Tag Archives: Foreign Business Act

NBTC Notification Restricting “Foreign Domination” – Some Context

It’s hard to see what sort of involvement by a foreigner in Thailand’s telecommunications sector is not up swept into the notification restricting “foreign domination” over Thailand’s telecommunications businesses recently issued by the acting National Broadcasting and Telecommunications Commission (NBTC).  The NBTC’s notification goes far beyond the restrictions found in Thailand’s already expansive Foreign Business Act (FBA).

As reported in this PriceSanond News piece, the acting NBTC recently issued a notification restricting “foreign domination” over telecommunications businesses.  It was published in the Thai Government Gazette on 30 August 2011 and became effective the following day, 31 August.   The notification applies to all current holders of and applications for Type-2 (with network) and Type-3 licenses, meaning that it applies to companies that currently operate a business based on a permission, concession or contract with CAT or TOT. In other words, it applies to current participants in the telecommunications sector. The notification lists the following ten examples of what the NBTC claims is “foreign domination” of a telecommunications business:

1. direct or indirect share holding by foreigners or foreigners’ agents;

2. use of apparent agents (nominees);

3. holding of shares with special voting rights;

4. participating in appointing or having control over the board of directors or senior officers of the licensee;

5. a financial relationship such as having a corporate guarantee or a loan with a lower-than-market interest rate;

6. licensing or franchising;

7. management or procurement contracts;

8. joint investments (by a licensee and foreigners);

9. transactions involving transfer pricing; and

10, any other behavior which provides direct or indirect control to a foreigner over a licensee.

“…any other behavior…”  That catch-all phrase seems about as expansive as you can get.

So Why Issue this Notification Now?

Just a hunch, but the Thailand’s telecommunications sector is lucrative, and the competition has become fierce.  The relationship between Thailand’s second largest telecommunications carrier, DTAC, and its third largest telecommunication, True, has been particularly contentious.  And of course time is running out for this NTBC: new members are supposed to be appointed to the NBTC this Monday.

But first some more background:

In April of this year, DTAC challenged a deal between True and CAT Telecom public limited company (CAT) in Thailand’s Central Administrative Court.  CAT is a state-owned company that runs Thailand’s international telecommunications infrastructure, including its international gateways, satellite, and submarine cable networks connections.  CAT was formed out of a government agency and is often still thought of as a government agency.

At that time, the Bangkok Post reported that Somkiat Tangkitvanich, the vice-chairman of the Thailand Development Research Institute (TDRI), “said the deal amounted to a ‘pseudo-concession’ and should be investigated for compliance with the law.”

About two months later, in mid-June, “True Move…filed a criminal complaint against its bigger rival DTAC for having a foreign state enterprise as a major shareholder, which it claims is a violation of the Foreign Business Act”, reported the Bangkok Post.  The Bangkok Post went onto report: “True Move has no plan to file a complaint against Advanced Info Service even though the mobile market leader also has a complicated shareholding structure, said Athueck Asvanont, vice-chairman of parent True Corporation.”  Interesting.

And filing this criminal complaint, of course, had nothing to do with the complaint which DTAC earlier filed with the Central Administrative Court over what the TDRI’s Somkiat Tangkitvanich said amounted to a “pseudo-concession“.  The Bangkok Post reported in this same article that True’s Athueck “rebutted the claim that the petition represented retaliation against DTAC for filing a case with the Central Administrative Court seeking to scrap the contentious deal between CAT Telecom and True Corporation.”

Several weeks later, the Ministry of Commerce (MOC”) announced that DTAC appeared to be employing an illegal nominee structure in violation of the FBA. This development was summarized on this blog here.

Row Within MOC on FBA Claim Against DTAC

As blogged here and reported in the Bangkok Post, in early July, shortly after the elections but before a new government was formed and appointed new ministers, there was a row within the MOC itself about how to handle the matter.  The Bangkok Post provided this description of the row:

The head of the Business Development Department is challenging his boss’s order for the department to take legal action against DTAC on its nationality, saying the instruction is a “direct political intervention” and “illegitimate”.

