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When the family of Thaksin Shinawatra, the Thai prime minister, sold its 49 per cent stake in Thailand’s largest telecommunications empire in January, it inadvertently triggered a crisis that has left Mr Thaksin battling for his political survival and the country without a fully functioning government.

Thailand is now heading towards elections that many hope will resolve the political impasse. But the sale of Shin Corp to Temasek Holdings, the Singapore government’s investment arm, also had another big unintended consequence: it has been raising questions about the shaky legal underpinnings for foreign direct investment in Thailand.

Eager to score points against the prime minister, Mr Thaksin’s political enemies have relentlessly accused Temasek of violating Thailand’s foreign ownership laws. Foreign business people in Thailand fear that the fall-out could extend well beyond Temasek and Mr Thaksin, at a time when the country faces increasing competition from fast-growing neighbours such as Vietnam.

“One question is the extent to which the opponents of Thaksin will sacrifice the foreign investment climate on the altar of trying to nail the great man,” says one Bangkok-based attorney with a prominent international law firm.

When Temasek began its $3.8bn takeover of Shin Corp – which Mr Thaksin founded before entering politics and then passed to his children and brother-in-law – Temasek and Shin executives quickly declared that the deal would not alter Shin’s status as a “Thai company”. It was a crucial point. Shin, through its subsidiaries, operates businesses – including Thailand’s largest mobile phone operator, a low-cost airline and a television station – that all have restrictions on foreign participation, as do many sectors of the Thai economy.

The Thai Telecommunications Law, for example, caps foreign ownership of companies holding telecom concessions at 49 per cent. The Foreign Business Act, which governs all foreign investment, requires companies operating in strategic industries and most services, including domestic airlines, to be majority-owned by Thais or to obtain a licence – a time-consuming process with unpredictable results.

Foreign ownership of media organisations is prohibited. Most sensitively, Thailand bars foreigners from property ownership, except under extremely limited circumstances. It is a public stance that reflects the country’s pride in being the only south-east Asian nation never to have been colonised.

For decades, however, pragmatic Thai authorities have distinguished between nominal equity ownership of a company and actual control. That regulatory tolerance, supported by legal ambiguities, has permitted foreign companies to preserve an aura of Thai ownership over operations they in effect controlled. Often this involved complex shareholding structures in which Thai nationals hold a majority of the equity but have limited voting and dividend rights.

Thailand’s property market – particularly its booming sales to foreigners of vacation or retirement homes at Phuket and other beach resorts – has operated on similar principles. Foreign home-buyers establish technically Thai-owned companies to hold the land.

Temasek was clearly seeking to follow that practice in its acquisition of Shin Corp. But in buying one of Thailand’s largest companies from the family of a highly controversial prime minister, it triggered a furore that, in part, tapped into Thais’ long-standing resentment of the more prosperous Singapore. A preliminary commerce ministry investigation, instigated by the opposition Democrat party, concluded that the take­over appeared to violate Thailand’s foreign ownership rules – a fresh worry for Temasek, which has seen the market value of its Shin investment plunge by nearly 40 per cent since the deal was done.

That finding, and subsequent calls to scrutinise other foreign businesses, is generating anxiety among many of Thailand’s established foreign investors, who fear their own local corporate structures could be found in similar breach. “Somebody has to decide how much this is going to turn into a witch-hunt,” says Michael Montesano, a Thailand specialist at the National University of Singapore. “If it does turn into a witch-hunt, there are witches everywhere.”

Even if the Shin deal is eventually cleared of improprieties, there are indications that Bangkok’s famed regulatory forbearance – which has long helped make Thailand an appealing investment destination despite the superficial restrictions – could be poised for substantial change.

The commerce ministry last month announced that Thai investors in ventures with a 40–49 per cent foreign shareholding or with foreign directors must now prove the source of funds for their investments – an apparent attempt to ensure Thai partners are not proxies for foreign groups. The regulation suggests that Thai authorities intend to start looking beyond nominal equity ownership structures towards actual flows of capital and dividends and issues of control, to determine whether a company is Thai or foreign-owned – a dramatic departure.

“This the first time this issue of changing the basis on which foreign ownership is assessed has come up explicitly,” says Sriyan Pietersz, head of research at JP Morgan in Bangkok. “It’s a Pandora’s box.”

For now, concerns about the ultimate outcome of the Shin probe, and the lack of clarity on whether the commerce ministry regulation will apply only to new ventures or also to existing companies that make acquisitions, has prompted many prospective investors to delay committing further funds. “Thai law has always looked at form over substance, so in the past people were reasonably confident in saying, ‘this complies with the form’,” the Bangkok-based lawyer says. “But all professionals now have to advise their clients that these structures will be given very close scrutiny. The uncertainty is causing people to put investments on hold.”

Temasek created a multi-layered structure to hold the Shin stake it purchased from the Shinawatras and the shares it subsequently acquired through a mandatory tender offer. By May, the telecoms company was 96 per cent owned by two entities: Aspen Holdings, a wholly-owned Temasek subsidiary, held around 44 per cent of Shin Corp while 52 per cent was held by Cedar Holdings.

