Monthly Archives: June 2011

Another Attempt to Expand the FBA?

There have been at least two attempts to make the Foreign Business Act (“FBA”) more restrictive by changing the definition of an “alien” business under the FBA to make it more expansive – to cover businesses that are not currently covered by the FBA. Both attempts have failed. And both attempts generated tremendous negative sentiment in the foreign business community. Now, following True’s claim that DTAC is in violation of the FBA, The Nation (www.nationmultimedia.com/2011/06/16/business/Foreign-Business-Act-may-be-tightened-after-DTAC-r-30157910.html) reports there may be yet another try to expand the scope of the FBA.  We don’t need this.

Again, it appears that a re-definition of what is an “alien” company is under consideration.  And again claims are raised that this is necessary because of uncertaintiy in this area.  In fact, the FBA is not at all unclear on the definiton of an “alien” under the FBA.

The definition of an alien business under FBA Section 4 is quite clear.  It does not refer in any sense to control or even economic benefit.  It simply refers to share ownership.  This definition, in the FBA and its predecessor, NEC 281, has remained unchanged for about 40 years.  In reliance on this definition tens of thousands of preference share companies have been formed.  The Ministry of Commerce has previously said these structures were acceptable under Thai law. 

But it seems as though there might be another go.  The Nation reports: “…the shareholding issue would be central to the amendment, as the law now focuses on factual figures, not the sense of ultimate ownership…”

Maybe something got lost in that translation, but this sounds like the old argument that companies could be held liable for violating the spirit of the Foreign Business Act (FBA).  The “sense of ultimate ownership”?  Not sure what that means.  The FBA provides for severe criminal penalties and the dissolution of businesses.  Subjecting foreigners to these severe penalties based on something as nebulous as the “sense of ultimate ownership”  doesn’t sound comforting.

The Nation goes onto to quote the MOC:

…the process of proving the nationality of a company was complicated, as it involved a money trail. Likewise, to prove whether DTAC is a Thai or a foreign company, investigation into investments, shareholding ratios and the distribution of returns to shareholders would be necessary…

Actually, when you look at the definition of a company’s “nationality” in FBA Section 4 none of these factors are mentioned.  The definition is quite clear (an earlier blog post provides the definition).  You simply look at share ownership. Section 4 doesn’t mention or even hint at any of this other stuff (except shareholder ratios).

The politicians are making more sense on this than the officials.  From the Democrats:

Buranat Samutharak, spokesman of the Democrat Party, said he had doubts over why TrueMove initiated the complaint, as it was the duty of the state agencies, not the private telecom operators, to examine which companies may or may not circumvent the Foreign Business Act and bring them to prosecution.

The complaint “is just to make it become front-page news, which hurts both of them”, he added.

And this: Supachai Jaisamut of the Bhum Jai Thai Party said the legal case between the two companies did not bring any benefit to consumers.

This is NOT a political blog, but it’s interesting how the politicians – from all of the political parties that are quoted as having anything to say on this subject – make a lot more sense than the bureaucrats.  It’s also reassuring.

Alleged FBA Violation in the News

Yesterday’s Bangkok Post (http://www.bangkokpost.com/business/telecom/242184/true-move-lays-charge-against-dtac) reports on another example of the Foreign Business Act (FBA) being used in a dispute between two business rivals, again highlighting the danger of failing to comply with this law and how alleged evidence of non-compliance can be found in some surprising places.  This time it’s in the telecommunications industry.  And today it is headline news in The Nation (http://www.nationmultimedia.com/2011/06/15/business/DTAC-Its-not-True-30157864.html) and front page news on the first page of the Business Section of the Bangkok Post (Expect posts about that in the next day or so.) Yesterday’s Bangkok Post reports:

True vice president Athueck Asavanand said the company sent a representative, Suphasorn Honchaiya, to file a complaint with the police against Dtac for violating Section 4 of the Foreign Business Act (1999), which limits foreign telecom ownership to 49 per cent .

