Shin probe generates panic

Local law firms flooded with queries

POST REPORTERS

Thai and international law firms are receiving a flood of new business inquiries as foreign companies grapple with the possible need to change their shareholding structures in the wake of an ongoing investigation into nominee companies.

The Business Development Department has reportedly concluded that the Singapore government's investment arm, Temasek Holdings, had violated the Foreign Business Act and telecom laws by controlling more than 49% in the local telecom giant Shin Corp.

But the report has remained sealed pending a broader inquiry into the use of nominee companies by foreign investors.

Yanyong: Examining broader implications	Thanong: Contentious nominee definition

A survey of a dozen of the country's most prominent foreign investors, including Tesco, Holcim, Carrefour and others, showed a widespread use of multiple share classes, different voting rights, nominee structures and other techniques to bypass the 49% restriction.

Thai law defines the nationality of a firm based on the nationality of its shareholders _ if a majority of capital is controlled by Thais, then the company itself is considered Thai.

International accounting practice, however, typically takes a broader view, and considers not only the surface nationality of the shareholders, but also issues such as management control and the rights to financial benefits from the investment.

Yanyong Phuangrach, a deputy permanent secretary of the Commerce Ministry, said authorities were examining the broader implications of the issues raised by the Shin case and how they related to the law and foreign investment.

Mr Yanyong, who is chairing an inquiry panel into Shin shareholding structure, declined to comment on the reported conclusion by the Business Development Department that Shin was in violation of the law.

''What is of concern to us is the impact [the ruling] will have on business,'' he said. ''The conclusion from the investigation could be different from the one that [has been reported].''

Temasek currently holds 44% of Shin outright and has an indirect stake in another 52% through Cedar Holdings. Temasek has insisted that it is in compliance of the law, as Cedar is majority owned by Thais given Siam Commercial Bank's 10% shareholding and Kularb Kaew's 45% stake. Kularb Kaew is in turn 68% controlled by Sino-Thai businessman Surin Uptakoon, with Temasek holding the remainder.

Thanong Bidaya, the caretaker finance minister, acknowledged that the Shin investigation had raised widespread concerns among foreign companies, adding that the definition of a nominee was a contentious one.

''If a Thai investor borrows funds to purchase shares in a Thai company, with the loan guaranteed by a foreign bank, who has actual ownership? This is a practice that has gone on for 20 to 30 years in Thailand, and it is debatable whether you can say this is a clear case of a nominee,'' Mr Thanong said.

He said authorities needed to consider whether chain shareholdings across different levels of shell companies should be combined together for the purposes of the law. A foreign investor holding minority stakes across several shell companies has previously been classified as under the 49% limit, despite the fact that total shareholdings, direct and indirect, might exceed the limit.

''In the past, Japanese companies, for instance, invested heavily in Thailand and sought prominent Thais as partners. Many investors basically purchased shares on behalf of the Thai directors and we have never assumed that this was a violation,'' Mr Thanong said.

But the inquiry into the issue has made the business community nervous.

''The market is panicking and most of the companies are already looking at restructuring their shareholding structure,'' said a lawyer, who declined to be named but admitted that his office had received many inquiries about such deals.

Lawyers and investment bankers say that the problem is not just Shin, but the fact that the verdict could establish a principle that would catch hundreds of other companies in violation of the law.

''Our firm is having a problem now as foreign investors want to buy out a company, but, with the outcome of Shin still not out, the buyers are not willing to put up the funds for the acquisition,'' said one investment banker currently involved in a merger and acquisition deal involving a listed Thai company.

Lawyers say that there are few options open to companies to restructure their shareholdings because, under the law, voting rights for preferred shares cannot be changed after the formation of the company. Most foreign companies that are likely to be scrutinized are currently using preferred shares to exert control.

''We are restructuring our shareholding in the aftermath of the Shin deal,'' said a senior executive at a multinational firm that has invested billions of baht in its Thai operations.

Legal experts say they expect that eventually, they will receive some sort of accommodation from the authorities, with one possibility being a grandfather clause to give existing companies time to comply with the changes.

While few expect the government to agree to full liberalization of foreign ownership, another option would be to revamp the Foreign Business Act to restrict its application to key sectors deemed critical to national interest. The act's so-called ''List 3'' covers a broad range of industries, including services, construction, engineering, law, trading, retail and tourism.

One foreign executive said that if Thailand decided to expand its enforcement of the 49% rule with a new definition of nominee, he would have no choice but to divest his shareholdings to comply.

''The laws have always been there. The companies have been trying to circumvent them and now they are realizing that it is not the right way to go about it. So many will look to sell some of their shares in the proxy companies back,'' he said.