Cablegate: Foreign Investors Leery As Shin Investigation Widens

VZCZCXRO0663
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHBK #5424/01 2480625
ZNR UUUUU ZZH
R 050625Z SEP 06
FM AMEMBASSY BANGKOK
TO RUEHC/SECSTATE WASHDC 1381
RUCNASE/ASEAN MEMBER COLLECTIVE
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 03 BANGKOK 005424

SIPDIS

SIPDIS

STATE PASS USTR
USDOC FOR 4430/EAP/MAC/OKSA
TREASURY FOR OASIA
TREASURY PASS TO FRB SAN FRANCISCO/TERESA CURRAN

E.O. 12958:N/A
TAGS: ECON ETRD EFIN TH

SUBJECT: FOREIGN INVESTORS LEERY AS SHIN INVESTIGATION WIDENS

REFTEL: BANGKOK 538, BANGKOK 1549

1. Summary: The Ministry of Commerce is wrapping up an
investigation into possible illegal foreign ownership structures
arranged for the sale by Prime Minister Thaksin of
telecommunications giant Shin Corporation, an investigation which at
least in theory could have far-reaching effects on foreign
investment in Thailand. The use of holding companies and nominee
firms to skirt foreign ownership restrictions is common practice,
though of questionable legality, and both new and established
investors may also come under scrutiny. Most U.S. investors are not
affected as their investments were arranged under the U.S.-Thailand
Treaty of Amity or under investment promotion privileges by the
Board of Investment, both of which allow for majority foreign
ownership. Although foreign investors risk being dragged into the
fray, U.S. investors here discount that risk, reasoning that the
Shin deal is indeed a very special case, and that both the
government and its opponents have made it clear that they recognize
the value of foreign investment and are substantially more
interested in legalizing and making transparent foreign ownership
rather than further restricting it. The issues raised by the Shin
sale have led to a renewed interest here in modernizing foreign
investment rules, a development we may be able to leverage in our
FTA talks. While our concerns have been allayed somewhat by the
calm reaction from many investors, we still plan to seek
clarification on investment rules from the Ministry of Commerce.
End Summary.

Shin under the microscope again
-------------------------------

2. In a controversial January 2006 deal, Singaporean investment
firm Temasek Holdings purchased a 49 percent share of Shin
Corporation from caretaker Prime Minister Thaksin Shinawatra (see
reftels). The sale of Shin sparked an outcry among PM Thaksin's
critics as details of the USD 1.9 billion deal emerged, including
that Thaksin structured the sale in such a way that he was not
required to pay tax.

3. Opposition Democrat Party members requested the Ministry of
Commerce to investigate the ownership structure of the Shin deal,
alleging that the Thai majority shareholders of Shin were in fact
stand-ins for Temasek, or "nominees", a possible violation of
Thailand's Foreign Business Act (FBA) which restricts foreign
business ownership in service sectors to 49 percent. On paper the
deal seemed to comply with the law. Typical of nominee structures
here, the Shin transaction was effected via a bewildering series of
shell companies: Temasek's purchase of Shin involved several
holding companies created specifically for this transaction, with
Temasek maintaining a minority position in many of them. The
majority holder of Shin is Cedar Holdings, a Thai-owned firm thanks
to its ownership by yet another holding company, Kularb Kaew, which
lists a number of Thai businessmen as controlling partners.
Technically this makes Shin Corp. Thai-owned; however, Kularb Kaew's
Thai partners reportedly have limited voting rights and dividends
from Shin and may not be full partners in the venture.

4. In a widely reported but unreleased preliminary decision, the
Ministry's Department of Business Development found that Kularb Kaew
was indeed a nominee, holding shares for Temasek to help it avoid
foreign ownership limits. Article 36 of the FBA prohibits Thai
nationals from acting as a nominee, though crucially the Act fails
to define precisely what constitutes a nominee firm. Under the Act,
if Kularb Kaew is found to be a nominee its Thai owners are subject
to fines and a maximum of three years imprisonment, and the company
can be dissolved.