The department, a unit under the Commerce Ministry, insisted on submitting its committee’s original findings to the police and ask them to determine whether the law had been broken, and if so, to take further action.

The move openly challenges Commerce Minister Alongkorn Ponlaboot, who had yesterday demanded that Banyong Limprayoonwong, director-general of the ministry’s Business Development Department, press the charge against DTAC. “He [Mr Alongkorn] has no authority or obligation under the Foreign Business Act (FBA) to force me to accuse a company of being foreign-owned,” Mr Banyong said.

“Mr Alongkorn’s decision cannot be regarded as a government policy. It is a direct political intervention,” Mr Banyong said

Shortly afterwards a new government was formed.  The old ministers were replaced with new ones.  And the FBA case appears to have drop off the radar (for now at least).

What about the NBTC and its Notification?

The NBTC which issued the notification restricting “foreign domination” in telecommunications businesses is also about to be replaced with new members. Its members were also appointed before the July elections.  The NBTC’s notification on “foreign domination” of telecommunications businesses was published just one week before new members are supposed to be appointed to the NBTC.  As expained here:

The Thai Senate is scheduled to select members of the National Broadcasting and Telecommunications Commission (NBTC) this Monday, 5 September 2011.  The current acting NBTC recently issued a controversial notification restricting “foreign domination” over telecommunications businesses shortly before the Senate was scheduled to select new members.  The Bangkok Post reports that the selection process has been “punctuated by fierce lobbying”.  If the Senate fails to select members of the NBTC by 11 September, the cabinet then appoints members to the NBTC, reports the Bangkok Post.

“Fierce lobbying” for seats on what would be a rather pedestrian regulatory body elsewhere?  The Senate has the first shot at appointing new members to the NBTC.  But if they are unable to do so by 11 September, the new Thai cabinet is supposed to make the appointments.

What this Means for Thailand: the Larger Picture

Leslie Lopez, a writer for the Straits Times Straits Times in Singapore, recently made the following observations:

Thailand’s manufacturing sector is one of the most robust in the region because of liberal foreign investment rules, and that in turn has made the country a regional hub for industries such as car manufacturing and electronics.

But the services sector is highly regulated in favour of local groups.

Thailand also ranks as one of the last countries in the region to fully deploy advanced wireless technology, largely because of the absence of a regulatory agency with the necessary clout to rein in the powerful state enterprises and push ahead with the licensing of new services.

As a result, the country continues to suffer from a lack of foreign investment in the sector.

***

“The setting up of the NBTC will get the reform process going. That is key,” says investment analyst Thitithep Nophaket, who covers the telco sector for Phatra Securities in Bangkok, referring to the new watchdog body.

Yes; setting up an NBTC that is not beholden to any business interest is important.  Eliminating or at least curbing laws that can be used to take out effective foreign competitors would also help.  Let’s see if it happens.

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Diageo – Victim or Perpetrator?

The Thai press has reported  extensively on the settlement reached between the major multinational alcoholic beverages company, Diageo plc, and the U.S. Securities and Exchange Commission (SEC) after Diageo self-reported violations of the U.S. Foreign Corruption Practices Act (FCPA). Most of the coverage seems to consist of speculation – or perhaps “hints” is the better word – about the identity of the “Thai government official and foreign political official” retained by Diage to provide “lobbying services…in connection with several important tax and customs disputes that were pending between Diageo and the Thai government”.  This is understandable.  The SEC’s Order (in particular, pages 5 and 6) instituting the claim, imposing a cease and desist order and civil penalties provides plenty of hints.  Fingering the ‘bad guy’ makes for simple and exciting press.

But there is another, more fundamental, issue here: why is it that some Thai agencies seem to attract more than their fair share of corruption cases?  “Bribery is particularly concentrated in a few governmental sectors in charge of large financial transactions: the Land Department, Tax and Customs Department, the Transport Department, and the Police Department”, according to the Business Anti-Corruption Portal’s report on Thailand. The Diageo matter involved the Customs Department, and that is not surprising.

