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DE RUEHBK #5424/01 2480625
ZNR UUUUU ZZH
R 050625Z SEP 06
FM AMEMBASSY BANGKOK
TO RUEHC/SECSTATE WASHDC 1381
RUCNASE/ASEAN MEMBER COLLECTIVE
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 03 BANGKOK 005424 
 
SIPDIS 
 
SIPDIS 
 
STATE PASS USTR 
USDOC FOR 4430/EAP/MAC/OKSA 
TREASURY FOR OASIA 
TREASURY PASS TO FRB SAN FRANCISCO/TERESA CURRAN 
 
E.O. 12958:N/A 
TAGS: ECON ETRD EFIN TH
 
SUBJECT:  FOREIGN INVESTORS LEERY AS SHIN INVESTIGATION WIDENS 
 
REFTEL: BANGKOK 538, BANGKOK 1549 
 
¶1.  Summary:  The Ministry of Commerce is wrapping up an 
investigation into possible illegal foreign ownership structures 
arranged for the sale by Prime Minister Thaksin of 
telecommunications giant Shin Corporation, an investigation which at 
least in theory could have far-reaching effects on foreign 
investment in Thailand.  The use of holding companies and nominee 
firms to skirt foreign ownership restrictions is common practice, 
though of questionable legality, and both new and established 
investors may also come under scrutiny.  Most U.S. investors are not 
affected as their investments were arranged under the U.S.-Thailand 
Treaty of Amity or under investment promotion privileges by the 
Board of Investment, both of which allow for majority foreign 
ownership.  Although foreign investors risk being dragged into the 
fray, U.S. investors here discount that risk, reasoning that the 
Shin deal is indeed a very special case, and that both the 
government and its opponents have made it clear that they recognize 
the value of foreign investment and are substantially more 
interested in legalizing and making transparent foreign ownership 
rather than further restricting it.  The issues raised by the Shin 
sale have led to a renewed interest here in modernizing foreign 
investment rules, a development we may be able to leverage in our 
FTA talks.  While our concerns have been allayed somewhat by the 
calm reaction from many investors, we still plan to seek 
clarification on investment rules from the Ministry of Commerce. 
End Summary. 
 
Shin under the microscope again 
------------------------------- 
 
¶2.  In a controversial January 2006 deal, Singaporean investment 
firm Temasek Holdings purchased a 49 percent share of Shin 
Corporation from caretaker Prime Minister Thaksin Shinawatra (see 
reftels).  The sale of Shin sparked an outcry among PM Thaksin's 
critics as details of the USD 1.9 billion deal emerged, including 
that Thaksin structured the sale in such a way that he was not 
required to pay tax. 
 
¶3.  Opposition Democrat Party members requested the Ministry of 
Commerce to investigate the ownership structure of the Shin deal, 
alleging that the Thai majority shareholders of Shin were in fact 
stand-ins for Temasek, or "nominees", a possible violation of 
Thailand's Foreign Business Act (FBA) which restricts foreign 
business ownership in service sectors to 49 percent.  On paper the 
deal seemed to comply with the law.  Typical of nominee structures 
here, the Shin transaction was effected via a bewildering series of 
shell companies:  Temasek's purchase of Shin involved several 
holding companies created specifically for this transaction, with 
Temasek maintaining a minority position in many of them.  The 
majority holder of Shin is Cedar Holdings, a Thai-owned firm thanks 
to its ownership by yet another holding company, Kularb Kaew, which 
lists a number of Thai businessmen as controlling partners. 
Technically this makes Shin Corp. Thai-owned; however, Kularb Kaew's 
Thai partners reportedly have limited voting rights and dividends 
from Shin and may not be full partners in the venture. 
 
¶4.  In a widely reported but unreleased preliminary decision, the 
Ministry's Department of Business Development found that Kularb Kaew 
was indeed a nominee, holding shares for Temasek to help it avoid 
foreign ownership limits.  Article 36 of the FBA prohibits Thai 
nationals from acting as a nominee, though crucially the Act fails 
to define precisely what constitutes a nominee firm.  Under the Act, 
if Kularb Kaew is found to be a nominee its Thai owners are subject 
to fines and a maximum of three years imprisonment, and the company 
can be dissolved. 
 
