A Brief History of the Foreign Business Act


Before there was the FBA, there was the Revolutionary Party’s Announcement of National Council No. 281 (NEC 281), which was issued by Thailand’s then military government on 24 November 1972.  NEC 281 is very similar to the FBA.  NEC 281, like the FBA, divides restricted businesses into three schedules or annexes.  The restrictions imposed by NEC 281 are similar to those imposed by the FBA.  Both Annex C of NEC 281 and Schedule 3 of the FBA are justified on the grounds that “Thais are not yet ready to compete with foreigners” in the areas listed on this schedule.  And the definition of a foreign company used by NEC 281 is virtually identical to the definition used in the FBA.

Both NEC 281 and the FBA precisely define foreign companies in terms of “share capital”.[i] Neither NEC 281 nor the current version of the FBA refer to or even mention voting or beneficial control.  They both provide that a company will be considered an “alien” company if foreigners hold more than 50% of the registered share capital of that company.

Not surprisingly, this precise definition of a foreign company coupled with the expansive scope of NEC 281 led to the formation of what are sometimes called “preference share structures” – companies where Thai nationals own a majority of the share capital, but foreigners have voting control.  These structures became almost routine,  and practices in the formation of these structures became lax as the MOC routinely accepted registration of the companies employing such structures without real question.  Indeed, practices became downright sloppy, something any investor buying a company formed before, say, the year 2001 should seriously investigate during its due diligence.

In 1995 Thailand ratified the World Trade Organization’s General Agreement on Trade in Services (GATS).  In carving out businesses that would not be subject to liberalization under GATS, Thailand’s schedule of such business referred specifically to “registered share capital” – the same language employed by NEC 281 in its definition of an “alien company.”

About four years later, in 1999, the Thai government replaced NEC 281 with the FBA.  When the Thai parliament considered the FBA, a proposal was made to draft this law so that alien companies would be defined in terms of Thai majority voting rights, but that proposal was rejected because of fears it would make Thailand less competitive in an increasingly globalized world. Instead, foreign companies were defined in terms of registered share capital alone.  When the FBA was enacted, the government promised to periodically review and reduce the scope of restricted businesses on Schedule 3.  Eleven years later, not a single business has been removed from Schedule 3.

In the nearly 38 years since NEC 281 was issued, thousands of preference share companies have been formed.  They have been routinely accepted by the MOC for registration without challenge or review.  Indeed, MOC officials publicly acknowledged the legitimacy of such structures.  Foreign companies, including some prominent household name multinationals, relied on these structures when making substantial foreign direct investments into the Thai economy.

Estimates on the number of preference share companies’ range from the thousands to 14,000[ii] to 100,000[iii], but no one really knows the exact number.  Indeed, the debate about the exact number is a red herring, since the more important and indisputable point is that there are many such companies, and that many of them are important contributors to the Thai economy.

There were signs of a change in attitude before the 2006 coup, but the real press for greater restrictions – indeed, proposals for an outright change in the law and re-definition of what constitutes an “alien” – came after the 2006 coup from the militarily appointed National Legislative Assembly.  And this will be the subject of the next post on the FBA.


[i] Compare the definition of an “alien juristic person” in NEC 281, Section 3, with the definition of an alien juristic person in the FBA, Section 4.

[ii] Bangkok Post, “Deal flow dries up on policy uncertainty”, 14 October 2006, quoting an unnamed Western Diplomat: “Under our calculations there are about 14,000 companies…”

[iii] The Nation, “Nominee, or just a passive local partner?”, 11 September 2006: “It is estimated that about 100,000 Thai companies fall into this category.”

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