The Bangkok Post reports that: “Numerous business surveys have placed the Customs Department at the top of the list of government agencies with serious corruption and transparency problems.”  A large part of the problem at Thai Customs is the incentive system for rewarding tipsters and Customs officials who uncover alleged violations of Thai customs laws.  The Bangkok Post reports:

Previously, officials would get cash rewards of 25% while outsiders would get 30%. However, there were no ceilings. There were cases involving billion-baht shipments where the rewards would be staggering. This led to officials spending too much time trying to find fault with shipments.

Reform in the form of reducing numbers has been the approach, but many question if reducing ‘the take’ rather than changing the underlying policy is really effective. Many also ask why such a system was allowed in the first place; the Bangkok Post reports: “Pornsil Patchrintanakul, the deputy secretary-general of the Board of Trade says the cash rewards should have never existed.”

And why allow any form of pernicious incentive system like this to continue even if the incentives are more modest? Another Bangkok Post article reports: “Even capping the ceiling of each case at 5 million baht might not solve the problem.  For shipments of larger value, officials could simply break them down into smaller cases that meet the 5-million-baht limit.”   The prior Bangkok Post article provides part of the answer about why real reform is so difficult:  “A senior Finance Ministry official said there once was a proposal to abandon the reward system but there was serious opposition from the Customs Department.”

But another, less reported, legal ruling highlights the flaws in Thailand customs law regime: the WTO Ruling and WTO Appellate Body ruling in the Philipp Morris case.  The WTO case concerned the valuation of imported cigarettes, but the fact that the imported products in this particular WTO case were cigarettes should not divert attention to its more important findings.  The rulings by the WTO panel and a WTO Appellate Panel are far more important for what they say about the rule of law in Thailand.

The WTO not only found that Thailand failed to comply with its international obligations in setting values for these imported products for tax purposes, but also that: “Thailand…fail[ed] to publish laws and regulations pertaining to the determination of a VAT for cigarettes and the release of a guarantee imposed in the customs valuation process.”  It is may be hard to garner sympathy for a cigarette producer, but this case was not about protecting the Thai public from cigarettes.  How is any company importing goods into Thailand supposed to do business when its imports are subject to unpublished laws and regulations?

If the subject matter of the dispute, cigarettes, is still a concern, consider this from the WTO: “Philippines challenged the Thai government system under which certain government officials simultaneously served on the board of TTM, a state-owned domestic cigarette manufacturer.”  This wasn’t a public health issue.  It was a trade issue pure and simple.

But even more troubling, according to the WTO’s summary of the case: “[t]he Panel also found that Thailand acted inconsistently …by failing to maintain or institute independent review tribunals or process for the prompt review of guarantee decisions.”  No independent review of decisions made by officials with strong financial incentives to find violations?

This is not about cigarettes or even about the alcoholic beverages that Diageo produces and imports.  It’s about the rule of law.  And the inevitable friction between: (a) legal regimes that permit officials to exercise unfettered discretion when identifying violations pursuant to unclear – or here – unpublished regulations; and (b) and increased enforcement of foreign anti-corruption laws.  Clashes are inevitable.

The U.S.’s FCPA prohibits the payment of bribes to gain a business advantage.  In US vs Kay the fifth circuit held that prohibited payments (illegal bribes) not only include payments to obtain, say, government concessions or contracts, but also include payments made to reduce import duties and reduce taxes if they are made to obtain an unfair business advantage.  But what if they are simply necessary to even do business at all in a particular country?

This feature of the FCPA and other foreign anti-corruption laws puts businesses, particularly foreign businesses, in a very awkward position when they have to deal with less than transparent foreign government agencies.  It often places companies doing business in those jurisdictions with few, if any, legitimate options.  And it is not limited to only the Thai Customs Department.

What might be characterized in the U.S. as payment made to obtain an “unfair” business advantage is often seen as a necessary payment so as even to be able to do business.  It doesn’t provide the business with an unfair business advantage.  It is often simply seen as an unsavory requirement for doing any business at all in some jurisdictions.

