NEW INVESTMENT REGULATIONS PROPOSED

UNCLAS SECTION 01 OF 02 BANGKOK 007650

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/MLS AND EB
STATE PASS TO USTR FOR WEISEL
COMMERCE FOR EAP/MAC/OKSA
TREASURY FOR OASIA
STATE PASS TO FEDERAL RESERVE SAN FRANCISCO FOR DAN FINEMAN
STATE PASS TO FEDERAL RESERVE NEW YORK FOR MATT HILDEBRANDT

E.O. 12958: N/A
TAGS: ECON ETRD EINV TH
SUBJECT: NEW INVESTMENT REGULATIONS PROPOSED

REF: A. BANGKOK 7435 ("GRAVE CONCERNS" ABOUT FOREIGN

INVESTMENT)

B. BANGKOK 6363 (THAILAND PURSUES CASE AGAINST
SINGAPORE INVESTOR)

C. BANGKOK 2978 (THAILAND: INVESTEMNT SLOWDOWN)

D. BANGKOK 788 (THE GREAT THAKSIN ASSET SALE)

BANGKOK 00007650 001.2 OF 002



1. (SBU) Summary. On December 28 a committee assigned by the
Minister of Commerce to advise him about changes to the
Foreign Business Act (FBA - the law which governs the ability
of foreign firms to conduct business in Thailand's services
and other sensitive sectors) submitted its report. Although
the report has not been made public, Dr. Deunden
Nikomborirak, Research Director at the Thailand Development
and Research Institute and a member of the committee met with
us and provided information about the committee's
recommendations which include redefining ownership to include
control and requiring companies to divest themselves of
majority ownership if their current ownership structure is
not sufficiently transparent. Very few US-owned firms are
likely to be affected. End Summary.


2. (SBU) Dr. Deunden explained that the committee charged
with proposing changes to`the FBA wrestled with several
competing goals:
- End the utilization of nominee structures now used to get
around FBA restrictions.
- Not frighten off foreign investors.
- Meet the political need of "proving" that the structure
used by Temasek in purchasing former PM Thaksin's Shin Corp
was illegal.


3. (SBU) The committee proposed changing the definition of a
"foreign" business entity from one in which a non-Thai owns
51 percent of the equity to one that includes a requirement
that the majority owner also have a majority of voting rights
(i.e. control over the Thai company). Dr. Deunden noted that
this would be a departure from Thailand's WTO GATS commitment
which limited foreign participation in Thai services
companies to ownership but makes no mention of control. The
committee suggests that those sectors which have their own
specific laws that include their own definition of "foreign"
not be covered under the FBA. This would include banking and
finance, insurance, air transport and tourism.


4. (SBU) The FBA contains three lists of activities
prohibited to foreigners. List 1 is those sectors "not
permitted to aliens for special reasons" which includes
media, farming, ranching, forestry, fisheries and the
purchase of land. List 2 comprises sectors relating to
national security, national culture, natural resources and
domestic transport. List 3 is businesses in "which Thai
nationals are not yet ready to compete with foreigners" and
specifically mentions 20 sectors including legal professions,
construction, small retail, advertising, hotel and the
catchall "other categories of service business." The
committee report offered two options to the minister; to keep
lists 1 and 2 as they are and liberalize list three by
opening all sectors not specifically identified; or keep all
three lists as they stand. The committee could not reach
agreement on either option even after it was further proposed
that any sector opened to foreign ownership would be subject
to a review within two years to consider whether "too much
damage" had been caused to domestic participants as a result
of the liberalization.


5. (SBU) Finally, the committee recommended that foreign
firms which have shareholding structures that clearly
identify differing classes of stock, especially preferred
shares and ordinary shares with differing voting rights,
would be considered grandfathered. These firms would be
required to identify themselves as foreign but would then
automatically be issued with a foreign business license
permitting them to continue to operate. The logic for
permitting this type of structure to be grandfathered is that
by identifying differing classes of stock the ownership
arrangement was more transparent.


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6. (SBU) However, for companies which structured themselves
through a series of holding companies and/or had identical
classes of stock with differing voting rights or which used
other means to disguise the actual control of the Thai
entity, they will be given a certain period of time (six
months to one year recommended in the report) to restructure
themselves as a bona fide Thai-majority owned and controlled
company. Presumably they would not be permitted to simply
convert to a preference share structure since the rationale
for the differentiation was that Shin Corp's transaction was
structured through a series of holding companies acting as
nominees for Temasek.


7. (SBU) Most US companies will be unaffected by these
changes either because they are in manufacturing, are
established under the bilateral Treaty of Amity which gives
US investors national treatment in some services sectors, or
because most US-associated law firms advised their clients to
structure themselves using preference shares. We believe
those most affected will be some of the big retail firms
(Tesco, Carrefour, Makro),some distribution companies owned
by Japanese electronics and auto firms, and telecom. But Dr.
Deunden believes that even here, most companies will simply
operate as before. She noted that these companies have been
operating in Thailand without challenge for up to 30 years
and that the Business Development Department of the Ministry
of Commerce (responsible for applying the law) has only seven
employees. She acknowledged, however, that these companies
may not be willing to take the risk of operating illegally
under the new regulations and could be subject to "being
outed" by competitors.


8. (SBU) Comment: Commerce Minister Krirk-Krai was Thailand's
representative to the WTO, so he is well aware of the risks
Thailand will run if the country is seen as further limiting
foreign ability to invest in Thailand. On the other hand, he
is politically compelled to ensure that the Temasek-Shin
transaction is shown to be illegal. The forces of
protectionism are clearly strong as demonstrated by the
committee's inability to agree to any liberalization in
return for further tightening of the definition of foreigner.
In any case, considerable foreign direct investment, which
has been delayed pending a resolution to the FBA issue, will
likely suffer further declines as at least some foreign firms
will be forced to divest.
BOYCE