Cabinet tightens foreign investment laws

January 10, 2007

Extracted from the Bangkok Post: Bangkok Post

(Bangkokpost.com, Agencies)

The Cabinet on Tuesday approved in principle changes to regulations on foreign businesses, setting off immediate reaction even though the law still must go before a panel of legal experts for revisions.

"They approved in principle the Foreign Business Act but the Council of State will study the legal details for proper implementation,'' said Netrpreeya Chumchaiyo, deputy government spokeswoman said.

The amended law will, from now, go to the Council of State which will fine-tune it before it is submitted to the National Legislative Assembly for debate.

The amended law imposes new restrictions on foreign ownership in the country. Investors were rattled at the new regulations, which come two weeks after a bungled attempt to impose capital controls.

Singapore state-owned investment company Temasek Holdings Pte will be among those affected by the changes, Finance Minister Pridiyathorn Devakula said. Loopholes under which foreigners invest through nominees will be tightened, he said.

The law redefines "alien" to mean "foreigners and their Thai nominees," who must reduce combined ownership to less than 50 per cent, M.R. Pridiyathorn said.

"Foreign investors who altogether hold more than a 50 per cent stake in a company must lower their stake within a year," the minister said after a nearly five-hour cabinet meeting.

"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.

A maximum of 15 Thai-listed companies will be affected by the tighter foreign business ownership rules, Stock Exchange of Thailand President Patareeya Benjapolchai said.

The benchmark SET Index slumped another 2.4 per cent. Yields on 10-year notes fell to the lowest in three weeks after the Cabinet approved revisions to foreign investment laws.

"The market is already sick. This was like taking a sick man into the operating room," said Monkol Phuangpatra, a broker for Atkinson Securities.

The new rules are generally seen as another blow to investor confidence in Thailand, already dented by a September coup and last month's decision to impose capital controls.

"Companies that already invest and use the nominee structure will have to liquidate or find a partner within one year," said Ekachai Chongvisal, who helps oversee the equivalent of $2 billion at Tisco Asset Management Co in Bangkok.

"Given the strict timeframe of 12 months I doubt many Thai investors will be able to absorb all this liquidation."

Prime Minister Surayud Chulanont's cabinet debated the changes for nearly five hours. They could redefine shareholder rights and ownership structures for local subsidiaries of international firms.

The foreign business community has warned of potentially severe economic fallout from the mooted changes and urged the government to delay the new measures by six months.

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

Immediately after the Cabinet's decision was announced, the stock market reacted by falling 10.6 points or 1.64 percent. The index plunged further by 14.45 points to 617.43 points before it rebounded to 620 points.

Analysts fear the revised law could force foreign companies to sell off huge amounts of stock to Thai investors, who might not be able to absorb a large number of shares over a short period.

SET on Tuesday closed at 616.75 points, falling down 17.07 points or 2.69 per cent.