This is not a justification for such payments and I am not involved in or familiar enough with Diageo’s situation to say if that is what happened here, but this clearly does happen in practice in Thailand.  More developed countries are more aggressively enforcing their own anti-foreign corruption laws, and this is a positive development.  But the increased enforcement on the supply of the corruption problem must be matched by increased reform on the demand side.

Laws that provide unfettered discretion to officials and provide for little or no independent review on how such discretion is exercised are big part of the problem on the demand side.  As long as local vested interests can use such laws to tilt the playing field in their favor, they will do so.  And in doing so, they undermine local economies, create business environments conducive to corruption and – this is often missed – generate friction with the increasingly robust anti-foreign corruption regimes of more developed economies.  And because these uneven playing fields place foreign companies subject to regulation in countries with robust foreign anti-corruption laws in impossible situations, these same foreign companies will, naturally enough, often press harder for serious enforcement of international conventions and obligations that are designed to level the playing fields.

Aggressive efforts to enforce rights and obligations under the WTO, the UN Convention, the New York Convention and other international treaties and conventions will play an increasingly important role in efforts to level the playing field going forward.   We are now only seeing the early signs of this.

Claims of Political Interference in DTAC FBA Probe

We said it would get interesting.  Over the last two days the press have carried stories about conflicts within the Ministry of Commerce (MOC) over the probe into DTAC for allegedly violating the Foreign Business Act (FBA).  Page one of the business section of today’s Bangkok Post provides a good summary (“http://www.bangkokpost.com/business/telecom/246620/official-defies-instruction-to-file-suit-against-dtac”).  The whole story should be read, but first a few snippets:

The head of the Business Development Department is challenging his boss’s order for the department to take legal action against DTAC on its nationality, saying the instruction is a “direct political intervention” and “illegitimate”.

The department, a unit under the Commerce Ministry, insisted on submitting its committee’s original findings to the police and ask them to determine whether the law had been broken, and if so, to take further action.

The move openly challenges Commerce Minister Alongkorn Ponlaboot, who had yesterday demanded that Banyong Limprayoonwong, director-general of the ministry’s Business Development Department, press the charge against DTAC. “He [Mr Alongkorn] has no authority or obligation under the Foreign Business Act (FBA) to force me to accuse a company of being foreign-owned,” Mr Banyong said.

“Mr Alongkorn’s decision cannot be regarded as a government policy. It is a direct political intervention,” Mr Banyong said.

The article goes onto to describe the difference between Business Development Department’s report and the report from Mr. Alongkorn’s committee as follows:

Mr Banyong’s panel is less certain about the legal implications and planned to ask the police to investigate further for more evidence.

The original complaint against DTAC was raised by True Move, the country’s third largest mobile operator. It alleged that DTAC is 71.35% held by foreigners and their nominees.

***

A telecom veteran, who asked not to be named, said the legal move by True Move could also spell trouble for mobile leader Advanced Info Service on its shareholding structure.

“Even though True said it would not do the same with AIS, the outcome of the DTAC case will inevitably put pressure on AIS’s shareholding structure, particularly under the administration of the new Pheu Thai-led government,” he said.

We’re not going to delve much further into this politically charged morass here, other than to make the obvious observation that it is morass.  Laws such as the FBA lend themselves to this sort of political controversy in Thailand.  There are views on what constitutes an illegal nominee under FBA Section 36, but much of this is contested terrain – perfect ground for political battles having little to do with sound policy or providing Thailand with a better IT infrastructure.

It is also safe to say that these sorts of controversies do not instill investor confidence in Thailand.  More about that later.

Early Comments on the FBA Investigation into DTAC

The Bangkok Post reported that the Ministry of  (“MOC”) issued a 35 page report addressing claims that DTAC is an “alien” under the Foreign Business Act (FBA): “Commerce Ministry investigators have made a preliminary finding that some Thai nominees hold shares on behalf of foreigners in the mobile firm DTAC”. (http://www.bangkokpost.com/business/telecom/245480/dtac-probe-finds-nominees)

That report was to be forwarded to the Royal Police, but more about that below. Continuing with the Bangkok Post report: “Mr. Yanyong [of the MOC] said the preliminary investigation had found some Thai shareholders were nominees for foreign groups led by Telenor, a Norwegian state enterprise.”  In other words, this case turns on the so-called “nominee shareholder” prohibition contained in FBA Section 36, as we originally suspected.

