Amending the Foreign Business Act: What should be done?(15 January 07)

Abhisit Vejjajiva 15 january 2007

  Abhisit Vejjajiva 15 january 2007

In the past week, the issue of amending the foreign business act has received wide attention and criticism. Even though those responsible for the amendments have tried to explain the issue in the hope of reassuring the public, it can be expected that this issue will continue to be hotly debated both domestically and internationally for some time to come.

We have to recognize that the Thai economy, like other economies, needs foreign investment, long term and short term. Foreign capital plays a major role in nurturing the economy, creating jobs, and lifting standards of living of Thai citizens.

At the same time, to protect national interest concerning security, culture, or areas in which Thais are not yet ready to compete, there has to be clear and transparent rules to regulate foreign investment.

The current Foreign Business Act of 1999 provides such a framework, and the need to amend the law should be expected after it has been implemented and appraised. Yet the current proposal to amend the law is problematic in many ways because:

1. The amendment comes at a time when the international community is already extremely sensitive towards political and economic climate in Thailand. The coup on September 19, followed by the New Year bombing, as well as capital controls imposed by the Bank of Thailand have all sent the wrong signals to foreign business and investors.

2. Given that the change in the definition of foreign business amounts to a significant policy shift, there has been too little in the way of consultation and participation by stakeholders.. Since the issue does not warrant confidentiality, the government could have benefited from a more open process by allowing the business community to give constructive inputs, as well as keeping the business world well-informed, and thereby preventing any panic.

3. The amendment process appears to be an overreaction to the Kularb Kaew (one of the vehicles used by Temasek to acquire SHIN Corp) case, almost to the point of panic. The public is confused as to the objective, content and the process of the amendments and their implementation.

The government’s plan to change the definition of “Foreign Company” which previously looked only at shareholding structure, to also include voting rights is not wrong. In fact, the new definition is reasonable and is accepted internationally. People who have real management control are owners of the company, no less than those who hold majority of shares. The issue is that once the definition has been changed, some companies which used to be Thai companies are now considered foreign.

Therefore, there is a need for an adjustment period for these companies.

Yet this is a different issue to amnesty.

For Thai people to hold shares without voting rights under existing law is not illegal, if the shares were acquired with their own money and the investment decision is reasonable in terms of risks and returns.  

But the case where a foreigner buys shares via a Thai person while retaining ultimate control (voting rights) and economic benefits is already illegal under the existing law (Sections 35, 36, and 37).
The company, the foreigner, and the Thai nominee are all subject to prosecution. Such is the case of Kularb Kaew, which the Ministry of Commerce investigated after a petition by the Democratic Party.  The definition of foreign ownership concerning voting rights is irrelevant.

Given that there is a clause to “grandfather” existing business following the proposed definition change, there is no justification for the granting of amnesty to those who broke the existing law. Even if lawmakers legislate that amnesty would not cover those companies facing prosecution, such provision in the law may not be applicable because it could be deemed discriminatory. Those who favour writing the law to grant selective amnesty must prove that they do not have ulterior motives.

Putting the issue of amnesty aside, we could then focus on the definition change and aim to create an atmosphere that promotes foreign investments in a well-regulated environment. If this is indeed the objective, we should look closely at each annex on the foreign business act and what their implications should be for regulation.

In cases where foreigners are not allowed to do business (annex I), such as broadcasting, and cases prescribed in other specific laws, such as telecommunications, the way ahead is simple. Companies must adjust and comply with the laws. It is believed that very few companies fall under this category.
In other cases (annex II and annex III) where there are many affected companies, it should be noted that the law does not ban foreigners from engaging in these businesses. It only requires foreigners to apply and be granted a license to operate under certain laid down conditions.

What we need to understand is why, in spite of this, so many companies choose to structure themselves as Thais. It seems that, first, foreign operators do not want to go through the trouble of the time-consuming process of application. For example, business in annex 2 will have to receive approval from the cabinet which can take up a lot of time. The law also gives officials discretion in granting such a license, hence opening up opportunities for corruption. Another reason is that holding a license under the foreign business act does not enable the company from overcoming other legal restrictions such as landholding. In contrast, receiving BOI privileges automatically allows a foreign company to own land necessary for business.

As things stand, foreigners have only two options for adjustment. First, they can restructure and declare themselves foreign and apply for a license to operate. But they will face many problems, as mentioned above. Another method is to comply with the new law as a Thai entity but they have to compete to find Thai partners. This will likely affect share prices given the limited time and potential Thai investors.
The biggest threat is that a third option will be used. This is to attempt to pass the company off as Thai by finding further loopholes and using more sophisticated contracts. This would defeat the whole purpose of having the amendment altogether and nothing will have been achieved.

Hence if the government wants to amend the law and make it clear, transparent, and supportive of good governance, it should seek to amend the Foreign Business Act in these areas as well:

1. Adjust the application process for conducting businesses in Annex II and Annex III lists by cutting all discretionary powers. The government should devise clear conditions and qualifications for each sector and make approval for those applicants who meet such requirements swiftly and automatically.

2. Allow approved foreign businesses to purchase land for conducting business, similar to foreign companies who receive BOI privileges.

3. The government should confer with the foreign business community in an open manner to clear any misunderstandings and allow foreign businesses to provide input to sort out any remaining issues that are of concern.

Only by doing this will the government send the right signal, namely, that Thailand welcomes transparent foreign investment which are in accordance with national interests.

Furthermore, if coupled with a review and removal of capital control imposed by Bank of Thailand, this will align the government’s attempt to protect the national interest and promote good governance with the realities of the global economy today.