English words "nominee" and "nominal" come from the Latin word "nōmen" which means "name" or "title".
Many other English words come from this Latin word such as: nominate, noun, renown, binomial, denomination, ignominy, misnomer, and nomenclature.
Studying the history (or etymology) of words, can help you remember a family of words that have similar definitions like the "nom" words above and is especially helpful if you are studying for college entrance tests such as the GRE, TOEFL, SAT, IELTS, or GMAT.
Wikipedia has two very helpful lists of English words that come from Latin Nouns and Latin Verbs.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What is Kularb Kaew?
2. What is the Commerce Ministry investigating?
3. If it was true, what would "Kularb Kaew is a nominee of Temasek" mean?
4. What is the percentage limit on foreign ownership in Thai telecom companies?
5. What criteria have been used in the past to determine a company's ownership status?
6. What two criteria could be used in the future to define a company's ownership status?
7. Why are some foreign companies alarmed by the shift in defining the ownership status of companies?
8. How long has this 'butterfly structure' of nominee owners been used?
9. What recent report concluded that Kularb Kaew was a nominee shareholder? Who was the report prepared by?
10. What did the Commerce Ministry do with the report? Did they release the report?
11. Why didn't they release the report?
(Note: Make a simple inference from comments on the possible impact of the report)
12. What factors are currently used to determine company structure and who owns a company? How might these factors change?
13. How might a change in the law affect Thailand's attractiveness to large foreign investors?
[Check back shortly for more]
Article
'Pandora's Box' could be opened
Major implications for nominee probe
UMESH PANDEY NUNTAWUN POLKUAMDEE
A Commerce Ministry investigation into whether Kularb Kaew was a nominee of Temasek Holdings could have far-reaching implications for Thailand's business community, according to legal experts.
Kularb Kaew was set up in late January by Temasek as a holding vehicle in its takeover of the local telecom giant Shin Corp.
Shin is currently 42% held by Temasek vehicle, Aspen Holdings, and 55% by Cedar Holdings. Cedar in turn is 45% controlled by Kularb Kaew, with the remaining shares held by Siam Commercial Bank and Temasek.
The major shareholder of Kularb Kaew, at 68%, is Surin Upatkoon, a Thai businessman based in Malaysia, with the remainder controlled by Temasek.
''This is like opening up a Pandora's Box. The implications are going to be far reaching,'' said Supavud Saicheua, a managing director of Phatra Securities.
The Democrat Party has alleged that Kularb Kaew is a nominee of Temasek, and therefore in violation of the Foreign Business Act and local telecom laws.
While on paper, Kularb Kaew would appear to be Thai due to Mr Surin's majority shareholding, authorities are investigating whether Temasek actually holds control over the company.
If so, it would imply that Shin also is foreign-owned, thus violating the 49% limit on foreign shareholdings in telecom companies.
This is the first time authorities have indicated that management control and financial flows could be used to define a company's status rather than the nationality of the nominal shareholders.
It is a shift that has alarmed many foreign companies, given the widespread use of nominees in the market, according to Kittipong Urapeepatanapong, a partner at the law firm Baker & McKenzie.
''This is not very good news. There are hundreds, if not thousands of companies that are using such structures and it will be interesting to see what the conclusion of the committee set up by the Commerce Ministry will be,'' he said.
''This 'butterfly structure' has been in use for more than 30 years, so much so that it has been considered acceptable to do such a thing.''
The ministry's Business Development Department, in an 800-page report, reportedly concluded earlier this month that Kularb Kaew did qualify as a nominee.
But the Commerce Ministry has not released the report, and has instead appointed a high-level committee with representatives from the Securities and Exchange Commission and the Bank of Thailand to investigate the legal implications that could arise.
Mr Kittipong warned that the case would have a huge impact on foreign investor confidence and be seen as a step backwards by many investors.
''I can't comment on the specifics of this deal, but I can say that it would have a huge impact on investment, both now and in the future,'' he said.
Mr Kittipong noted that the law currently stated that only equity shareholdings would be taken into account when determining a company's structure. Issues, such as the source of funds, dividend distribution and voting rights, are not taken into account.
Dr Supavud agreed that a ruling against Kularb Kaew would be negatively received by foreign investors.
''With foreign funds now in competition to invest in countries such as China, India and Vietnam, a move by Thailand to restrict foreign direct investment would be something that could hurt the country in the long run,'' he said.
