Thailand's New Foreign Business Act - end of the road?
There has been much talk about the amendments that were made to Thailand's Foreign Business Act. The draft is likely to be passed any time soon.
Background
The Foreign Business Act ("FBA") regulates how foreigners do business in Thailand. The Act states what are the activities that foreigners can engage in without the need to have a local Thai shareholder holding at least 51% of the shares in a Thai company. Before the amendments made during the Asian Financial Crisis (1997 to 2003-4), there were virtually no activities that a foreigner could engage in without the need to find a local partner. Foreigners resorted to using what was commonly known as a "nominee scheme" or the "51/49 scheme" whereby a local Thai will hold 51% of the shares of the Thai company in his name, but his voting rights were minimised to the extent that the foreigner holding 49% would control the company. Invariably, the Thai shareholder had no involvement in the day to day management of the company or to profits of the business and was paid a fee to be a nominee. Such schemes were also used to foreigners to purchase land and landed property in Thailand.
There were provisions in the FBA which forbid Thais to abet or assist foreigners to bypass the FBA. However, there was little or no enforcement by the relevant authorities and the 51/49 scheme was never really tested in court as to its legality and viability.
With the amendments during the financial crisis, foreigners could engage in some activities where they could hold almost 100% of the shares in the Thai company legally without the use of a Thai nominee. One such activity was the wholesale and retail of good where the capitalisation of the Thai company exceeded THB100 million. This opened the doors for hypermarts like Lotus and Carrefour to enter the market. The hypermarts' low prices and bulk volume purchases from suppliers ultimately drove many neighbourhood grocery stores to closure as they were not able to compete on pricing nor could these neighbourhood stores obtain volume discounts from their suppliers.
For those activities where foreigners still could not use wholly foreign owned Thai companies to engage in, the 51/49 scheme was still used. Out of 10 Thai companies that were incorporated for foreigners, at least 9 used the 51/49 scheme. These schemes came under scrutiny when the then Prime Minister Thaksin Shinawatra and his family sold their controlling stake in the listed telecommunication company, Shin Corp, to Temasek Holdings, an investment company owned and controlled by the Singapore government. While we will never know if Temasek actually used the 51/49 scheme to hold their shares in Shin Corp, suffice to say, it created so much publicity that PM Thaksin was ousted and now lives in exile. Probes into Thaksin's wealth were conducted by various government agencies under the current military government that seized power in a bloodless coup.
With that, the current government amended the FBA to plug the hole created by the 51/49 scheme, effectively the death sentence for most foreign owned businesses in Thailand and foreigners who owned land and landed property through such schemes.
The New FBA
I had the chance to browse through the draft. With the amendments, any arrangement that allows the foreigner to bypass the FBA, including the use of superior voting rights in shares would be illegal. So what are foreign business owners going to do? It remains to be seen if my learned Thai friends can find some way around this. What is of concern is will the relevant government agencies now audit each and every Thai company that has a foreigner that holds 49% of the shares to ensure compliance with the new laws? It is one thing to have the law and another to actually enforce it. Only time will tell. For now, I guess everyone has to mai pen rai ("Its OK" in Thai) and jai yen yen ("Relax, chill" in Thai).
Background
The Foreign Business Act ("FBA") regulates how foreigners do business in Thailand. The Act states what are the activities that foreigners can engage in without the need to have a local Thai shareholder holding at least 51% of the shares in a Thai company. Before the amendments made during the Asian Financial Crisis (1997 to 2003-4), there were virtually no activities that a foreigner could engage in without the need to find a local partner. Foreigners resorted to using what was commonly known as a "nominee scheme" or the "51/49 scheme" whereby a local Thai will hold 51% of the shares of the Thai company in his name, but his voting rights were minimised to the extent that the foreigner holding 49% would control the company. Invariably, the Thai shareholder had no involvement in the day to day management of the company or to profits of the business and was paid a fee to be a nominee. Such schemes were also used to foreigners to purchase land and landed property in Thailand.
There were provisions in the FBA which forbid Thais to abet or assist foreigners to bypass the FBA. However, there was little or no enforcement by the relevant authorities and the 51/49 scheme was never really tested in court as to its legality and viability.
With the amendments during the financial crisis, foreigners could engage in some activities where they could hold almost 100% of the shares in the Thai company legally without the use of a Thai nominee. One such activity was the wholesale and retail of good where the capitalisation of the Thai company exceeded THB100 million. This opened the doors for hypermarts like Lotus and Carrefour to enter the market. The hypermarts' low prices and bulk volume purchases from suppliers ultimately drove many neighbourhood grocery stores to closure as they were not able to compete on pricing nor could these neighbourhood stores obtain volume discounts from their suppliers.
For those activities where foreigners still could not use wholly foreign owned Thai companies to engage in, the 51/49 scheme was still used. Out of 10 Thai companies that were incorporated for foreigners, at least 9 used the 51/49 scheme. These schemes came under scrutiny when the then Prime Minister Thaksin Shinawatra and his family sold their controlling stake in the listed telecommunication company, Shin Corp, to Temasek Holdings, an investment company owned and controlled by the Singapore government. While we will never know if Temasek actually used the 51/49 scheme to hold their shares in Shin Corp, suffice to say, it created so much publicity that PM Thaksin was ousted and now lives in exile. Probes into Thaksin's wealth were conducted by various government agencies under the current military government that seized power in a bloodless coup.
With that, the current government amended the FBA to plug the hole created by the 51/49 scheme, effectively the death sentence for most foreign owned businesses in Thailand and foreigners who owned land and landed property through such schemes.
The New FBA
I had the chance to browse through the draft. With the amendments, any arrangement that allows the foreigner to bypass the FBA, including the use of superior voting rights in shares would be illegal. So what are foreign business owners going to do? It remains to be seen if my learned Thai friends can find some way around this. What is of concern is will the relevant government agencies now audit each and every Thai company that has a foreigner that holds 49% of the shares to ensure compliance with the new laws? It is one thing to have the law and another to actually enforce it. Only time will tell. For now, I guess everyone has to mai pen rai ("Its OK" in Thai) and jai yen yen ("Relax, chill" in Thai).
Labels: Foreign Business Act, legal advice NOT, Thailand
posted by H Who at 6:18 pm
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