This quote is a bit odd since Section 4 of the FBA simply defines the term “alien” and that definition says nothing about voting control. Was it really evident from DTAC’s corporate registration papers that it was majority foreign owned?  Seems unlikely.

Or is True claiming that that DTAC is unlawfully using Thai nominees under FBA Section 36 to make it appear as though DTAC is not an alien?  This is typically the claim when ultimate control and the economic benefits of control rest with a foreign party.  And the absence of any reference  to control or economic benefit in FBA Section 4 makes it an unlikely basis for a claiming that a company is violating the FBA.

The more common claim is that a foreigner is illegally employing Thais as “nominees” in violation of the FBA’s section 36.  That is, the company appears Thai based on ownership of share capital as reflected in the company registration papers, but some or all of the Thai are actually nominees of the foreigners.  They aren’t real investors. This is a complicated area, but the current test appears to be whether the Thais are genuine investors in the sense that they had and used their own funds to acquire their shares and those shares provide sufficient economic benefit to the Thais so that it would be hard to say they are not genuine investors.

But there is another way to claim a company is foreign majority owned or using nominees, and that is through documents the parties themselves have signed or announcements the company itself has made.  That seems to be the claim here:

He said Dtac reported a 49 per cent foreign shareholding to the Commerce Ministry, but Telenor notified the stock markets in Norway and Singapore that it owns 66.50 per cent of Dtac

In some cases the registration papers say that Thais owns a majority of the shares, but other documents, such as a shareholder agreement or even a “trust deed”, are claimed to provide evidence that the shares are really owned by foreigners. Here, True appears to be claiming this admission was made in filing on a public stock exchange, adding a new twist to these sorts of claims and providing further food for thought (and fodder for more blog posts).

This article in the Bangkok Post supplies all we know about the case, and more facts may come to light out in the days to come.  But it’s interesting to see that the article points to the same red flags of a FBA violation previously mentioned on this blog.

Enforcement of the FBA is real.  The Ministry of Commerce (MOC) announced the formation of task force of 25-30 MOC officers to search company records for evidence of nominee shareholding.  B&M reports at least one guilty verdict.  There are certainly many more investigations we don’t read about, and those investigations are more than just an administrative and costly nuisance, since they represent an existential threat to a company: they challenge the company’s very right to conducts its business and threaten business dissolution. More commonly, in business disputes between disgruntled business partners or competitors FBA allegations are raised for leverage.  Here, we appear to be getting a glimpse of the bigger FBA iceberg because it involves major players in Thailand’s contentious telecommunications industry

Thailand’s 30% Graft Tax

The Thai Federation of Industry (TFI) reports in the Bangkok Post that “businesses can be asked to kick back up to 30% of contract values to state officials”. This is based on anecdotal evidence, but you can’t expect precise measurements on this sort of thing. And that number is not particularly surprising.

The more cynical view would be: “So what? This is Thailand. Live with it or leave.” But I think there is good reason for hope. In that same article: “Dusit Nontanakorn, chairman of the Thai Chamber of Commerce (TCC) and the Board of Trade said Thailand should follow the example of Hong Kong” and went on to say:

If we don’t start today, there will be no map of Thailand left. Can we stop paying respect to those who are rich but cheat, and start to wai those who are poor but honest?”

This is not the first time that we have heard a prominent person in Thailand comment on corruption, but those are strong words.  And he is absolutely right about the corrosive effect of corruption on states.

The article goes on to report:

The chamber recently created a corruption situation index (CSI), which it intends to update every six months to gauge the attitudes of respondents toward corruption and the effectiveness of measures to stop improper practices.

The creation of a local corruption situation index is also new.  Let’s hope the indexing continues.  There is ample commentary in cyber-space on how to tackle corruption and I will add some comments of my own in future blog posts, but one thing seems obvious to me: you cannot even begin to address corruption unless you shine a spot light on the problem and openly discuss it.