Umm, wasn't that Pandora's Box? 
------------------------------- 
 
¶5.  Scrutiny into Temasek's use of nominees in the purchase of Shin 
has unnerved other investors in Thailand, worried that their own 
opaque arrangements could be called into question.  Although Thai 
law has clearly restricted majority foreign ownership since 1972, 
the ample presence of foreign businesses suggests otherwise.  In 
practice, foreign investors have long used nominee companies to 
skirt these limitations.  The use of nominee companies for this 
purpose has been obvious to everyone, including successive Thai 
governments, which have tolerated -- and, it is argued, implicitly 
endorsed -- the practice.  This solution is "very Thai:"  the 
political attractiveness of a law that severely limits foreign 
participation in a large part of the economy is maintained, while at 
the same time the practical need for foreign capital and expertise 
is accommodated.  Business analysts estimate that thousands of 
foreign businesses potentially would be affected by a stringent 
 
BANGKOK 00005424  002 OF 003 
 
 
application of the regulations.  A recent study by economic think 
tank Thailand Development Research Institute concluded that nominees 
held 24.1 percent of shares in all listed companies on the SET, 
about one trillion baht (USD 26 billion) in share value. 
 
¶6.  Ownership restrictions have led investors to create patchworks 
of ownership vehicles to comply with the letter, if not the spirit, 
of the law.  A typical business arrangement involves a Thai firm 
holding a majority share in the operating company with a foreign 
investor holding a minority share.  However, the Thai firm is 
typically owned in part by the foreign investor, giving the foreign 
investor a majority economic interest, but still providing the 
appearance of Thai majority ownership.  Nominees often control 51 
percent of a company on paper, but in practice the shares they hold 
have limited voting rights and no entitlement to dividends.  In some 
cases the foreign investor lends money to the Thai firm to purchase 
the majority share, and then holds the shares as collateral for the 
loan, effectively controlling all shares.  For many smaller deals, 
the law firm that structures the deal acts as nominee; small law 
firms can be majority partners in literally hundreds of businesses. 
 
¶7.  In the past, the Ministry of Commerce interpreted ownership 
nationality by actual shareholdings, and did not consider the level 
of economic interest or control.  In a number of challenges to 
nominee structures over the years, the RTG consistently amended 
foreign ownership regulations to define a company's nationality by 
shareholdings rather than control. 
 
¶8.  To crack down on the use of nominees the Ministry is 
implementing new regulations.  Effective August 15, the Ministry 
requires registrants of new partnerships and limited companies that 
include foreign shareholdings of more than 40 percent to submit six 
months of bank statements as evidence that the Thai partners have 
sufficient capital to undertake the investment.  The Ministry also 
has authority to examine existing businesses to verify that their 
ownership complies with the law, but limited manpower in the 
Ministry virtually guarantees that investigations will not be 
widespread.  In a related move, the Ministry of Interior notified 
all provincial governors on May 15 that land purchases involving 
foreigners be examined for illegal use of nominees.  The SET has 
also announced that it plans to require public disclosure of the 
identity of shareholders who have at least a five percent stake in a 
listed company. 
 
¶9.  The new Commerce regulations have yet to prevent new investors 
from using nominees.  Local lawyers noted that the regulations 
applied to companies with more than 40 percent foreign ownership; 
one law firm submitted two new business registrations last week with 
39 percent foreign ownership that were approved without further 
scrutiny.  In addition, Commerce intends to examine initial business 
registrations closely, but is not clear on how it will handle 
recapitalizations.  In theory a foreign investor could initially set 
up a structure with genuine Thai investment, then recapitalize with 
foreign money giving him majority control without raising any 
eyebrows at Commerce. 
 
U.S. Saved by the Treaty 
------------------------ 
 
¶10. Nearly all U.S. investors have managed to legally acquire 
majority control by setting up their investments under the 
U.S.-Thailand Treaty of Amity and Economic Relations (AER) or by 
using investment promotion privileges granted by the Board of 
Investment (BOI).  The AER offers national treatment for U.S. 
investors, allowing majority ownership in all but six protected 
sectors, including inland communications, inland transportation, 
fiduciary and depositary operations, domestic agricultural trade, 
and land and resource exploitation.  Land ownership is also 
restricted, with some exceptions for industrial estates, 
BOI-promoted investment, and petroleum concessionaires. 
 
