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Cablegate: Foreign Business Act Changes Imminent

VZCZCXRO9213
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHBK #2403/01 1171014
ZNR UUUUU ZZH
P 271014Z APR 07
FM AMEMBASSY BANGKOK
TO RUEHC/SECSTATE WASHDC PRIORITY 6524
INFO RUCNASE/ASEAN MEMBER COLLECTIVE PRIORITY
RUEHCHI/AMCONSUL CHIANG MAI PRIORITY 3493
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUEHBS/USEU BRUSSELS PRIORITY

UNCLAS SECTION 01 OF 02 BANGKOK 002403

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/MLS AND EB
COMMERCE FOR EAP/MAC/OKSA
TREASURY FOR OASIA
STATE PASS USTR FOR WEISEL
FEDERAL RESERVE SAN FRANCISCO FOR DAN FINEMAN

E.O. 12958: N/A
TAGS: EINV ECON PREL TH
SUBJECT: FOREIGN BUSINESS ACT CHANGES IMMINENT

REF: A. BANGKOK 2071 (CABINET SENDS INVESTMENT BILL TO
LEGISLATURE)
B. BANGKOK 883 (FOREIGN MISSIONS RESPOND TO FBA)

BANGKOK 00002403 001.2 OF 002


1. (U) On April 25, the Thai National Legislative Assembly
(NLA) approved for consideration the cabinet-proposed version
of amendments to the Foreign Business Act (FBA). The purpose
of the bill is to tighten restrictions (or, as the RTG
prefers to term it; "close loopholes") in the current version
of the FBA which has heretofore effectively permitted foreign
investment in a variety of service sector industries
nominally closed to majority foreign ownership.

2. (U) The key amendments to the 1999 bill as shown on the
NLA website include:
- Companies in sectors under lists 1 (businesses not
permitted to aliens for "special reasons" such as media,
agriculture and land-owning) and 2 (business related to
national safety and security such as weapons, natural
resources and domestic transport) of the three lists of
proscribed industries will have three years to sell down
their shareholdings to below 50 percent voting rights and
equity ownership.
- Companies on List 3 (businesses in which Thai are not
yet ready to compete including the professions, construction,
retail and wholesale, and anything else not defined) may
continue in business indefinitely without restructuring
unless they are determined to be a nominee (defined as a
company or individual acting in order to allow foreigners to
operate a business in the proscribed areas in avoidance or
violation of the provisions of this act) in which case they
have one year to wind up their business or sell majority
ownership and control to a Thai entity.
- Penalty for non-compliance increased from up to 3 years
imprisonment to up to 5 years.
- Definition of a "foreign company" is expanded to
include not only majority equity ownership but also majority
foreign voting rights.

3. (U) An ad hoc committee comprised of 18 NLA members, 5
persons from the Ministry of Commerce (including the
Minister) and four others will consider the bill and propose
amendments before a second reading of the bill. While there
is no timeframe for this second reading, our sources have
said they expect it within two weeks. A third and final
reading of the bill, essentially approval by the whole house,
would be shortly after the second reading.

4. (SBU) A committee member told us that the committee is
likely to include two additional clauses. One would prohibit
companies that are grandfathered under list three from adding
new branches or expanding their sales or production capacity
by more than 30 percent beyond 2007 levels. A second would
prohibit boards of directors of companies in proscribed
sectors from being controlled in any way by foreign board
members or members somehow under the control of foreign
shareholders.

5. (SBU) Six foreign embassies in Bangkok have demarched the
RTG arguing that redefining what comprises a "foreign" entity
to include voting rights is contrary to Thai commitments
under GATS. The RTG has never responded to these demarches
but Commerce Minister Krirk-Krai, who previously was the Thai
Ambassador to the WTO, has assured his Prime Minister that
Thailand is within its rights despite reserving only equity
ownership under its exemptions to its 1995 GATS accession
commitments.

6. (SBU) Due to our bilateral treaty of Amity and Economic
Relations, we know of only three companies which will be
impacted by the amended FBA. Post is currently in touch with
these companies and working with them in their interactions
with the RTG. There may be U.S. citizens who formed holding
companies through Thai nominees to get around restrictions on
individuals owning land in Thailand, but none has yet
contacted us.

7. (SBU) Comment: With the Thai economy slowing significantly
and the flow of foreign direct investment in decline, it is
hard to understand the strong drive behind these further
restrictions on foreign investment at this time. Several
analysts believe that the following factors are behind this:

BANGKOK 00002403 002.2 OF 002


- The Thai elite lost significant assets in the aftermath
of the 1997 financial crisis. Now that the elite is again
flush, this is an opportunity to repurchase assets (at good
prices) from foreigners who previously purchased low-priced
assets from Thais when the Thai sellers were in distress.
- Thaksin embraced globalization. In the current
government, everything must be anti-Thaksin.
- The preference is for a bigger piece of a smaller pie.
Foreigners are still welcome to invest in manufacturing (to
take advantage of foreign technology and supply chains) but
for services -sold only within the nation- that is to be
reserved for Thais.
- The fact that for the 35 years the FBA has been in
existence there has never been a case of a company
successfully prosecuted for violating the FBA (and only one
court case) is seen not as foreigners using what the law
provides but foreigners taking advantage of Thai's easy-going
nature. The amendments are to implement the law's intent,
according to its proponents.

8. (SBU) Comment continued: Thailand is in the midst of
political confusion and a resulting wave of nationalism. Many
sophisticated Thais know that these amendments are not in
Thailand's longer term interest but are reluctant to speak
out for fear of being branded "a slave to the farangs" as one
Thai industrial estate developed termed it. This cycle will
pass, but the country's economy will be far more vulnerable
to downturns and find it more difficult to attract FDI in the
future.


ARVIZU

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