Putting numbers on this, particularly realistic numbers (and 30% is realistic), also helps by making the problems created by corruption more concrete.  That basically means that approximately one of three Baht or dollars spent on many public projects is not actually going into the project but into someone’s pocket. This increases the project’s price and, perhaps more important, limits potential participants in the project. In the current environment with stricter enforcement of international anti-corruption laws, more honest and capable businesses simply won’t want to participate in a project with that level of corruption.  And the Thai public suffers as a result.

To put this in historical perspective, it wasn’t so long ago that international organizations shied away from discussing corruption.  Up until the 1990s, corruption was a taboo subject for international organizations.  The US had its Foreign Corrupt Practices Act since the 1970s, but aggressive enforcement of the FCPA is a very recent phenomena.  Last year in the American Chamber of Commerce’s magazine, T-AB, I wrote: “In the prior decade, the Department of Justice (“DOJ”) did not file a single FCPA case until 2002; but last November, the DOJ announced there were more than 130 open FCPA cases. That number is expected to increase.” (www.deaconsbkk.com/knowledge/legal-update-increased-enforcement-of-the-fcpa.php). And that number has certainly increased.

There is no reason to rule out change in Thailand. It will not happen overnight, but I am optimistic that a consensus is developing in the local business community that business as usual is no longer acceptable.

Should the Trade Competition Law be Amended?

Since the Thai Anti-Competition Act (TAC) was enacted in 1999 there has not been a single successful prosecution under the TAC. Now several proposals have been put forward to change this by giving this law more teeth to secure convictions. But is this a good thing? Could the cure be worse than the disease?

Perhaps some thought should first be given to the purpose of the TAC. At the very least the purpose of this law should be explicit. Is it intended to provide consumers with a wide range of products at the lowest possible price or is it intended to serve other interests?

An article in the 3 June 2011 edition of the Bangkok Post (www.bangkokpost.com/business/marketing/240326/market-dominance-revised) reports that that some trade competition authorities contend “other factors” besides market size should also be considered to determine “market dominance”. These “other factors” include: “better access to production materials and resources, more extensive distribution channels, technology and capital advantage”.   When a business has “market dominance” under a trade competition law, it is generally also subject to regulation under that law. This is consistent with a 5 February 2010 seminar organized by the Office of The Trade Competition Commission where some said that both horizontal and vertical restraints on tradewould and should be considered to determine if at least some provisions of the TCA have been violated.

But wait a minute. Don’t customers gain if they are offered more products at better prices? Does it matter if a supplier is able to supply more products at better prices because it has better access to production materials and resources, extensive distribution channels and more advanced technology? Justice Learned Hand once observed in the seminal U.S. antitrust case against Alcoa that U.S. antitrust law does not attack monopoly power obtained through “superior skill, foresight and industry.”

The primary and – some would argue – only legitimate goal of anti-competition laws is to protect consumers from predatory business practices that artificially restrict choice and increase price for consumers. This is why prohibitions on vertical “restraints” on trade are so controversial in competition law. What some describe as a vertical “restraint” on trade others see as a more efficient and transparent means of providing consumers with a wider selection of goods at lower prices.  Should a business be handicapped under trade competition laws because it has access to better technology and production materials?  Consumers don’t benefit.

Distributors and less efficient domestic producers often take a different view of trade competition laws; they often argue that trade competition laws should serve other goals besides increasing consumer choice and lowering price. And although some anti-competition legal regimes clearly do serve other goals, they are – or at least should be – clear about their goals. Is the law intended to serve consumers or is it intended to protect other interests? Unless and until there is clarity on this fundamental point, expect a heated, but muddled, discussion about amending the TCA.

New Guest Blogger Added

The blog has been inactive for several months and to change this Douglas Mancill of  Deacons Bangkok (www.deaconsbkk.com) has agreed to assist in posting blogging articles.  Doug’s bio is here (http://www.deaconsbkk.com/the-firms-partners/douglas-mancill.php) and you can contact him direct on the articles he posts (rather than me).