But Korn Chatikavanij, a deputy secretary-general of the Democrat Party, said legal reforms should be taken to eliminate the practice altogether.
''This whole thing needs to be looked at. Yes, Thailand needs foreign investment, but it should be within legal parameters,'' said Mr Korn, a career investment banker and former country head of JPMorgan Chase.
Rapee Sucharitakul, the chairman of Kasikorn Securities, said the case showed that Thailand needed to modernise its current laws.
Rather than focus on nominees or shareholdings, authorities should place more emphasis on the question of monopoly power and management control in sectors deemed critical to national security.
Mr Rapee, a former senior official of the SEC, noted that the current law placed limits on foreign investors based on their shareholdings, resulting in the use of nominees to bypass the law.
But more critical than shareholding structure was the question of management control, a point that has been mostly ignored by authorities.
''In other countries, foreign ownership isn't necessarily restricted. But takeover panels and screening committees are used to ensure that the national interest is served,'' Mr Rapee said.
''Thailand's capital market has developed quickly, more quickly than our laws. What is written in the law and what occurs in reality are not the same.''
Nominees can take several different forms.
Foreign banks, for instance, have established numerous entities to hold shares on behalf of their customers, while the Stock Exchange of Thailand operates a company offering nominee services through Thai NVDR, which manages non-voting depository receipts for foreign investors.
The third category, however, involves companies ostensibly held by Thai nationals but actually controlled by foreigners, both in terms of voting rights and financial benefits from shareholdings.
One senior executive at the SET said nominees hindered transparency in the market by obscuring the actual parties that controlled a company.
An investor seeking to take over a firm or exercise management control could hide their intentions and avoid mandatory tender regulations by taking up blocks of shares through nominees.
Vocabulary
a loophole - a part of a law that is unclear which allows people to do something that otherwise would be illegal
a nominee, a proxy - a person who acts on behalf of another.
The precise legal definition of "nominee" is quite long, but gives you a good idea of what some foreign owners of Thai businesses are doing and why some Thais consider it illegal:
"A nominee is an individual or entity [of Thai nationality], which acts on behalf of a beneficial owner [the real foreign owner]. Most often the nominee pretends to be the owner of an entity, asset, or transaction to provide a veil of secrecy as to the beneficial owner's involvement. Many offshore entities provide nominee services whereby they will provide a nominee to act as owner of your arrangement but generally will not act unless instructed to by the beneficial owner."
The "beneficial owner" is "the true [foreign] owner of an entity, asset, or transaction as opposed to any stated ownership provided in documents or oral representations. The beneficial owner is the one that receives or has the right to receive proceeds or other advantages as a result of the ownership. It is common practice in offshore financial secrecy jurisdictions [such as the Cayman Islands] to interpose entities, individuals, or both as stated owners. The beneficial or true owner is contractually acknowledged in side agreements, statements or by other devises." (Source: United States Internal Revenue Service; note the word in brackets were added my me).
a nominee shareholder - a person who can legally own certain shares of a company [a Thai] who acts on behalf of a true owner who cannot legally own the shares [the foreigner] (Another word for this is "front man")
terminology - words with special definitions in specialized areas like the law, medicine, science, business, or computers
criteria - a factor that you use to make a decision (for example if you get a TOEFL over 650 then your English is good enough to attend ABC University in the United States)
x has far-reaching implications - if x is true, than many other things are true and x has a big effect
a vehicle - something used to achieve a certain purpose (for example Thai nominee shareholders are used by foreigners to own Thai companies)
a holding - a holding in a company, owning shares in a company
a holding vehicle - a legal way to hold shares in a company (for example using nominee Thai shareholders; note that some people interpret these to be illegal under Thai law, others accept the fact that it is technically illegal, but that the law is never enforced, so there is effectively no law)
a takeover - "A takeover in commerce refers to one company (the acquirer) purchasing another (the target). Such events resemble mergers, but without the formation of a new company" (See Wikipedia on takeovers)
a Temasek vehicle - a company that Temasek uses to own another company
to open up a Pandora's box - to do something that creates many new problems
Foreign Business Act - The Thai law of 1999 on foreign ownership of companies in Thailand (Read the law, another good source)
nominal - in name only; supposed to be, but isn't; appears to be x, but isn't; named x, but isn't
not very good news - bad news
foreign investor confidence - the degree to which foreign investors in Thailand feel that that there investment is safe and will give them the return they expected
to take a step backwards - to do something that makes a problem worse, that doesn't solve the problem