Cedar itself was owned 49 per cent by Temasek, 9 per cent by Siam Commercial Bank and 41 per cent by Kularb Kaew, an unlisted Thai company.

Kularb Kaew – the name means “glass rose” – was initially 49 per cent owned by Temasek and 51 per cent owned by two Thais, including a former deputy prime minister, who together borrowed Bt24bn ($640m) from Temasek to finance investment. Temasek’s holding in Kularb Kaew was later cut to 30 per cent to make way for a new Thai investor, who also bought much of the equity held by the original Thai partners.

Though the shareholding levels of the various holding companies have slightly altered again since through the exercise of warrants, Temasek – though its acknowledged direct and indirect holdings – has an economic interest in nearly 76 per cent of Shin Corp.

Yet Thailand has long looked not at aggregate foreign equity through cascading levels of holding companies but rather at just the most superficial level of ownership. Independent lawyers and business analysts say the complicated shareholding structure was little different to arrangements made, without any regulatory trouble, by foreign investors in many sectors of the economy.

According to Macquarie Securities, Norway’s Telenor used a similar structure last year to take effective control of Total Access Communications, Thailand’s second largest mobile operator. Property developers working on big condominium projects in Bangkok operate in similar ways, as do thousands of other foreign companies including some hypermarket chains. “The structure used in the purchase of Shin has been widely used by foreign investors for more than 30 years,” Phatra Securities, a local stockbroker, wrote in a report.

But Mr Thaksin’s political rivals have pushed for Shin Corp’s complex new shareholding structure to be subjected to unprecedented scrutiny. They have claimed that the original Thai investors in Kularb Kaew were mere nominees for Temasek – a finding that would shatter even the fragile pretence that Shin, even at the most superficial level, remained majority Thai-owned. It would also raise Temasek’s economic interest in Shin to 96 per cent.

Although nominees are widely and legally used in Thailand by wealthy, powerful Thais trying to conceal their own shareholdings, the Foreign Business Act prohibits Thai citizens from acting as nominees for foreign companies – a crime potentially punishable by fines and imprisonment.

So far, no one has ever been prosecuted – partly due to the authorities’ lack of interest in pursuing such matters and partly because proof is hard to come by. But as evidence, Kiat Sitthee-amorn, a senior Democrat party leader, points to Kularb Kaew’s company registration, filed with the commerce ministry. This document specified that the Thai investors would earn just 3 per cent of the dividends despite ostensibly owning 51 per cent of the company.

The public record also barred the Thai shareholders from pledging their shares to anyone else, unless approved by the foreign shareholders, in this case Temasek.

Mr Kiat concedes that such arrangements are not unusual in Thailand, though he claims such details are more often spelt out in private side-letters rather than in public records. “This is the classic case of the nominee,” he says. “Authorities cannot prosecute if there is no evidence. What can they do? In this case, though, evidence is all over the place.”

After months of consideration, the ministry’s business development department, which was charged with looking into the matter, apparently agreed. Though the full report has not been released, an investigation last month concluded that Kularb Kaew was a nominee for Temasek. That would mean the Shin Corp deal violated foreign equity limits – and could potentially be nullified.

Thailand’s already nervous foreign business sector had its jitters exacerbated when Mr Thaksin’s political supporters quietly requested the ministry to begin similar investigations into other companies operating in Thailand.

Well aware of the potential repercussions, top commerce ministry officials have now delayed release of the Shin investigative report and have set up an inter-agency committee to consider a definition of “nominee”, a process that they say could take several months. But the Democrats, keen to strike further blows against Mr Thaksin ahead of the elections, are pushing for the initial report to be released and accuse the ministry of stalling.

The pall this has cast over Thailand’s investment climate could yet worsen. Peter van Haren, chairman of the Joint Foreign Chambers of Commerce in Thailand, says that if Thailand upholds a finding that the Shin deal was illegal, it could “set a precedent” and “snowball” unpredictably.

Yet many businessmen with long experience in Thailand say they believe the damage will be contained. Gary Biesty, managing partner of law firm Johnson Stokes and Masters, predicts that the politically sensitive investigation of Shin could just fade away with elections and the formation of a new government. “We are telling everybody: ‘Let’s wait and calm down for two months’,” he says. “We are not going to get a ruling on this, and the need for a ruling will go away. It will be back to business as usual, which is a lovely pragmatic way of dealing with this.”

Even if the controversy does fade, however, analysts say the probe has so unsettled foreign investors that they may no longer be comfortable with a return to the way things were. This would add to the pressure on Thailand to undertake reforms. Mr van Haren says he is hopeful that Thailand will liberalise the Foreign Business Act and raise foreign equity limits “to make it more conducive for international investors to come in and set up business”.

In property, certainly, “Thailand has really got a choice,” says James Pitchon, executive director of CB Richard Ellis, a consultancy. “If they want to develop a vacation-home property industry, there has got to be a more user-friendly ownership structure.”

The next government may be forced take a clear stand on its willingness to accept all types of foreign investment. “The Thai compromise doesn’t work any more,” says one business analyst. “Thailand has to decide how much foreign investment it wants from the rest of the world, and in what industries, and then be open about it.”

Copyright The Financial Times Limited 2017. All rights reserved.
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