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Stock market is battered by the military government’s changes
to ownership law
Thailand's military-appointed
government raised the specter of protectionism and sparked a steep drop in stock prices Tuesday when it acted to halt
the longstanding practice of using nominee firms to bypass the 49% foreign
ownership restriction.
The market responded with a 17 point drop on the Stock Exchange of Thailand, or nearly2.7 percent, after the cabinet
announcement. Coming in the wake of recent bombings, capital controls and political uncertainty, many analysts expect things to only get worse for the bourse,
which has been battered in the past three weeks.
While full details of how the move will be implented are not yet clear, the nationalist-inspired action appears aimed largely at
punishing Singapore-government run Temasek Holdings, which purchased
telecommunications giant Shin Corp from deposed prime minister Thaksin
Shinawatra’s family a year ago this month.
Brokers and other analysts were not surprised but they were
dismayed, seeing the regulations as a case of politics intervening to hurt the
economy. “I had hoped that a compromise
would prevail and prevent this from coming out of the Cabinet today, but no.
This to me is the worst case,” wrote Andrew Stotz, head of Thailand research at Citicorp Securities in Bangkok, in an email with
the subject line exclaiming “THEY DID IT!”
Fortunately for
many, the new rules will not be applied retroactively for the thousands
of companies using nominee shareholding structures that are not operating in
sectors supposedly vital to national security or Thai culture.
Companies that fall under so-called “List Three” of the
Foreign Business Act, which designates sectors in which Thailand is
supposedly not ready to compete, will merely need to apply for an Alien
Business License to continue operations. This list includes everything from
rice milling and construction to accounting, legal services, hotel management
and brokerages.
“The good news is that major investments will not be
affected, although the revision will hurt foreign direct investment to some
degree,” said a Western diplomat who monitors economic activities. “It’s not
terrible, but it’s not good either. It’s like staring into the abyss and
realizing you’ve still survived.”
Even so, the measures appear to achieve the potent political
goal of hitting Temasek’s Shin Corp deal, which was done using a complex
structure of holding companies and sparked considerable outrage, both because a
foreign firm grabbed a blue chip telecommunications asset and Thaksin’s family
avoided paying taxes on the deal.
Complaints by the main opposition Democrat party at the time
led to a Commerce Ministry investigation on whether one of the holding
companies, ostensibly owned by Thais, was actually controlled by Temasek. Turns
out it was nothing unusual – just like the nominees set up used by thousands of
other foreign-run companies in Thailand.
Although the Democrats and others sought to vilify Temasek,
Shin and Thaksin, the 73.3 billion baht tax-free deal actually followed
standard operating procedure in Thailand
for the past 30 years. Any attempt to single out Temasek as a villain would be
impossible.
When the generals took out Thaksin by force last September,
some thought the political fight against Temasek would fade into the
background. But the uproar over the Shin deal made it impossible for the
generals to do nothing.
The old law said that a company’s nationality is determined
by its shareholders, not its voting structure. Thus, a company could be
majority owned by Thais but still controlled by foreigners, ala the kind of holding
companies Temasek used.
Pending a mandatory legal review, the new law passed by the
cabinet Tuesday will say that a company will be considered foreign-owned if
offshore investors control more than 50 percent of either shares or voting
rights. That would make Temasek the owner of those holding companies in which
it controls more than 50% of votes, even if it holds less than half of the
company’s shares.
Finance Minister Pridiyathorn Devakula said companies
operating in sectors which deal with
national security, culture and other “special” businesses, have one year to
reduce shareholdings and two years to reduce voting rights.
But, in another twist, the government also said the rules
“don’t apply to any company under investigation.” That includes Kularb Kaew,
one of the holding companies in the Shin deal that was already ruled a nominee
of Temasek. It also includes Norway’s
Telenor, which indirectly owns mobile
phone operator DTAC, the major rival of market leader Advanced Info Service, a
Shin subsidiary acquired by Temasek.
At some point,
Temasek will also have to sell down its holdings in iTV, Thailand’s sole independent television station
born out of the 1992 pro-democracy protests that fell first into the hands of
Thaksin and then the Singapore
government. Running a television station is on the list, along with putting out
a newspaper, rice farming, land trading and making images of Buddhas.
The property sector
is due to be hit hard. Many foreign run companies buy and sell land in resort
areas like Phuket and Koh Samui, and they will now be forced to sell down their
holdings. That could spark a massive exodus as firms struggle to comply with
the new requirements.
“How can you trust anyone with more than half of your business?” Larry
Cunningham, managing director of Phuket One Real Estate, said in a recent
interview.
Kitti Nathisuwan, head of research at Macquarie Securities
in Bangkok,
told Asia Sentinel: “The nationalistic elements are running through the room.
They are basically telling foreigners: ‘We don’t want your money.’”
Another analyst, Vikas Kawatra of Kim Eng Securities, wrote
in a research note that “Imposing restrictions on FDI is simply wrong—even
though the intention behind the move is to punish the deposed PM Thaksin
Shinawatra. I think these two steps aren't the last silly moves expected from
this government.”
Pridiyathorn claimed
that the revised law simply brings Thai law in line with global standards. He
plans to make the rounds of foreign business associations in the coming days to
further explain what the government has in mind.
But no matter what,
the move is seen as a clear retreat into protectionism at a time when the rest
of the region is opening up. Peter van Haren, chairman of the Joint Foreign
Chamber of Commerce in Thailand,
which represents more than 10,000 businesses, has said that protected lists should
be eliminated altogether.
The argument is
simple. The lists were drawn up in 1972 to protect sectors in which Thai
companies are not competitive. Yet 35 years later, those companies are still
not competitive.
“We wonder
how long it would be protected?” he told the Bangkok Post last month. “With no
free competition, the winners are the ones who control business, but the losers
are the end users or consumers.”
This longer term thinking may contain more vision than an
appointed government slated to serve for just one year is required to come up
with. Many of the new leaders, including the prime minister, are ex-soldiers
bent on preserving the status quo and hurting Thaksin, whose economic policies
were hailed by foreigners, rural Thais and many businessmen.
At some point, the country’s leaders will need to stop
looking to the past and start looking at where they want Thailand to go
in the future. At the present, many think it’s only moving backward.
“The foreign content of the Thai economy is very important,”
said Sompob Manarangsun, an economist with Chulalongkorn University.
“We can’t just say we don’t need foreign capital anymore because the baht is
strengthening. The global economy is becoming more and more open. Even emerging
countries like Vietnam and India are
opening up. We cannot do the opposite and start retreating.”
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