equity shareholdings - the stock of a company
source of funds - where the money in the investment comes from, for example a foreign source
dividends - the part of a company's earnings that are given to shareholders every year (capital gains or stock appreciation is the other way shareholders receive a return on their investment)
dividend distribution - who receives the dividends, who they are distributed to (not the Thai nominee shareholder)
voting rights - the right to vote for the directors of the company (this usually comes with stock ownership)
eliminate the practice altogether - stop doing it, don't do it anymore at all
within legal parameters - do something without breaking any laws
investment bank - a bank that helps corporations raise funds in capital markets (stocks and bonds) and also provides strategic advisory services for mergers, acquisitions and other types of financial transactions." (See Wikipedia on Investment Banking)
investment bankers - the staff of investment banks
a monopoly - a market with only one seller (for example if you owned the only store in Thailand that could sell MacDonalds hamburgers)
monopoly power - the power of being the only seller in a market
national security - "National security refers to policy enacted by governments to ensure the survival and safety of the nation-state, including but not limited to the exercise of diplomatic, economic, and military power in both peace and war." (See Wikipedia on National )
bypass the law - find a way to avoid the law, find a legal loophole ("bypass" means "go around")
a panel - a small group of people gathered together for a special purpose (for example discussing an issue at a conference or on TV)
screening - checking for problems before accepting something (for example job candidates are screened by checking references to make sure they have the right skills and attitude)
depository receipts - the way that foreigners hold stock in another country like Thailand (See Wikipedia on Global Depository Receipt - GDR)
ostensibly - something which appears to be true
transparency - the public has access to important information, nothing hidden
hide their intentions - don't tell people what you are really going to do
mandatory - required
a tender - a formal offer to buy
mandatory tender regulations - the rules that must be followed when one is buying another company
etymology - the history of words
tax evasion - misrepresenting or concealing income from government tax authorities, in order to reduce the tax paid (See Wikipedia)
money laundering - "engaging in financial transactions in order to conceal the identity, source and destination of the money" (See Wikipedia)
Answer Key:
1. What is Kularb Kaew?
Kularb Kaew is a holding company set up in January by Temasek as part of its takeover of Shin Corp.
2. What is the Commerce Ministry investigating?
Whether Kularb Kaew was a nominee of Temasek holdings.
3. If it was true, what would "Kularb Kaew is a nominee of Temasek" mean?
It would mean that Kularb Kaew is holding Shin Corp shares for Temasek, the true owner.
4. What is the percentage limit on foreign ownership in Thai telecom companies?
There is a 49% limit on foreign shareholders.
5. What criteria have been used in the past to determine a company's ownership status?
The nationality of the nominal shareholders.
6. What two criteria could be used in the future to define a company's ownership status?
Management control and financial flows.
7. Why are some foreign companies alarmed by the shift in defining the ownership status of companies?
The use of Thai nominal shareholders is already used by many companies. Changing the way the law is interpreted now would probably affect these companies, making their ownership illegal.
8. How long has this 'butterfly structure' of nominee owners been used?
For over 30 years.
9. What recent report concluded that Kularb Kaew was a nominee shareholder? Who was the report prepared by?
An 800 page report by the Business Development Department in the Commerce Ministry.
10. What did the Commerce Ministry do with the report? Did they release the report?
No, they "appointed a high-level committee with representatives from the Securities and Exchange Commission and the Bank of Thailand to investigate the legal implications that could arise."
11. Why didn't they release the report?
(Note: Make a simple inference from comments on the possible impact of the report)
The report could have a huge impact on foreign investment.
12. What factors are currently used to determine company structure and who owns a company? How might these factors change?
Now only equity shareholdings are used. That is, if enough shares are held by Thai nationals then company ownership is legal. In the future, source of funds, dividend distribution, and voting rights might be used.
The typical procedure used with Thai nominee shareholders is to choose people who don't know each other and have them sign a paper relinquishing their ownership rights that the real foreign owner can use if she needs to.
The "source of funds" for nominee Thai shareholders would obviously be the foreigner who would also receive any "dividends" the company issued, and is the only one who really "votes". Any of one of these three criteria would reveal the true foreign owner of the company.
13. How might a change in the law affect Thailand's attractiveness to large foreign investors?
Investment funds might flow to countries like China, India, and Vietnam who are competing with Thailand for investments, if the law changed.
[Check back shortly for more]
