FOREIGN BUSINESS ACT

[Braveheart]

Extracted from The Nation: The Nation

 

Planned amendments give more teeth to laws that restrict business holdings; executives warn of investment backlash

 

Foreign companies, which have been using Thai nominees to circumvent ownership laws, will be forced to reduce their stakes and their voting rights within specified time limits when the amended Foreign Business Act becomes law.

 

After deliberating for almost five hours yesterday, the Cabinet approved a draft amendment to the Foreign Business Act designed to create a level playing field and transparency among foreign companies doing business in Thailand.

 

The amendment aims to end the legal contention over allegations that Temasek Hold-ings of Singapore had relied on nominees to get around the Thai ownership law to take over Shin Corp.

 

The amendments require foreign business owners to reduce their voting rights to below 50 per cent within one year.

 

For shareholdings, if they own a stake in their own name that exceeds the limit, they have two years to reduce it. If the exceeded limit is held in the name of a Thai nominee, they have one year to reduce it.

 

Commerce Minister Krirk-krai Jirapaet said the new law would set a clearer definition on foreign corporate entities.

 

"The law is designed to create more transparency in the system. It should improve the investment atmosphere," he told a news conference.

 

Under the amendments, "foreign companies" are defined as those whose shareholding stakes or voting rights exceed 50 per cent.

 

This law mainly affects foreign companies in the service industry. Most foreign manufacturing companies are exempt, including companies that fall under Board of Investment mandated waivers.

 

The Foreign Business Law covers three lists of business sectors - deemed critical to national security - subject to the degree of protection. The most protective category is Annex 1, followed by Annex 2 and Annex 3.

 

Industries listed in Annex 1 include rice farming, forestry, agriculture and protected professions such as hairdressing. Annex 2 comprises national security-related sectors such as telecommunications, handicrafts, media, weaponry, ammunition, military equipment, the culture-related sector, environment, transportation, marine and air transport, domestic aviation, antique sales, salt farming and mining.

 

Companies operating in industries listed in Annex 3 of the law will be exempt from the rule. Annex 3 includes rice milling, fisheries, forestry, accountancy services, the service business, legal service business, agriculture, engineering, and retail.

 

However, the retail law will soon be subject to a retail business law to be introduced in the near future.

 

At present, there are around 8,800 companies under Annex 1 and 2, while another 30,000 companies operate under Annex 3.

 

According to the draft amendments, companies, which operate under Annex 1 and 2 and which violate the foreign business law, will be required to revise their shareholding structure and voting rights below 50 per cent within a maximum of two years.

 

For foreign companies, which have used nominees to circumvent the ownership law, they must report their true status to the Commerce Ministry and will be given one year to comply with the law by reducing their stake to less than 50 per cent.

 

In total, the new law will govern almost 40,000 multinational companies operating in Thailand at the moment.

 

The Joint Foreign Chambers of Commerce on Monday warned the government to suspend the amendment saying members might withdraw their investments if the new law becomes more restrictive.

 

"Companies in List 1 and 2, which include large companies, will be affected. The net effect is something that we can't really gauge and we don't know what it is [at the moment]. However, the immediate effect is that it changes the playing RULES, and that reduces the confidence of investors," said Peter Van Haren, chairman of the joint foreign chambers.

 

However, the new law would not affect the legal process in the Kularb Kaew case. Krirk-krai said Kularb Kaew, suspected to hold Shin Corp's shares on behalf of Temasek Holdings, would be subject to the old law.

 

The Commerce Ministry is still firm on its recommendation to the police that evidence leads the ministry to believe that Kularb Kaew might be a nominee for Temasek of Singapore.

 

Sources said Cabinet members intensely debated the merits of the law. According to the source, Interior Minister Aree Wongsearaya voiced concern that the new law might provide amnesty to Kularb Kaew. Information and Communications Technology Minister Sitthichai Pookaiyaudom also questioned the implication of the law on the Shin Corp deal.

 

Foreign Minister Nitya Pibulsonggram asked for Cabinet's comments on how he should explain the new law to foreigners. Eventually, Prime Minister Surayud Chulanont assigned Krirk-krai to explain the issue to avoid confusion.

 

Surayud also tried to ward off investors' concerns, saying the decision was right and the government would be able to explain it.

 

He said the changes would not take effect for "some time", as a panel of legal experts needs to review the changes and the government would try to reassure nervous investors.

 

"We think that it needs to be worked out in detail for the law to be more transparent, and to make investors more confident," Surayud said.

 

But that failed to console the stock market, which tumbled 2.69 per cent, with the Stock Exchange of Thailand (SET) composite index losing 17.07 points to close at 616.75.

 

Krirk-krai said he could not say when the law would be enacted as the draft would have to receive the blessing of the Council of State. He expected that it might take three to four months.

 

Krirk-krai said the amendment would promote good governance and transparency. Foreigners wishing to hold more than 50 per cent in businesses under Annex 2 and 3 could apply for approval on a case by case basis.

 

The old law imposes a maximum three-year jail sentence and Bt100,000 to B1 million in fines. But the new law would increase the fine from Bt500,000 to Bt5 million.

 

Director general of the Business Development Department, Kanissorn Navanugraha, said the law should be clearer and the investment atmosphere should be transparent. The department would develop the system of checking company structures and would randomly check to see who was violating the law.

 

Asked if foreign investors would pull out, Krirk-krai said: "It's their right to invest, but I believe that quality foreign investors will understand this issue."

 

Petchanet Pratruangkrai

 

The Nation