THAILAND PURSUES CASE AGAINST SINGAPORE INVESTOR

C O N F I D E N T I A L SECTION 01 OF 03 BANGKOK 006363

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E.O. 12958: DECL: 10/17/2011
TAGS: ECON PGOV PHUM PREL TH
SUBJECT: THAILAND PURSUES CASE AGAINST SINGAPORE INVESTOR

REF: A. A. BANGKOK 5706


B. B. BANGKOK 6002

C. C. BANGKOK 6080

D. D. BANGKOK 6156

Classified By: DCM ALEX ARVIZU FOR REASONS 1.4 B AND D.


1. (C) Summary. The RTG is expected to announce soon a
reinterpretation of the rules governing the Foreign Business
Act cap on foreign shareholding in Thai service sector
companies and what it will do about Temasek's USD $1.9
billion purchase of Shin Corp in particular. Its decision
will have a major impact on near term foreign direct
investment inflows to Thailand. Singapore investors, a major
source of Thai FDI, are demanding clear and rules as a
minimum in order to again consider investing in Thailand. For
some, however, even that may not be sufficient to overcome
the mistrust that recent Thai actions have caused. The new
Thai leaders find themselves in a bind: under pressure to
validate charges of financial improprieties against deposed
PM Thaksin, the newly appointed government feels the
political imperative to find legal fault with the
Shin/Temasek deal. That goal could clash with the need to
reassure international investors that Thailand remains a
welcoming destination. Reconciling these conflicting aims is
the biggest economic challenge faced by the Thai government.
End Summary.


2. (C) Ever since the sale of former PM Thaksin's family
holding company, Shin Corp, to Singapore's Temasek, the Thai
press has been running articles highly critical of the
Singapore government-owned investment company and the
Singapore government itself. They stand accused of abetting
the USD $1.9 billion tax-free liquidation of Thaksin's
assets, of knowingly structuring the transaction in violation
of Thailand's restrictions on foreign ownership, and of
seeking to control a strategic set of assets (satellite,
television channel and mobile telephone network) that many
Thai commentators argue by law and for security should be
owned only by Thais. As reported in reftels, the foreign
ownership issue has spread beyond Shin/Temasek and the
telecom sector to foreign ownership rules in general with
sixteen major companies with significant foreign ownership
(including Tesco, DHL Logistics (Thailand),Siam City Cement,
and Carrefour) currently under investigation for potentially
violating the ownership restriction contained in Thailand's
Foreign Business Act (FBA).


3. (C) The FBA basically restricts foreign ownership in the
service sector to a maximum of 49 percent ownership. Until
now, ownership was defined as simply the number of shares
owned and whether the owner was considered a Thai. This meant
that actual management control of a company, the right to
name members of the board, differing share classifications
with differing voting and/or dividend rights and, especially,
the use of various holding company structures to hold the
shares in the operating company (nominees) were all
widely-used tools to get around the Thai restriction. Lawyers
here, who have widely advised on setting-up the necessary
structures and often acted as de- facto shareholders for
their foreign clients, are now advising their clients to
"wait and see" - unwilling to provide formal legal advice
until the Thai government clarifies their interpretation of
the FBA.


4. (C) Singapore is the second largest source of direct
foreign investment in Thailand - its USD $21 billion placing
it behind Japan and just ahead of the US as a source of Thai
inward investment. To gauge the effect of recent Thai
discussion of foreign investment regulations in general and
Singapore investment in particular, Singapore and visiting
Bangkok econoffs met on October 10-11 with a variety of major
Singaporean investors in Thailand and Singapore-based bank
analysts who cover Thailand. Among portfolio investment
advisors, the feeling was that long-term, buy-and-hold,
investors have largely stopped purchasing additional
positions and will probably stay in that mode until new
elections are held. They ascribe the foreign inflows into the
Thai stock market (SET) since the coup to hedge funds and

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other short-term investors and expect trading volumes on the
SET to remain low.


5. (C) Temasek's Chief Investment Officer, Charles Ong,
lamented the probable loss he will have to take on their
investment in Shin. Both he and his investment advisor on the
transaction, Goldman Sachs, accepted that Temasek would
probably have to restructure their shareholding in Shin to
clearly go below the 49 percent foreign ownership cap. If
they sold at current market prices, this would mean a loss of
up to US$340 million on their initial investment.


