Going with the flows? ASEAN and liberalisation in Thailand

Going with the flows? ASEAN and liberalisation in Thailand In positioning itself as a regional hub for investment, the Thai government has taken steps to liberalise its regulatory framework in a bid to attract foreign capital flows. Being part of the ASEAN association has assisted in giving Thailand a leading edge. By implementing the Community s core elements, Thailand has established itself as a competitive and welcoming environment on the M&A front, according to Vipavee Kaosala and Issariya Vimonrat of Thanathip & Partners. Proactive steps In recent years, countries within the ASEAN region have continued to flourish and prosper in spite of the global financial crisis. Despite the economic downturn in Europe and the United States, local governmental authorities and policymakers in ASEAN member countries, including Thailand, have been proactive in developing and improving the regulations of capital and financial markets with a view to establishing the ASEAN Economic Community (AEC) in 2015. By way of background, the Association of Southeast Asian Nations or ASEAN is a regional economic association established in 1967, comprising ten member states, namely, Thailand, Indonesia, Malaysia, Philippines, Singapore, Myanmar, Brunei, Cambodia, Lao PDR and Vietnam. With the aim of transforming ASEAN into a stable, prosperous and highly competitive region, all ASEAN leaders affirmed their commitment to accelerate the launch of the AEC by 2015. With a view to establishing the ASEAN s economic integration, all ASEAN member countries have agreed to ensure that the AEC implements four key characteristics laid out in the ASEAN Economic Community Blueprint. These characteristics include: (i) a single market and production base; (ii) a highly competitive economic region; (iii) a region of equitable economic development; and (iv) a region fully integrated into the global economy. Following the formation of the AEC, ASEAN will become a single market and production base, thereby making the ASEAN region more dynamic, attractive and competitive by global standards. In moving towards this goal, all ASEAN member states will be facing great challenges in implementing the following five core elements of the ASEAN single market and production base (i) free flow of goods; (ii) free flow of services; (iii) free flow of investment; (iv) free flow of capital; and (v) free flow of skilled labour. 32

Going with the flows? ASEAN and liberalisation in Thailand By Vipavee Kaosala and Issariya Vimonrat, Thanathip & Partners In response to the surge of ASEAN cooperation, Thailand has also been dedicated in preparing itself for the implementation and implications of economic policies, initiatives and measures stipulated in the AEC Blueprint. In order to establish itself as a regional hub for investment (equipped with capital, skilled labour, economic dynamics and a friendly business environment), the Thai governmental authorities have taken numerous steps over the past few years to improve and develop the regulatory framework with a view to liberalising investment, capital markets and financial services in Thailand. Capital market development This year has been marked by the progressive development of capital markets in Thailand owing to ASEAN member countries initiatives to implement various policies, measures and economic commitments set forth in the AEC Blueprint. Over the past few years, the Office of the Securities and Exchange Commission (SEC), a regulatory body responsible for overseeing Thailand s capital markets and compliance with the Securities and Exchange Act B.E. 2535 (A.D. 1992), has played a more aggressive and crucial role in developing Thai capital markets for the upcoming establishment of the AEC. Cross-border offerings In 2009, Malaysia, Singapore and Thailand jointly announced the implementation of the ASEAN and Plus Standards Scheme for multi-jurisdiction offerings of securities in ASEAN with the aim of facilitating cross border offerings of plain equity and debt securities within ASEAN. The Scheme aims to provide cost savings to issuers making multi-jurisdiction offerings within ASEAN. It also aims to enhance the attractiveness of the ASEAN region as a combined capital market for fundraising and to cultivate and market it as an alluring investment destination for global investors. Under the Scheme, issuers seeking to issue plain equity or debt securities in more than one ASEAN country will be required to prepare only one set of disclosure documents, with additional limited wraparound for multi-jurisdiction offerings. The SEC promptly responded to the implementation of the Scheme by issuing a new set of regulations governing an offer for sale of securities issued by a foreign company for listing on the Stock Exchange of Thailand (SET), under which the disclosure requirements were prepared in accordance with the Scheme. With a view to attracting more investment from international players, the SEC (together with the SET) plans to further relax listing criteria for holding companies later this year to allow a company holding more than 50 percent of a core subsidiary s total paid-up capital to be qualified for listing on the SET as a holding company. This represents a relaxing of the current requirement of 75 percent or more. These developments are expected to significantly impact the size and number of fundraising activities of international players and foreign investments in Thailand. New gateway to regional capital markets At the regional level, seven exchanges from six ASEAN member countries (namely, Thailand, Indonesia, Malaysia, Philippines, Singapore and Vietnam) have affirmed their commitment to establish ASEAN Exchanges or ASEAN Electronic Trading Link in 2012. This is aimed at encouraging more intra-asean cross-border trading, promoting the growth and competitiveness of ASEAN capital The AEC will not only broaden opportunities for capital markets related activities, but will also drive the growth and strength of various business sectors through mergers and acquisitions at both the domestic and cross-border levels. Vipavee Kaosala Volume 10 Issue 5, 2012 33