The report is not public and it’s early days, but we can make a few observations and comments about this matter.   For example, what the MOC’s “findings” do and do not mean.  And what they suggest about the MOC’s views on what constitutes nominee shareholding under FBA Section 36.

First and foremost, the MOC’s findings, preliminary or otherwise, are not law.  We are a long way off from anything that can remotely be considered law.  Even if this matter gets to the Royal Police, they actually investigate the matter and they decide some of the Thai shareholders are nominees, that finding by the police and anything the police decided is also not law.  The matter must still go to the prosecutors who must then decide if they want to prosecute.  And if they do prosecute and a Thai Court reaches a substantive decision, there are the inevitable appeals.

A comment, reported in the 8 July 2010 edition of the Bangkok Post (http://www.bangkokpost.com/business/telecom/246011/political-appointee-asserts-role), appears to confuse this point:

Sanya Sathirabutr, a political adviser to Alongkorn Ponlaboot, a Democrat MP and acting deputy commerce minister, said yesterday his investigative team had the authority to decide the nationality of the company and hoped to make a decision by Monday.

Not quite.   If it gets that far, that decision will need to be made by a Court.

But even if the MOC’s findings are not law, they are important.  The press reports give us a glimpse into the MOC’s thinking on this matter.  “‘We have no authority to ask for the financial documents. We need to pass on the duty to the Royal Police instead,’ he [an MOC official] said.”  He appears to be referring to alleged loan arrangements with some of the Thai shareholders.

In practice, when making inquiries about possible nominee status, the MOC looks for evidence of the financial ability of Thai shareholders to fund an acquisition of shares with their own money.  A simple review of bank statements is generally conducted at the company registration stage.  The alleged focus on loan agreements in the DTAC case goes beyond this, but it is consistent with our general theory about what, in the MOC’s eyes, distinguishes genuine investors from nominee investors: evidence that the Thai investor had the ability to and did in fact fund an investment with his or her own funds.

From an administrative perspective, you can see why this approach is attractive.  The so-called “nominee” provision found in Section 36 turns on intent: why did this Thai investor buy these shares?  Did he do so as a genuine investor or as a nominee of foreigners?   MOC officials cannot read minds, but they can read financial statements.  Whether that, by itself, is sufficient and how those records should be read is another matter – a matter that also has not yet been decided.

And the there must also be a prosecution.  FBA Section 36 is a penal provision providing for, among other things, imprisonment of up to three years.  From a prosecutor’s perspective, absent an unequivocal admission from the Thai investor (say, a written deed of nominee shareholding signed by the Thai shareholder), how do I, the prosecutor, prove this investor intended to help foreigners circumvent the FBA?  If the Thai shareholder says he is a genuine investor, how do I prove otherwise?

This case, if it proceeds, will need to address these and many other difficult questions.  It will be interesting.

2007: Proposed Amendments to the FBA – What Happened?

Following the 19 September 2006 coup that ousted the government of Thaksin Shinawatra (Thailand’s first non-constitutional change in over 15 years), the military did all of the things that you would expect of coup makers: it canceled upcoming elections, abrogated the Constitution, dissolved Parliament, banned protests and all political activities, suppressed and censored the media, declared martial law, and arrested Cabinet members.  The military also appointed members to a body called the ‘National Legislative Assembly’ (NLA), and the NLA began to consider and enact new ‘legislation’.

For the foreign business community in Thailand, proposed amendments to the Foreign Business Act (FBA) were the most controversial piece of new legislation. These amendments were intended to re-define what constituted an “alien business” under the FBA.  Foreign control would matter even if the company was majority owned by Thais.  From the post on the history on the FBA, you will recall that up until this time, Thai law expressly provided that a Thai majority owned company was not considered an “alien company” – even if it was foreign controlled – unless the Thai shareholders were  “nominees” of foreigners.