6. (C) Ong and Goldman Sachs (Singapore) Managing Director
Richard Ong (no relation) strongly refuted the charge that
Temasek was politically tone-deaf in pursuing the Shin deal.
Richard claimed that Thaksin went to see King Bhumiphol on
two occasions to confirm the monarch's approval for the sale
of Shin to Temasek. Charles argued that they purposely sought
out Siam Commercial Bank (SCB) as an advisor to the deal and
investor in one of the Shin Corp holding companies (nominees)
because 1) former PM Anand Panyarachun is an SCB director and
has strong ties to the Democrat Party (Note: Not correct;
Anand does not belong to any Thai political party.) and 2)
SCB is 24 percent owned by the Crown Property Bureau and is
one of the monarchy's largest investments and sources of
income. Vichit Suraphongchai, the Executive Chairman of SCB
is also an advisor to the Crown Property Bureau. After the
Temasek transaction, he was named to the Shin Corp board.
(Comment: Knowledgeable lawyers in Bangkok say that many
"sensitive" deals are done with SCB participation because of
the inferred protection of the monarchy SCB provides. This
assumption apparently is no longer valid and some wonder how
SCB will compete and whether some investors will avoid
Thailand in the future because the political uncertainty is
seen to have increased, with "monarchy insurance" apparently
no longer trusted. End Comment.) Ong and Goldman Sachs both
indicated that it will be some time before either will
consider further investments in Thailand.


7. (C) Temasek's Charles Ong believes that the coup was the
reaction of the old Bangkok elite reasserting itself against
the new rich of whom Thaksin was both prime example and
leader. From this he extrapolates that many of the old elite
lost considerable assets in the wake of the 1997 crises and
were forced to sell off these assets at "fire- sale prices"
to foreigners. With a reinterpretation of the FBA, the
opportunity could arise whereby foreigners will have to
rapidly sell down their holdings in their Thai operations,
thus creating a buyer's market for these shares, and allowing
the elite to buy these shares at artificially low prices.
(Comment: While we believe that this is a bit too extreme an
interpretation, the fact that it is coming from a key Asian
investor is a bad sign for future investment in Thailand,
especially if any future actions by the interim government
somehow augment this negative view. End Comment.)


8. (C) Senior Singtel officials said that they invested in
Thaksin's AIS cell phone company in 1998 and currently own 20
percent of that entity. They claimed that they have had no
discussions with their majority shareholder, Temasek, about
combining their ownership in AIS. AIS' concession to operate
expires in 2015 and clearly Singtel has doubts that AIS will
win a license to offer 3G telecom services or have their
concession will be converted to a license license before that
time although, as they noted, the concession agreement makes
no mention of foreign ownership as an issue. Singtel is also
concerned that AIS will not win a license to offer 3G telecom
services, which would help AIS eliminate costly revenue
sharing requirements for 2G services under its concession
with state-owned TOT. With Thailand's National Telecom
Commission currently considering new regulations that would
further limit foreign ownership in the telecom sector,
Singtel is clearly concerned about the future of their
investment, although they expressed confidence that they had
a "reasonably iron-clad contract." They did not offer what
they plan to do about it.


9. (C) In the property sector, Banyan Tree Resorts told us
that they have put a major new investment in Chiang Mai on

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hold until things "clarify." In the interim, they continue
to make money from their Thai hotel operations but their
property sale division is at a standstill because foreign
purchasers are no longer certain they can create the legal
structures to assure their ownership of freehold property.


10. (C) DBS and UOB banks both made major investments in
Thailand following the 1997 financial crisis, purchasing
distressed banks and adding additional capital and management
to try and nurse them back to health. While UOB is satisfied
with their investment and said they have felt no
discrimination as a Singapore-based institution, DBS has
faced some problems. First, they sold their interest in OK
Capital, a consumer finance joint venture with Shin Corp,
back to Shin following the Temasek transaction. This was
because of their concern about the FBA regulations. Second,
DBS sought to increase their 16 percent interest in Thai
Military Bank (TMB) when that institution raised additional
capital earlier this year. While foreigners are allowed to
buy up to 25 percent of a Thai bank with approval from the
Ministry of Finance and the Bank of Thailand, this permission
was denied to DBS because of the political concerns of the
Thais that further Singapore investment was politically
difficult in the wake of the Shin/Temasek deal, especially
since DBS is 28 percent owned by Temasek. DBS' board member
for TMB said that he believes uncertainty about Thailand as a
safe investment destination will last until at least new
elections.

Comment

11. (C) The Singaporeans we met feel that they have been
unfairly singled out and that, in any case, the RTG "should
not mistreat investors." That said, there is clearly
reluctance in the Singapore government to publicly raise how
they feel and are clearly hoping that the U.S. will do it for
them. Charles Ong did say that he expected Minister Mentor
Lee to call "his old friend and fellow former PM" privy
councilor Prem to discuss the matter. Deputy PM Pridyathorn
must move quickly to clarify the new rules of the FBA in
order to regenerate investment flows beyond those in the
manufacturing sector which are unaffected by the FBA. If
Singapore's investors are standing back, we suspect that the
same holds true for investors elsewhere as well. Under
pressure to validate charges of corruption against Thaksin,
the newly appointed government feels the political imperative
to find legal fault with the Shin/Temasek deal. That goal
could clash with the need to reassure international investors
that Thailand remains a welcoming destination. Reconciling
these conflicting aims is the biggest economic challenge
faced by the Thai government.
BOYCE

BOYCE