markets in the international arena, and attracting more international funds into ASEAN. ASEAN Exchanges will provide investors with access to more than 3,600 listed stocks through a single access point called the ASEAN Common Exchange (ACE) Gateway, thereby bringing more investment opportunities to people in the ASEAN region. In light of this, investors will be able to trade stocks listed on ASEAN Exchanges through local qualified intermediaries as well as to make local currency settlements. Further, ASEAN Exchanges will provide an easily identifiable reference for investors called the ASEAN Stars comprising 180 ASEAN blue-chip stocks representing the most dynamic and exciting 30 companies from each ASEAN member country as ranked by investability (in terms of market capitalisation and liquidity). The proposed launch of this remarkable electronic trading link has already attracted a number of acquisitions of Thai securities operations by leading brokerage firms in Malaysia and Singapore for expansion of their overseas operations and customer base, including OSK Group, CIMB Securities International, UOB Kay Hian and Maybank. Raising the bar In response to the upward trend and continued implementation of the ASEAN Capital Markets Integration Plan and the AEC Blueprint, the SEC, in conjunction with the Federation of Thai Capital Market Organisations (FETCO), has developed strategies for improvement of the regulatory framework concerning capital markets related activities. There has also been development in rebranding and reinforcing the image and vision of Thai capital markets with the aim of promoting Thailand as a robust venue of choice for fundraising activities amongst ASEAN member countries. In this regard, the SEC and FETCO are expected to introduce a new standard of practice which shall serve as a guideline for publicly listed companies with regard to compliance and disclosure requirements, as set forth by the SEC and the SET. Based on the above, the SEC and Thai Institute of Directors (IOD) have strongly urged publicly listed companies in Thailand to emphasise clear and complete disclosure of information in reports and public announcements in preparation for the assessment of ASEAN Corporate Governance Scorecard (ASEAN CG Scorecard) introduced by the ASEAN Capital Markets Forum (ACMF) in March 2012. The Scorecard is a means by which global principles and internationally-recognised best practices can be incorporated, thereby further enhancing Thai publicly listed companies visibility and investability to global investors. It appears that we will likely see an increase in the level of fundraising activities and foreign investments in Thailand if there are further improvements in corporate governance standards of publicly listed companies and the legal framework governing capital markets related activities. Standards will additionally be raised with the implementation of certain disclosure obligations and investor protection, in accordance with international practices and standards. Cross-border M&As The AEC will not only broaden opportunities for capital markets related activities, but will also drive the growth and strength of various business sectors through mergers and acquisitions at both the domestic and cross-border levels. Moving towards the realisation of the ASEAN single market and production base under the framework of the AEC Blueprint, ASEAN member countries have throughout the past decade carried out five rounds of negotiations and concluded eight out of eleven packages of commitments under the ASEAN Framework Agreement on Services (AFAS). AFAS is designed to enhance cooperation as well as to eliminate material hurdles to trade in services amongst ASEAN member countries. Trade in services under the AFAS is categorised into four modes of service supply, namely, cross-border supply, consumption abroad, commercial presence and temporary movement of natural persons. It is expected that increasingly broader liberalisation in respect of services will rolled out in connection with each package of commitments in the lead up to 2015. Liberalisation To achieve the goal of free flow of services in accordance with the AEC Blueprint before 2015, each ASEAN member country, including Thailand, is committed to facilitate foreigners access to their respective service businesses. According to the 8th Package of Commitments under the AFAS dated 28 October 2010 (which was approved by the Thai Cabinet on 17 April 2012), all foreigners wishing to carry out certain restricted businesses in Thailand are still required to obtain a foreign business 34

