Yawning Bread. January 2007

Temasek Holdings stews in familiar juice




I made a prediction for Today newspaper in the last week of December. It is a sign of how incredibly messy Thailand has become that I don't even know whether I'm right or wrong.

In the last week of 2006, the newspaper contacted me asking what I thought would be the top 7 issues or outcomes that people should expect to witness in 2007, as well as 7 under-the-radar matters that could crop up.

"What do you mean by 'under-the-radar'? I asked.

"Things that people aren't really expecting, that might not even come to pass... kind of like dark-horse possibilities," the reporter explained.

They were canvassing thoughts from a broad selection of people, so I wasn't expected to name all 14.

I gave them my thoughts, as, I'm sure, did others; they were all consolidated into a feature article that appeared in Today's first edition for the year, on 3 January 2007. Among the top 7 things to look out for were said to be the increase in the Goods and Services Tax and likely changes in the healthcare system.

I can't recall what the newspaper listed as the top 7 'under-the-radar' events to watch out for were, but my one nomination was not included in the published list. In my email to Today dated 28 December, I had said,

A dark horse that I think we need to be aware of is further political problems for Temasek Holdings in Thailand. I can foresee a situation where the military-appointed government starts losing popularity in the country and there is then the risk that they will use nationalistic issues, e.g. flogging Temasek-ShinCorp, to keep rallying the people or divert attention from the democracy deficit.


On 9 January 2007, the Thai newspaper, The Nation, reported that the Commerce Ministry was submitting for cabinet approval, a major change to the Foreign Business Act. The proposed amendment would treat any company in which foreign shareholders had 50 percent or more of voting rights as a nominee company [1]

Currently, many foreign companies control Thai companies by using various joint venture holding companies as shareholders. Typically, on paper, the Thai partners have more than 50% of the holding company, but voting rights are distributed in a different way, favouring the foreign company. Thus, the foreign company has effective control of the holding company and consequently the Thai operating company, even though on paper, going by the ratio of shareholdings, the holding and operating companies are still majority-Thai.

Thai law may have been unclear about how to treat such shareholder agreements, but in practice, successive Thai government have refrained from looking too closely at these cosy arrangements.

Strictly speaking, foreign companies are barred from a broad range of commercial activities, and that is why many investors have resorted to such obfuscating set-ups in the past.

While the details of the proposed amendment have not been revealed -- corporate lawyers and foreign investors complained about the total lack of consultation and transparency -- it is believed that companies that currently run foul of the new rule will be given just 2 years to restructure themselves to make them really majority-Thai. All these companies will be scrambling to find genuine joint venture partners who can buy out their excess stake at fair value, but in such a scenario, it will most definitely be a buyer's market.

When the news of the proposed amendment to the law was first announced, almost everyone believed that reversing Temasek Holdings' takeover of Shin Corp was the main motive behind this move. In fact, the Sydney Morning Herald reported that Commerce Minister Krirkkrai Jirapaet singled out Shin Corp as a party that needed to restructure.

Krirkkrai and Finance Minister Pridiyathron Devakula gave news conferences that raised as many questions as answers.

The only affected company Krirkkrai mentioned by name was Kularb Kaew, a holding company set up for the $US3.8 billion takeover of Shin Corp, a telecommunications firm Thaksin founded, by Singapore state investment firm Temasek.

-- Sydney Morning Herald, 10 Jan 2007,
Thailand tightens foreign investment laws

See also the story on the right.

So things were unfolding in a way which I thought I had foreseen: as the military government loses the public's confidence, they resurrect nationalistic issues to stem their slide in public opinion.

They had already tarnished their own economic management credentials earlier in December by trying to impose currency controls in a sledgehammer fashion, only to retreat a day later when the stock exchange melted.

Then, just 3 days after I sent my email off to Today newspaper, 8 bombs exploded on New Year's eve in Bangkok. Till now, no one has claimed responsibility for them, and it is unlikely, given the poor forensic skills of the Thai police and their completely mindless investigative habits, that they will ever be able to pinpoint the perpetrators. This can only mean that the people who set off those bombs are free to set off others in the not too distant future.

As you can imagine, the Surayud Chulanont government clearly needs to demonstrate that it is in charge. What better way than to go after Thaksin again -- for example, his own and his family's diplomatic passports have just been cancelled -- and beat the nationalistic drum.

Yet the government has to be careful that their measures do not appear extra-legal and arbitrary -- faults commonly associated with military governments -- so while aiming to reverse the takeover of Shin Corp, they would want to do it in an across-the-board legal way. Hence the current proposal to amend the law, affecting all companies that have used nominee shareholders in the past.