To attract investors, previous Thai governments had publicly emphasized this point when trying to explain the FBA to prospective foreign investors.  And in reliance on this very narrow definition of an “alien” in the FBA, 35 years of practice and repeated reassurances by prior Thai governments, foreigners established and controlled tens of thousands of companies, and done so for decades.  But it appeared that all of this was about to change.

The NLA put forward increasingly restrictive proposals.  Foreigners would essentially be forced to divest themselves of businesses they might have established decades ago in Thailand.  The money, time and effort that tens of thousands of foreigners had put into establishing businesses in Thailand – some of them household named businesses that employed thousands – would be subject to forced fire sales to local interests.

This was headline news in the early part of 2007 with front-page articles about pleas by foreign embassies that the NLA please refrain from enacting such legislation.  The EU said such measures would violate Thailand’s obligations under the WTO.

In the heated arguments over these controversial amendments, the then government put forward some rather interesting arguments to justify their proposed amendments to the FBA, such as

  • The new laws would only affect businesses that were already using illegal nominee structures; these businesses were already violating the law, and they therefore had no right to complain.  The response to this was obvious: if these businesses are already using illegal nominee structures, why change the law?
  • Senior officials in the Ministry of Commerce claimed that every “civilized country in the world” had laws restricting foreign ownership similar in breadth to that of Thailand’s FBA, and such laws determined a company’s “nationality” based on voting control.  While there may be some truth to the latter, the former was demonstrably untrue, unless the U.S., Australia and every member of the EU don’t count as civilized countries.  Thailand’s FBA was and is extraordinary in its breadth.

What happened? The foreign business community’s relationship with and confidence in the government was strained.  There was genuine concern – indeed, an expectation – that such changes would be enacted by the NLA before elections were held on 23 December 2007 to replace the appointed NLA with an elected parliament.  But the elections came and went without any change to the FBA.

The foreign business community sighed in relief. But even in the several weeks after those elections while the NLA remained in power before an elected parliament was seated, there was a strong press to make the FBA much more restrictive.

But it never happened.

Although no legislation was enacted, Thailand’s reputation with investors suffered tremendously.  And the foreign business community felt as though they had only gotten through this by the skin of their teeth.

In the next post on the FBA, I will take a look at the current state of the FBA.  Between now and then, perhaps something else.

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.”

Let’s Start with the Foreign Business Act

The Foreign Business Act, B.E. 2542 (FBA), is often the first obstacle a prospective foreign investor in Thailand encounters.  And this makes it an excellent place to begin our discussion of Thai law and policy since the FBA illustrates and embodies so many of the difficulties that foreign investors face in Thailand.

The FBA was enacted in 1999 and prohibits “aliens” – a carefully defined term (more about that and the controversy this has created in subsequent posts) – from owning a wide range of businesses absent certain exceptions or issuance of an “alien business license”, which is difficult to obtain in practice.

The FBA does not cover every business.  I mention this because some seem to believe it covers every business owned by a foreigner, and I want to eliminate that misconception from the outset. The FBA is very broad, applying to about 50 types of businesses (depending upon how a “type” of business is defined) divided into three categories (often called “annexes”), but it’s not so broad as to cover all business activities.  Generally speaking, for example, manufacturing is not restricted under the FBA.  But it’s easy to see how the breadth of the FBA has created the misconception that it applies to any business in Thailand owned by a foreigner.

Complicating matters further, the FBA is also not the only law that restricts foreign ownership and participation in Thai companies.  Even if the FBA does not apply, other Thai laws restricting foreign ownership and participation may apply.  We will look at a few examples of this in future posts, but for now let’s start by taking a broad brush look at the three categories (or annexes) of businesses restricted under the FBA and the rationales for these restrictions.

Annex 1

Annex 1 prohibits alien ownership of nine categories of businesses for “special reasons”, and includes such businesses as newspaper publication, ownership of television stations, forestry, rice farming and trading in land.  The FBA does not permit licenses to be issued to foreigners for ownership of businesses listed in annex 1 under any circumstances.