Going with the flows? ASEAN and liberalisation in Thailand By Vipavee Kaosala and Issariya Vimonrat, Thanathip & Partners licence from the Ministry of Commerce (MOC) pursuant to the Foreign Business Act B.E. 2542 (A.D. 1999) (FBA). Nevertheless, the commitments laid out in the AFAS promise a relaxation of foreign shareholding limitations in respect of a wide variety of service businesses, such as certain professional services, business services, computer and related services, telecommunications services, audiovisual services, real estate services, rental/leasing services, distribution services, construction services, education services, health-related and social-related services, tourism and travel-related services, recreational, cultural and sporting services. The foreign shareholding limits will (possibly) be lifted up to the maximum of 70 percent of the total paid-up capital from the current requirement of not more than 50 percent. While it is unlikely that the implementation of the relevant commitments will result in an amendment to the FBA, it is not unjustifiable to expect that the Foreign Business Department, the MOC (which is the main regulator overseeing the foreign participation in businesses in Thailand and issuing foreign business licences), will reform its mindset, restrictive internal guidelines, burdensome and time-consuming application procedures in response to the liberalisation of service businesses under the AFAS framework. Apart from the elevation of foreign shareholding limit in various types of service businesses, free mobility of professional workforce, including managerial and executive level, will most likely play an important role in attracting foreign investments into Thailand. Limits on foreign ownership One of the most remarkable successes of the implementation of the AFAS in Thailand is the full liberalisation of foreign ownership restriction in securities businesses, namely, securities and derivatives brokerage and dealing, securities borrowing and lending, proprietary trading, securities underwriting, asset management, advisory and other auxiliary financial services. The foreign shareholding limit has been lifted to 100 percent pursuant to the 5th Package of Commitments on Financial Services. By taking advantage of this development and the proposed launch of ASEAN Exchanges, Thailand has witnessed a number of business activities in this particular sector, especially crossborder acquisitions of Thai securities houses by international players over the past few years. Likewise, we anticipate a large number of both domestic and cross-border M&A transactions to take place as the regional economic integration progresses in the coming years. Highly regulated businesses and outstanding hurdles Despite an attempt to liberalise service businesses in the ASEAN region, many ASEAN member countries, (including Thailand), still maintain restrictions on foreign participation in certain highly regulated businesses, for example, the finance and insurance industries. At present, it might not be unreasonable to conclude that the overall attitude towards the welcoming of foreign investments in both sectors remains very restrictive. Both sectors still have limitations on foreign participation at 25 percent of the total number of shares with voting rights. This is capable of being raised to 49 percent upon approval of their respective regulatory authorities, namely, the Bank of Thailand for financial institutions and the Office of Insurance Commission (OIC) for insurance companies, and up to 100 percent upon approval from the Minister of Finance in limited circumstances. This is usually how- It is very much expected that Thailand will witness an increase in the size and number of business activities during the next few years. Issariya Vimonrat Volume 10 Issue 5, 2012 35

ever subject to very specific terms and conditions prescribed by the relevant authority. The Minister of Finance (with consent of the Thai Cabinet) is empowered to grant approval for participation of a new player. The Minister of Finance is also empowered to issue new licences for financial and insurance businesses, however the government s policy is generally to refrain from doing so for a long period of time. However, in response to the AEC and the nationwide flood in 2011, the OIC now supports and is amenable to expediting the process of granting approval for increasing the foreign shareholdings from 25 percent to up to 49 percent. Based on this, it can be said that the Thai insurance industry has seen a surge in the volume of funds from foreign strategic investors since last year. In light of this, any foreigners who wish to participate or increase their existing shareholdings in the insurance sector in Thailand would do well to submit an application to the OIC demonstrating the benefits which the target company (as well as the Thai insurance industry as a whole) will derive from their investment, such as financial strength, product expertise, technology transfer or experience and know how. Similar to other ASEAN member countries, only Thai nationals are capable of owning land in Thailand. Therefore, despite receipt of a foreign business licence from the MOC, non-thai nationals (both natural and juristic persons) are prohibited from owning land pursuant to the Land Code B.E. 2485 (A.D. 1942), unless it is a long-term lease or approval is obtained from the Board of Investment of Thailand. Recent initiatives and the way forward In a bid to promote regional and international competitiveness of Thai capital markets, the Thai Cabinet has taken steps to boost the number of M&A activities in the country. Earlier this year, it approved key principles of a draft bill governing business combinations of publicly listed companies, securities companies and insurance companies, thereby allowing a business combination (whether in the form of a legal merger or amalgamation, an entire or partial business transfer, or share or asset purchases) of (i) publicly listed companies; (ii) publicly listed and non-listed companies; and (iii) non-listed companies which will be further listed on the SET. This new legislation aims to facilitate and promote the volume of M&As by relaxing the regulations governing M&A-related activities, particularly in relation to transfer of claims, novation, creditor protection and minority squeeze-out. Another notable initiative of Thai governmental authorities is the tax measures introduced by the Ministry of Finance, together with the Thai Revenue Department, to promote capital markets development and M&Arelated activities in Thailand, including free flow of capital and investment amongst ASEAN member countries. Key incentives include (i) temporary reduction of Thai corporate income tax from 30 percent to 23 percent in 2012 and to 20 per cent in 2013; (ii) personal income tax exemption on capital gains arising from sale of shares by individuals on ASEAN Exchanges where the gains are brought into Thailand; (iii) personal income tax exemption on capital gains derived from share swap transactions; (iv) personal income tax exemption on dividends received from foreign companies listed on the SET; and (v) corporate income tax exemption on dividends received by a Thai company from an investment in companies incorporated outside Thailand. Sizing up the competition Whilst Thai businesses will be significantly affected by the liberalisation of trade in services, investment, labour mobility, and greater harmonisation of rules and regulations amongst ASEAN member countries under the AEC Blueprint, Thai businesses will, at the same time, be presented with greater opportunity to branch out to the international arena and to participate in businesses in other ASEAN member countries. These opportunities come at a time when Thailand is able to outpace its rivals in terms of competitiveness. With all these positive changes, it is very much expected that Thailand will witness an increase in the size and number of business activities during the next few years before the full implementation of the AEC in 2015. vipavee@thanathippartners.com issariya@thanathippartners.com www.thanathippartners.com 36