But doing so, in such a broad manner, risked widespread alarm among foreign investors; as the Nation reported, all 28 foreign chambers of commerce protested loudly when news of the proposed amendment came out. The Thai stock market plunged again.

In a remarkable volte-face, reminiscent of what happened after the chaotic attempt to impose currency controls, a day after announcing the (still unpublished) amendments to the Foreign Business Act, the government began to backtrack, saying that foreign-invested companies are grouped into three classifications (Annexes 1 to 3 of the Law) and that the changes would only affect those in the first two lists. Most foreign-invested companies would not be affected by the new requirements, they said.

Under the draft, foreign investors under Annex 1 and 2 will be subject to a maximum shareholding and voting rights of 49.99 per cent, while those under Annex 3 will be required to hold shares not exceeding 49.99 per cent but will not have to reduce their voting rights.

-- The Nation, 11 Jan 2007, FOREIGN BUSINESS ACT
SET steadies after telecom exemption

However, without being able to read the actual text, no one in the market is all that much clearer. Different people have given different estimates of the number of companies affected.

But what was most intriguing was an announcement that telecom companies would be exempted.

After a sharp plunge on Tuesday, the Thai stock market headed up yesterday, thanks to the authorities' announcement that telecom companies were partially exempt from the amended Foreign Business Act.

The Stock Exchange of Thailand (SET) Index yesterday closed 0.9 per cent higher at 622.27, off the day's lowest level at 608.14, following a clearer picture of the draft act - which has less effect on foreigners than earlier estimated.

As investors cooled off with the announcement yesterday by Deputy Prime Minister and Finance Minister M R Pridiyathorn Devakula that telecom companies would not be subject to the 50-per-cent voting limit, they stopped selling shares in telecom companies.

-- ibid

Advanced Info Systems plc, the main operating subsidiary of Shin Corp, is a telecom company. But does that make Shin Corp a telecom company too? Nobody seems to know [2]. It's all very confused, and I don't know whether my prediction to Today is now proven right or wrong. I may have completely underestimated the Thai talent for generating utter confusion.

* * * * *

Whether the amendments are limited or broad, almost all observers are of the opinion that they are a retrograde step. In an age when capital and technology are needed from foreign investors for Thailand to keep pace with China and other neighbours, taking such a protectionist stance with regard to doing business in Thailand will hurt the economy in the long run.

Yet the government seems to feel that it must bend to populist nationalism, even as it tries to reassure foreign investors that, once again, the law will not be enforced if your trade is in Annex 3 (whatever that is), or if it is a telecom company (however that is defined). How is that different from the past when the law said these various companies must be majority-Thai, yet the government looked the other way when people found creative ways around the rules?

The root of the problem lies in the unresolved conflict between pandering to economic protectionism and wanting the benefits of foreign money. For a long while, people thought the legal fudging was harmless.

* * * * *

Right now, Singapore's Temasek Holdings may be caught in the trap, or maybe not, but the Singapore government has no moral right to gainsay such messy fudging either, for while our economic management in Singapore tends to have much more clarity than Thailand's, in other areas, the Singapore government is also very fond of similar stances, with the law saying one thing, perhaps vaguely too, but administratively not quite

Being very familiar with how the Singapore government behaves towards the gay community, I can immediately name you three examples, although I am sure other examples can be found relating to other areas too. Political observers have noted how our government likes to have in hand vast powers through "driftnet laws" that aren't normally used, but that can catch you on anything when they suddenly feel an urge to.

My first example is the case of the Nation and Snowball parties. They were licensed and held without any unusual hindrance from 2001 to 2004, in fact with increasing support from the Singapore Tourism Board. Then when complaints came up, believed to have come from the Christian rightwing, whom the government needed to appease over the casino issue, the government turned around and banned them. We hadn't known they were gay parties, the police quite disingenuously said.

Secondly, take our Internet Code of Practice [3]. It is forbidden to "advocate" homosexuality or lesbianism, on pain of penalties. What does "advocate" mean? Oh don't worry, says the government. We will apply the Internet regulations with a light touch; while we have all these sweeping laws, you can trust us to apply them sparingly.

How is this different from the Thai government's previous "light touch" when it came to nominee shareholders fronting for foreign investors?

More recently, we were told that, in order to reflect the so-called conservative majority in Singapore, the Penal Code would continue to criminalise homosexual sex, but don't worry, the government said, we won't enforce that particular law. Are gays and lesbians supposed to be happy with that state of affairs?

Isn't this exactly the same as what the Thais have been doing: pandering to an antediluvian segment of the population, while wanting to enjoy the benefits of openness and modernity? I can't see any moral difference between what has happened in Thailand and what the Singapore government continues to do here. 