¶11. While a theoretical case can be made that U.S. investment in 
Thailand could be harmed by the fall-out from the Shin deal, U.S. 
investors here seem unconvinced that, in practice, there is any 
problem.  In response to our inquiries, local lawyers and the 
American Chamber of Commerce have been unable to name a single U.S. 
company that in their view could be affected by more stringent 
application of foreign ownership limits (though we continue to 
canvass the U.S. business community).  Amcham speculates that 
smaller companies that wished to own land (which under Thai law is 
illegal) may have entered into a nominee ownership structure and 
could be subject to review.  Even in these few cases, however, 
precedent suggests that these companies would be given without 
penalty an opportunity to change their structures to bring them into 
compliance with Thai law. 
 
BANGKOK 00005424  003 OF 003 
 
 
 
Commerce pulls back the reins 
----------------------------- 
 
¶12. Soon after the Ministry of Commerce reportedly made a 
preliminary ruling that Temasek had indeed used nominees to purchase 
Shin, officials announced that a new committee would be formed to 
consider the broader implications of the investigation.  The 
committee includes members from the Securities and Exchange 
Commission, Finance Ministry, Bank of Thailand and the Council of 
State.  The committee's main task will be to more precisely define 
"nominee", a task that Deputy Minister Preecha Laohapongchana said 
could take two to three months. 
 
Democrats kick the political football 
------------------------------------- 
 
¶13. The opposition Democrat party has made hay on both Temasek's 
alleged use of nominees and the Ministry of Commerce's suppression 
of the investigation's findings, calling for a prompt disclosure of 
the Ministry's report.  At the same time, party leaders say they 
recognize the value of foreign investment and have called for 
liberalization of foreign ownership limits, thus obviating the need 
for complex, non-transparent nominee structures. 
 
¶14. In a meeting with Embassy officers, MP Kiet Sittheeamorn said 
the Democrat Party was pursuing the Shin case because it was a 
"particularly egregious" example of the use of nominees, so blatant 
that it could not be overlooked.  He implied that the party had no 
interest in initiating investigations into other businesses and 
criticized Thai Government officials for resorting to what he 
regards as scare tactics in suggesting that other foreign 
investments may be in jeopardy. 
 
The way out 
----------- 
 
¶15. Business observers say Commerce will likely drag out the Shin 
investigation as long as practicable while searching for an 
acceptable conclusion to the case.  One possible scenario suggested 
to us by a major property developer is that Commerce will simply 
declare that the Shin deal was not in compliance originally, but 
post-deal shifts in ownership have met legal requirements.  This 
short-term non-compliance would be subject to a modest fine.  In the 
meantime, Commerce would amend the FBA to clarify the definitions of 
nominee and foreign ownership in such a way as to reassure investors 
while still protecting sensitive sectors. 
 
¶16. The upside of the Shin investigation is that it has sparked a 
salutary debate on foreign investment in Thailand.  Driving through 
Bangkok, the most casual observer will see ample evidence that 
foreign investment in "Thai-only" sectors is rampant.  Overly broad 
restrictions have spawned a web of complicated ownership structures 
across many sectors and have not provided the control over key 
sectors that the law intended.  Many here are calling for a 
realistic reappraisal of Thai investment law, with changes including 
dismantlement of blanket restrictions on foreign ownership.  In 
place of current restrictions, analysts recommend a more confined 
list of protected sectors together with a structure to more closely 
analyze investments in these specific sectors. 
 
¶17. Comment:  Temasek's non-transparent but not uncommon ownership 
arrangement for its takeover of Shin Corporation has provided yet 
another opportunity for PM Thaksin's opponents to criticize his 
personal and public policies.  Although foreign investors risk being 
dragged into the fray, U.S. investors here discount that risk, 
reasoning that the Shin deal is indeed a very special case, and that 
both the government and its opponents have made it clear that they 
recognize the value of foreign investment and are substantially more 
interested in legalizing and making transparent foreign ownership 
rather than further restricting it.  We believe the renewed interest 
here in services liberalization may facilitate progress in this area 
in the context of our FTA talks. 
 
¶18. The level of concern varies among individual investors, with 
many respected observers holding sharply diverging opinions on how 
the Shin investigation will affect the overall investment climate. 
We are reassured that many U.S. investors feel their businesses will 
be unaffected, but nevertheless plan to seek clarification from the 
Ministry of Commerce on how foreign ownership regulations will be 
interpreted or amended.  We also will continue to canvass the U.S. 
business community on this issue and report their concerns. 
BOYCE