Deal Flow Dries Up On Policy Uncertainty

[calibanjr.]

From the Sat. Bangkok Post:

"The lack of clarity over how the Foreign Business Act should be interpreted has led to ''a complete drying up of new deals'', according to local corporate lawyers and investment bankers. ''No one is willing to offer a clean opinion of whether a structure will be permitted or not,'' one lawyer said.

''The long-term money is gone. What we're seeing now in the market is some buying by hedge funds, but the real investment is going to stay away.''

Chaiwat Kovavisarach, managing director of Turnaround Securities, a boutique investment banking house, said cross-border transactions were ''out of the question'' right now given the legal and policy uncertainties.

''Domestic mergers and acquisitions are moving, but at a snail's pace.''

This ongoing uncertainty about nominee structures has also started to take a toll on foreign direct investment (FDI), industry experts say.

''There's a big overhang in the investment community and we are starting to see a drying up of the foreign direct investment,'' said a leading regional banker.

''The issue of Shin and Temasek, and its implications of the ongoing investigations into the company has been of a big concern to the market.''

He was referring to the recent decision by the Business Development Department to forward the results of its investigation into the Shin deal structure to police for further investigation.

Public anger over the Shin deal was a major driver of the protests against former prime minister Thaksin Shinawatra, whose family earned 73 billion baht tax-free when it sold its holdings.

Police are investigating whether Temasek violated the 49% foreign shareholding limit through its indirect holdings in Shin Corp.

Temasek controls a 44% direct stake in Shin through fully-owned subsidiary Aspen Holdings, but has an additional indirect stake through its shareholdings of Kularb Kaew. Cedar Holdings controls 52% directly in Shin, and in turn is owned by Kularb Kaew, Siam Commercial Bank and Temasek.

Authorities say that Surin Uptakoon, a Thai businessman in Malaysia, may have violated the Foreign Business Act which prohibits parties from serving as nominees on behalf of foreign companies to bypass the foreign shareholding limit. Mr Surin owns 68% of Kularb Kaew, with Temasek the remainder.

Lawyers and investment bankers, however, say the regulatory inquiry into the Shin case has raised considerable uncertainty as to whether the shareholding structures of other joint ventures will also be scrutinised.

The Commerce Ministry has traditionally ignored issues regarding voting or dividend rights for the purposes of the Foreign Business Act and had focused instead only on whether direct shareholdings violated the shareholding limit.

Any move to expand the scope of the law to cover chain-shareholdings across different holding companies would put a huge number of companies in potential jeopardy, one lawyer said.

One chief executive of a foreign bank in Bangkok said that while foreign interest in Thailand remained strong thanks to cheap valuations and confidence in the country's long-term prospects, the legal uncertainties were affecting deals.

''For some of the bigger deals in telecoms or energy or any sector that remains protected, everything is on hold while people wait to see what happens with Shin,'' the banker said.

''Our clients remain very interested in doing deals in Thailand. But there's uncertainty on whether the Commerce Ministry will put its stamp on any given structure, and no one wants to risk doing something that might catch the eyes of regulators in the future.''

Western diplomats have also begun raising questions about Thailand's economic policies and commitment to open markets in light of the Shin investigation.

''Under our calculations, there are about 14,000 companies in Thailand that are using nominee structures, and I guess if they go on to prosecute everybody then the Business Development Department would not have anything else to do for a long time to come,'' said a western diplomat.

He said his mission has been undertaking polls across the region to access the situation of the proxies and that the government's investigation into the nominee structure was among the main reasons for the sudden drying up of investments.