Yawning Bread 


9 Jan 2007 
The Nation

Kularb Kaew is nominee under revised act

With the revised Foreign Business Act taking effect, Kularb Kaew Co Ltd - controlled by Temasek Holdings-owned Cypress Holdings Co Ltd will be defined as a nominee company.

And to comply with the law, the company has a year to reduce its foreign shareholding ratio and voting right.

Deputy Prime Minister and Finance Minister MR Pridiyathorn Devakula Tuesday came up with the judgement, clarifying the issue that has been under the authorities' scrutiny since April last year.

"Kularb Kaew falls into the "nominee" case and it must inform the authorities within 90 days and unload the (foreign) shareholding within 1 year," he said Cabinet meeting on Tuesday.

Earlier, Temasek gestured the readiness to follow the law, if the authorities promised to enforce a similar rule to all other foreignowned companies in Thailand.

This is believed to be a major reason behind the legal amendments.

Asked what is Temasek's next step, Myrna Thomas, Temasek's managing director for corporate affairs, said yesterday "We await details. We'll then consult with our legal counsel on the implications of the changes,"

Thai government has announced it will limit foreign investors to holding no more than 50 per cent of the shares or the voting rights in companies here under legal changes approved Tuesday.

"Foreign investors who altogether hold more than a 50 per cent stake in a company must lower their stake within a year," Pridiyathorn said.

"Foreign investors who hold more than 50 per cent of voting rights must also reduce their voting rights within two years,"he added.

The 50-per cent cap will only apply to companies that deal with areas considered important to national security, or that have an impact on natural resources or Thai culture, he said.

The cabinet approved the changes to the Foreign Business Act "in principle" on Tuesday.

Surayud said the government's top panel of legal advisers would continue to work on the details of the law to ensure precision and transparency.

"The Council of State is authorized to work on the details to make the law precise and transparent, without any need to be resubmitted for cabinet approval again," he told reporters.

"It will take some time for the law to take effect," he added.

The Cabinet approved Tuesday the foreign business law amended by the Commerce Ministry.

The amended act would include the requirement on the voting rights of the board members and increase the penalty for violators.

Netpreeya Chumchaiyo, deputy government spokesman, said after the Cabinet meeting that the Council of State is assigned to review the draft amendments.

Earlier, Joint Foreign Chambers of Commerce warned that the amendment might affect their decisions to do business decision.

Commerce Ministry and Finance Ministry are scheduled to make seperate press conference at 3pm.

Earlier Finance Minister Pridiyathorn Devakul vowed to press ahead with legal change that could overhaul the way foreign companies do business here despite warnings of potentially disastrous economic fallout.

Pridiyathorn insisted that foreign companies would not be scared off by the final version of the law, which has not yet been released.

Foreign business community in Thailand has urged the government to postpone the changes for at least six months.

"Why should we withdraw it? They have not yet seen the details. If they had seen the details, I am sure that they would be happy," Pridiyathorn said.

"Why should we postpone it when we have worked on it for three months. This is Thailand," he added.

The minister was speaking after attending the cabinet meeting which will consider the changes.

Pridiyathorn said he had consulted some foreign investors about the changes to the Foreign Business Act and more than half of them had found the new rules acceptable.

"I myself will talk with them. I have held talks with many investors but they have not seen all of the details and the commerce minister cannot disclose the bill before the cabinet gives its approval," he said.

"We have a record of welcoming foreign investment. We are not hostile to them. Foreign investors have made Thailand develop and we are certainly still adhering to this policy," he said.

The revised law is expected to redefine shareholder rights and ownership structures for local subsidiaries of international firms.

Companies have traditionally set up their operations in Thailand so that the local subsidiaries are nominally owned by Thais but controlled by foreigners.



  1. Reported in The Nation, 9 Jan 2007, FOREIGN BUSINESS ACT 'We could withdraw our investments', and in the Sydney Morning Herald, 10 Jan 2007, Thailand tightens foreign investment laws
    Return to where you left off

  2. A theory I have is that this move to exempt telecom companies is, far from helping Singapore and Temasek Holdings, meant to target the law even more precisely at Temasek-ShinCorp. As explained in a previous Yawning Bread article, Total Access Communications, trading under the name DTAC, is controlled by a foreign investor too, Norwegian Telenor. DTAC is the second largest mobile phone company, by subscriber base. This exemption may therefore let Telenor and DTAC off the hook. However, the government may rule that the exemption does not apply to Shin Corp, since Shin has businesses other than AIS under its umbrella. Shin is thus not a pure telecom company, therefore not eligible for exemption from complying with the divestment requirements. But right now, I'm just speculating.
    Return to where you left off

  3. Media Development Authority Internet Code of Practice.
    Clause 4 (2)(e)
    Return to where you left off