Umm, wasn't that Pandora's Box?
-------------------------------

5. Scrutiny into Temasek's use of nominees in the purchase of Shin
has unnerved other investors in Thailand, worried that their own
opaque arrangements could be called into question. Although Thai
law has clearly restricted majority foreign ownership since 1972,
the ample presence of foreign businesses suggests otherwise. In
practice, foreign investors have long used nominee companies to
skirt these limitations. The use of nominee companies for this
purpose has been obvious to everyone, including successive Thai
governments, which have tolerated -- and, it is argued, implicitly
endorsed -- the practice. This solution is "very Thai:" the
political attractiveness of a law that severely limits foreign
participation in a large part of the economy is maintained, while at
the same time the practical need for foreign capital and expertise
is accommodated. Business analysts estimate that thousands of
foreign businesses potentially would be affected by a stringent

BANGKOK 00005424 002 OF 003

application of the regulations. A recent study by economic think
tank Thailand Development Research Institute concluded that nominees
held 24.1 percent of shares in all listed companies on the SET,
about one trillion baht (USD 26 billion) in share value.

6. Ownership restrictions have led investors to create patchworks
of ownership vehicles to comply with the letter, if not the spirit,
of the law. A typical business arrangement involves a Thai firm
holding a majority share in the operating company with a foreign
investor holding a minority share. However, the Thai firm is
typically owned in part by the foreign investor, giving the foreign
investor a majority economic interest, but still providing the
appearance of Thai majority ownership. Nominees often control 51
percent of a company on paper, but in practice the shares they hold
have limited voting rights and no entitlement to dividends. In some
cases the foreign investor lends money to the Thai firm to purchase
the majority share, and then holds the shares as collateral for the
loan, effectively controlling all shares. For many smaller deals,
the law firm that structures the deal acts as nominee; small law
firms can be majority partners in literally hundreds of businesses.

7. In the past, the Ministry of Commerce interpreted ownership
nationality by actual shareholdings, and did not consider the level
of economic interest or control. In a number of challenges to
nominee structures over the years, the RTG consistently amended
foreign ownership regulations to define a company's nationality by
shareholdings rather than control.

8. To crack down on the use of nominees the Ministry is
implementing new regulations. Effective August 15, the Ministry
requires registrants of new partnerships and limited companies that
include foreign shareholdings of more than 40 percent to submit six
months of bank statements as evidence that the Thai partners have
sufficient capital to undertake the investment. The Ministry also
has authority to examine existing businesses to verify that their
ownership complies with the law, but limited manpower in the
Ministry virtually guarantees that investigations will not be
widespread. In a related move, the Ministry of Interior notified
all provincial governors on May 15 that land purchases involving
foreigners be examined for illegal use of nominees. The SET has
also announced that it plans to require public disclosure of the
identity of shareholders who have at least a five percent stake in a
listed company.

9. The new Commerce regulations have yet to prevent new investors
from using nominees. Local lawyers noted that the regulations
applied to companies with more than 40 percent foreign ownership;
one law firm submitted two new business registrations last week with
39 percent foreign ownership that were approved without further
scrutiny. In addition, Commerce intends to examine initial business
registrations closely, but is not clear on how it will handle
recapitalizations. In theory a foreign investor could initially set
up a structure with genuine Thai investment, then recapitalize with
foreign money giving him majority control without raising any
eyebrows at Commerce.

U.S. Saved by the Treaty
------------------------

10. Nearly all U.S. investors have managed to legally acquire
majority control by setting up their investments under the
U.S.-Thailand Treaty of Amity and Economic Relations (AER) or by
using investment promotion privileges granted by the Board of
Investment (BOI). The AER offers national treatment for U.S.
investors, allowing majority ownership in all but six protected
sectors, including inland communications, inland transportation,
fiduciary and depositary operations, domestic agricultural trade,
and land and resource exploitation. Land ownership is also
restricted, with some exceptions for industrial estates,
BOI-promoted investment, and petroleum concessionaires.

