Thailand has always witnessed foreign participation in various industries in the country. However, interested foreign nationals are limited, with few exceptions and without an investment license, to a 49 percent shareholding as per the general rules according to the Foreign Business Act of Thailand.
Although the 49 percent foreign shareholding threshold was imposed with the intention of protecting Thai companies from being completely run by foreign persons or foreign entities, it can be difficult for investors and shareholders to effectively engage in their particular line of business without a majority deciding power.
Therefore, foreign investors often are forced to accept implementing voting mechanisms into Thai companies’ corporate governance, so as to maintain control over decision-making, or alternatively they may seek to obtain a foreign business license – often a lengthy process.
From an economic policy perspective, it would seem prudent for Thailand to consider liberalising foreign investment in certain industries in order to encourage an influx of foreign capital investment and expertise.
One such industry that appears to be liberalising is the insurance industry in Thailand which, until recently, restricted foreign investment substantially to the ‘standard rules.’
The Thai insurance industry has seen significant excitement from foreign participants recently. On 18 January 2017, the Ministry of Finance (MOF) issued two notifications to the public to liberalise restrictions on the participation and ownership of foreign entities in Thai insurance companies, with immediate effect.
The notifications allow foreigners to directly hold more than 49 percent of the voting shares in a Thai insurance company. Additionally, foreign directors may comprise more than half of the directors of an insurance company’s board.
Since its last shift in 2015, when the MOF increased the threshold for foreign participation in insurance companies from 25 percent to 49 percent, this latest shift is expected to further ensure the transparency of the insurance system in Thailand and strengthen the stability of the insurance company and the overall business sector.
However, in order for a Thai insurance company to meet the conditions, the Office of Insurance Commission (OIC) must be satisfied that it has
i. sufficient Capital Adequacy Ratio meeting the OIC specification and
ii. a business plan that improves the efficiency and stability for insurance companies or the overall insurance industry.
Another factor that will be considered is the financially strong foreign contender, who exhibits at least 10 years of experience and expertise in the insurance business, thus having the ability to provide significant financial support to the Thai insurance company.
Nonetheless, an insurance company wishing to go this route should consider, well in advance, its total capital available (TCA). Non-life insurance companies must maintain no less than one billion THB and life insurance companies no less than four billion THB – still a significant barrier to entry.
The increased shareholding threshold for foreign shareholders marks a step that aids foreign participation and the Thai insurance industry as a whole. Being able to legally have majority voting shares, will naturally translate to improved control and management for the foreign investor.
Allowing a direct majority foreign shareholding may also curtail the practice of using holding companies, or looking for alternative ways to ‘effectively’ acquire more than 49 percent shareholding. This may align with the MOF’s objective to prevent and defuse any form of establishment of nominees, thereby further increasing the transparency of the insurance system.
The 2017 revision represents a step forward for the Thai insurance industry, whilst at the same time opening its economy to foreign investment. If it proves beneficial for both foreign participants and Thai insurance companies in the long run, we may be able to witness the increase of voting shares for foreign participants in other business sectors in Thailand.
So, the real question is whether this liberalisation is an isolated case, or the beginning of a new trend that may be extended to other industries?
This article first appeared in Window On Phuket.