Foreign Business Act: 'tougher amendments'

Source: Bangkok Post August 9 2007

Tighter curbs on foreign business

Investors predicted to vote with their feet


Foreign investor confidence is expected to nosedive after the National Legislative Assembly (NLA) yesterday approved significantly tighter restrictions on foreign businesses operating in Thailand . The NLA, in a surprise move, rebelled against the government draft of the Foreign Business Act (FBA) and instead approved by a 76 to 64 vote tougher amendments that significantly expand the definition of foreign companies under business restrictions.

The move, a clear setback to Commerce Minister Krirkkrai Jirapaet and the government, could have huge implications for the Thai economy and future foreign investment, analysts said.

The Foreign Business Act is the legal framework that defines what sectors are prohibited from foreign businesses operating in Thailand.

The current FBA defines a company as foreign if 50% or more of its shares are held by foreigners. The government draft would expand the definition to include firms where 50% or more of the voting rights are held by foreigners. But NLA members argued that the government draft did little to close existing loopholes, and added a clause that defines a company as coming under the FBA if foreigners hold the authority to appoint or dismiss directors or the right to set a firm's strategy or direction.

The tougher amendments also include a requirement to look at chain shareholdings, or shares held by a ladder of companies, to determine ultimate ownership and prevent nominee shareholding by firms registered as Thai but controlled by foreigners.

The new clause could potentially result in tens of thousands of companies being reclassified to fall under the FBA restrictions.

The NLA later agreed 134 to three to allow a parliamentary committee to reframe the wording of the FBA draft to comply with the approved amendments. NLA chairman Meechai Ruchupan said given the vote, the definition under the FBA would not be changed. Only the wording and details on implementation of the law would be adjusted by the committee.

Mr Krirkkrai pledged to review the three lists that define the business sectors under the FBA as well as the treatment of existing firms that could now be held in violation of the tougher rules.

The FBA outlines three lists that define the sectors that are subject to the law. List One, which includes media, land trading and agriculture, is prohibited outright to foreign companies. List Two which includes weapons manufacturing, land transport, mining and handicrafts, is restricted to up to 75% foreign ownership with cabinet approval. Companies in List Three, which deals with services and professional occupations, can be up to 100% foreign-owned with approval from the Commerce Ministry.

''It's uncertain how long the review will take. And I think it's also too early to say what the impact on investment will be,'' Mr Krirkkrai said. He defended the government draft as seeking a balance between the need to protect domestic industries while still attracting foreign investment.

NLA members voting for the tougher amendments insisted the changes would help lead to better enforcement and compliance with the spirit of the law.

''Without expanding the definition, we will see repeat mistakes such as the case of Kularb Kaew. A lack of clarity will also just lead to loopholes for foreigners to exploit,'' said NLA member Somchai Sakulsurarat. ''To say that writing a clear law will result in foreigners cutting their investment or leaving the country, I think, is just a poor excuse.''

Kularb Kaew is the holding company that was used by Singapore 's Temasek Holdings in last year's takeover of telecom giant Shin Corp. Kularb Kaew is currently under criminal investigation for serving as an illegal nominee for Temasek.

Another assembly member, Kamnoon Sitthisamarn, agreed that failure to clearly define what was a foreign company would only lead to further evasion. ''If we are afraid of deterring foreign investment, then we should review the FBA lists to see what sectors genuinely need protection. This would be easier and would not open the loopholes that are exploited to this day,'' he said.

NLA member Pattara Khumphitak noted that the popular resort island of Samui was dominated by foreign investors, despite legal restrictions on foreign land ownership. ''That foreigners can come and control Thai land is due to weaknesses in the law. Thais sell their land and buy cars, but in the end, we are only employees to others in our own country,'' he said.

Borwornsak Uwanno, another NLA member, said the FBA represented a compromise between nationalism and the country's economic interests. But he warned that the impact of the changes would be far-reaching for the economy, and suggested that major changes be made to the restricted lists to minimise the potential damage to investor confidence.

Others cautioned that the decision would have an immediate impact on investor sentiment.

Korn Chatikavanij, deputy secretary-general of the Democrat party, criticised the NLA move as ill-conceived. ''The question that has never been answered is to what ends are these amendments being made. There has never been any explanation as to how the Thai public and economy will benefit from the amendments,'' he said.

Mr Korn, a long-time investment banker, said the Democrats would ''definitely'' reevaluate the law if they were in the next government. ''What should be done is to rethink what sectors should be included under the law, before moving to reclassify the definition of foreign companies,'' he said. ''I'm wary of protectionist measures that at the end of the day continue to benefit vested interests as opposed to the general public.''

Jit Firatranont, a spokesman for the NLA commerce committee and a director of the Thai Chamber of Commerce, also criticised the ''extreme application'' of the law. ''This will have a considerable impact on the investment climate. New investors will definitely be reviewing their strategy in Thailand ,'' he said. ''High-technology companies, or firms with well-established international brands, will also have to think carefully about whether they would be willing to invest if they have to cede control.''

One prominent lawyer was even more blunt, saying the ramifications to the Thai economy would be massive. ''Nearly all the companies listed on the Stock Exchange of Thailand could potentially fall under the management control rule,'' he said. ''It's negative for the country and a massive step backwards. Other countries are opening up to foreign investment while we are going in the other direction.''