Annex 2

Annex 2 is divided into three chapters.  In theory, an alien can obtain a license to own a business operating in Annex 2 with approval of the Thai Cabinet.  But in practice getting such approval can be very difficult because of the political nature of the approval required.

Chapter 1 is described as “businesses involving national safety or security” and includes the manufacture, sale and maintenance of firearms, armaments and military vehicles.  Domestic land, water and air transportations “including domestic aviation business” also falls within chapter 1 of Annex 2.  Thailand is not unique in restricting foreign participation in these kinds of businesses.

Chapter 2 is described as ‘businesses affecting arts, culture, traditional customs and folk handicrafts” and includes, among other activities, the creation of Thai wood carvings, manufacture of Thai musical instruments.  I have yet to encounter a foreigner who wanted to set up a business in these areas.

Chapter 3 is described as “businesses affecting natural resources or the environment” and includes, among other activities mining and wood processing to make furniture and utensils. Extractive industries are often the subject of controversy and special protection, and Thailand is no exception.  Because extractive industries tend to attract more than their fair share of transparency problems, investment by foreign companies in these sorts of businesses is problematic even without the FBA.

Annex 3

Annex 3 is described as “businesses in which Thai nationals are not yet ready to compete with aliens.”  Annex 3 is probably the most controversial annex and lists 21 categories of restricted business activities, including, among others, accounting service business,  engineering service business, and “other service business, unless specifically exempted by Ministry of Commerce regulations”.  The Ministry of Commerce (“MOC”) has not specifically exempted any service businesses and the MOC interprets the term “services” very broadly.

For example, the MOC takes the position that a company is engaged in a service business if it leases property.  This means, for instance, that if a manufacturing company (which is not otherwise restricted under the FBA) wants to sub-let part of its facilities to reduce its costs (not uncommon in these financially difficult times), that manufacturing company is engaged in a service activity that requires an alien business license.  Similarly, the MOC takes the position that an alien company needs an alien business license to provide a guarantee.  This means that a foreign owned Thai private limited company that is engaged in manufacturing (and not otherwise restricted under the FBA) cannot grant a guaranty in favor of the foreign parent company without first obtaining an alien business license.  This can create some serious headaches when financing or restructuring the financing of a multinational company:  “Sorry Mr. Lender, the subsidiary that owns our largest factory in Southeast Asia can’t provide a guaranty because…”

What is an ‘Alien Business’?  And Why Definitions Matter

Section 4 of the FBA strictly defines an alien juristic person in terms of ownership of share capital.  Significantly, it does not refer in any sense to voting control of stock or management of a company.  An alien is defined as follows:

“Alien” means:

(1)   a non-Thai natural person;

(2)   a juristic person not incorporated in the country;

(3)   a juristic person incorporated in the country and being of the nature as follows:

(a)   a juristic person of which one-half or more of the capital is held by persons under (1) or (2), or one-half or more of the total capital is invested by persons under (1) or (2); or

(b)   a limited partnership or a registered ordinary partnership of which the managing partner or the manager is a person under (1).

(4)  a juristic person incorporated in the country, of which one-half or more of the capital is held by persons under (1), (2) or (3), or a juristic person of which one-half or more of the capital is invested by persons under (1), (2) or (3).

For the purpose of this definition, a limited company’s shares of which the certificates are issued to bearer shall be considered belonging to aliens unless otherwise provided by ministerial regulations.

This definition is similar to the definition used in the FBA’s predecessor, “NEC 281” (we’ll discuss that when we discuss the history of this law, since you can’t understand the FBA without understanding its history).  This precise definition coupled with the broad scope of both the FBA and its predecessor, NEC 281, and the fact that Thai private limited companies can have shares with different voting rights led to the formation of what are sometimes called “preference share structures” – companies where Thai nationals own a majority of share capital, but foreigners have voting control.   Although officials in prior government publicly stated that such structures were legal provided they did not involve nominee shareholding (fodder for a future post), they have become more controversial and practices surrounding the use of such structures have been more problematic over the last several years.  In the next several posts we’ll walk through the history of the FBA, discuss these issues and explain how they have created a problematic regulatory terrain for foreign investors.