11. While a theoretical case can be made that U.S. investment in
Thailand could be harmed by the fall-out from the Shin deal, U.S.
investors here seem unconvinced that, in practice, there is any
problem. In response to our inquiries, local lawyers and the
American Chamber of Commerce have been unable to name a single U.S.
company that in their view could be affected by more stringent
application of foreign ownership limits (though we continue to
canvass the U.S. business community). Amcham speculates that
smaller companies that wished to own land (which under Thai law is
illegal) may have entered into a nominee ownership structure and
could be subject to review. Even in these few cases, however,
precedent suggests that these companies would be given without
penalty an opportunity to change their structures to bring them into
compliance with Thai law.

BANGKOK 00005424 003 OF 003

Commerce pulls back the reins
-----------------------------

12. Soon after the Ministry of Commerce reportedly made a
preliminary ruling that Temasek had indeed used nominees to purchase
Shin, officials announced that a new committee would be formed to
consider the broader implications of the investigation. The
committee includes members from the Securities and Exchange
Commission, Finance Ministry, Bank of Thailand and the Council of
State. The committee's main task will be to more precisely define
"nominee", a task that Deputy Minister Preecha Laohapongchana said
could take two to three months.

Democrats kick the political football
-------------------------------------

13. The opposition Democrat party has made hay on both Temasek's
alleged use of nominees and the Ministry of Commerce's suppression
of the investigation's findings, calling for a prompt disclosure of
the Ministry's report. At the same time, party leaders say they
recognize the value of foreign investment and have called for
liberalization of foreign ownership limits, thus obviating the need
for complex, non-transparent nominee structures.

14. In a meeting with Embassy officers, MP Kiet Sittheeamorn said
the Democrat Party was pursuing the Shin case because it was a
"particularly egregious" example of the use of nominees, so blatant
that it could not be overlooked. He implied that the party had no
interest in initiating investigations into other businesses and
criticized Thai Government officials for resorting to what he
regards as scare tactics in suggesting that other foreign
investments may be in jeopardy.

The way out
-----------

15. Business observers say Commerce will likely drag out the Shin
investigation as long as practicable while searching for an
acceptable conclusion to the case. One possible scenario suggested
to us by a major property developer is that Commerce will simply
declare that the Shin deal was not in compliance originally, but
post-deal shifts in ownership have met legal requirements. This
short-term non-compliance would be subject to a modest fine. In the
meantime, Commerce would amend the FBA to clarify the definitions of
nominee and foreign ownership in such a way as to reassure investors
while still protecting sensitive sectors.

16. The upside of the Shin investigation is that it has sparked a
salutary debate on foreign investment in Thailand. Driving through
Bangkok, the most casual observer will see ample evidence that
foreign investment in "Thai-only" sectors is rampant. Overly broad
restrictions have spawned a web of complicated ownership structures
across many sectors and have not provided the control over key
sectors that the law intended. Many here are calling for a
realistic reappraisal of Thai investment law, with changes including
dismantlement of blanket restrictions on foreign ownership. In
place of current restrictions, analysts recommend a more confined
list of protected sectors together with a structure to more closely
analyze investments in these specific sectors.

17. Comment: Temasek's non-transparent but not uncommon ownership
arrangement for its takeover of Shin Corporation has provided yet
another opportunity for PM Thaksin's opponents to criticize his
personal and public policies. Although foreign investors risk being
dragged into the fray, U.S. investors here discount that risk,
reasoning that the Shin deal is indeed a very special case, and that
both the government and its opponents have made it clear that they
recognize the value of foreign investment and are substantially more
interested in legalizing and making transparent foreign ownership
rather than further restricting it. We believe the renewed interest
here in services liberalization may facilitate progress in this area
in the context of our FTA talks.

18. The level of concern varies among individual investors, with
many respected observers holding sharply diverging opinions on how
the Shin investigation will affect the overall investment climate.
We are reassured that many U.S. investors feel their businesses will
be unaffected, but nevertheless plan to seek clarification from the
Ministry of Commerce on how foreign ownership regulations will be
interpreted or amended. We also will continue to canvass the U.S.
business community on this issue and report their concerns.
BOYCE

© Scoop Media