Nominee companies - don't get ready to kiss them goodbye yet
KI Woo looks into why nominee companies will be with us for a long time to come.
Although the controversies surrounding the use of nominee companies in Temasek Holdings' acquisition of Shin Corp created a great hue and cry for change, particularly from politicians, don't expect anything significant to happen for a long time.
Many political leaders, such as Korn Chatikavanij, deputy secretary-general of the Democrat Party, and financial-institution leaders like Kasikorn Securities chairman Rapee Sucharitakul, have stated Thailand must initially step back and modernise its current laws by first looking at the big picture. This is probably the most logical long-term solution.
However, if we look past the current political rhetoric, too many obstacles stand in the way of any comprehensive, rapid solution. Thailand will eventually rid itself of its current widespread use of nominee companies to circumvent foreign-ownership laws, but this process won't come in the near future. Most proposed viable solutions include comprehensive reviews and then determining how the country ultimately wants to allow foreigners to control certain assets. The country's long-term interest would be the key factor determining how these rules and regulations were enacted and applied. Every sovereign country of course has the right to determine how and why certain assets should be kept in the control of its citizens. For instance, do we want our television networks, satellite companies, power-generating operations and telecommunications firms under the management and control of Thai citizens?
Although most of these control issues have been long established in Thailand and legislation and regulations enacted to implement them, the substance of these laws has not been applied. Thus, nominee companies are used with impunity to circumvent the laws' ultimate intent.
Most legislation has been promulgated after long, drawn-out political processes that have addressed the interests of many disparate stakeholders, including consumers, local people who currently own the assets that are invariably profitable monopolies or oligopolies, the government of the day and many others with a stake.
The fact that this country has still not established effective legal processes to ensure that the substance of the enacted legislation will be followed should not be construed as just another case of corruption or bad law enforcement. In reality, the lack of a clear process for enforcing the legislation results naturally in any democratic country when there is simply no clear-cut political consensus on how certain laws should ultimately be applied.
Many Thais still don't know what they really want in terms of foreign ownership or foreign-management control of certain industries and assets. The strict laws satisfy those who want to limit foreign ownership and foreign-management control while a legal system devoid of power or legal strength to deem the use of nominee corporations to be against the legislation's intended substance allows purchasers to obtain ownership or management control of certain restricted assets. Form over substance is allowed to rule.
Despite many complaints against the Thai legal system, its current penchant to use "form" to determine legality over any "substance" arguments merely reflects the current political winds. This is not a uniquely Thai problem.
Many other countries have overwritten their foreign takeover laws by using supervisory panels that review any foreign acquisitions for their net benefit to the country. Canada initially enacted such a law in 1975. Its Foreign Investment Review Agency was established to monitor foreign direct investments - especially those related to petroleum, natural gas, mining and manufacturing - that were at that time principally owned by investors from the United States.
These review panels would have the power to disqualify any "legal" purchases, even if they used so-called locally owned nominee companies to disguise ownership. Thailand could easily enact these review panels, but the question is whether our democracy is ready for this type of "extrajudicial" jurisdiction.
The prohibition of foreigners from owning land is another area where nominee companies have been widely used to circumvent current laws. Again, the lack of a real political consensus has stopped any substantial legal changes that will reflect more closely what is really happening. Despite the laws prohibiting foreign land ownership, these purchasers, aided by Thai legal practitioners and compliant government officials, have found a way to control the asset effectively.
All the political rhetoric against foreign land ownership and countless new regulations that must be intricately followed - including the current need to determine shareholders' funds - are merely a window on the lack of political consensus on foreigners' land-ownership rights.
Despite all the uncertainty and cries that foreigners won't invest in Thailand because of unclear laws - and more importantly, the regulations interpreting these laws - foreign investors will still keep coming to Thailand and find a solution to whatever problems await them. This is still a great long-term investment destination and a favourable place to visit and live, despite the doomsday naysayers' constant howls.