Singapore and Thailand face showdown over Temasek deal

Wayne Arnold
International Herald Tribune
17 Nov 06

They have been careful to appear cordial, but in the polite language of Asian diplomacy, a stubborn standoff has emerged between Thailand and Singapore over how to handle Singapore’s purchase of the communications assets of the deposed prime minister, Thaksin Shinawatra, and a legal confrontation between them is looming.

The trouble between the two Southeast Asian neighbors began in January, when Singapore’s investment arm, Temasek Holdings, purchased a controlling stake in Thailand’s dominant phone company, Shin, for $1.9 billion. That stoked public protests in Thailand over foreign ownership of a national champion and the Thaksin family’s tax-free windfall – adding to complaints alleging corruption that culminated in the September coup.

With Thaksin in exile, both governments have emphasized that their relations are on track. Yet the two are now at loggerheads over Shin.

The new, military-appointed Thai government, determined to document the corruption allegations used to justify the coup, is preparing a criminal case against Temasek and its Thai partners over the purchase. It also has signaled that it would like Temasek to voluntarily reduce its stake in order to avoid having to force an important foreign investor to divest itself of the assets.

Such a face-saving solution is anathema to Singapore, however, which denies breaking any laws.

“The two find themselves in a difficult situation,” said Karen Ang, an analyst who follows Shin for Citigroup in Bangkok.

The stakes are high. Shin’s falling share price since January has already added up to paper losses at Temasek of almost $680 million. That could rise if a court ruling against Temasek puts it in the position of a forced seller.

Analysts say Temasek failed to grasp just how political taking control of Shin would be. While cutting its losses now might take the diplomatic sting out of an awkward situation, it presents another problem.

“Selling at a loss would be admitting that, yes, we indulged in a transaction that wasn’t very transparent and was legally wrong,” said Vikas Kawatra, head of institutional sales at Kim Eng Securities in Bangkok.

The new Thai government, for its part, cannot very well drop an inquiry that has become the centerpiece of investigations into alleged corruption during Thaksin’s rule.

“They’re very, very worried about him making a comeback,” said Bob Broadfoot, managing director at the Political & Economic Risk Consultancy in Hong Kong. “There’s no way in the world they can take Shin out of this political equation.”

But in challenging the legality of the Shin deal, Thailand’s reputation among foreign investors – a major source of capital for development – may suffer.

Building Shin made Thaksin a billionaire. He transferred ownership to his eldest son and daughter when he became prime minister in 2001. But he was fending off allegations that he used his office to benefit the company when Temasek stepped in. After the purchase, Temasek and its partners were obliged to make a general offer and ended up with a 96 percent stake, as well as control of the largest Thai cellular operator, a TV station and a satellite company.

What incensed Thai protesters was that the Singapore government had not only gained control of critical national assets but that it had seemingly helped Thaksin’s family cash out tax-free.

Temasek has denied that it knew the deal would be tax-free.

Temasek’s chief executive, Ho Ching, has been largely silent, but her husband, Prime Minister Lee Hsien Loong of Singapore, rose to Temasek’s defense in early October, saying the Shin deal did not violate Thai laws.

Singapore’s influential founding prime minister, Lee Kuan Yew, who is the current prime minister’s father and holds a senior position in his cabinet, added his voice. “It can withstand any investigation,” he said of the deal. “Nobody doubts that, nobody within the system doubts that.”

After meeting with Prime Minister Lee in China in October, the new Thai prime minister, Surayud Chulanont, said the issue would not upset diplomatic relations. But he also said the government would not intervene in efforts to prosecute Temasek and its partners.

Analysts note that Surayud skipped Singapore during his first tour of Southeast Asia as prime minister, a snub shared only by tiny Brunei and the diplomatic outcast Myanmar.

Singapore bought control of Shin through a complicated holding structure, which lawyers and analysts say has been used for years to avoid running afoul of Thai limits on foreign ownership. Among the most prominent examples are the German logistics company DHL and the French supermarket operator Carrefour. Pick at the Shin deal, they warn, and a host of other foreign investments could unravel.

The Thai government has promised eventually to amend the foreign investment law to clear up any confusion over holding companies. In the meantime, regional media have reported talks between the Thai government and Temasek, with the Thai government offering a “road map” for a settlement that calls for Temasek to reduce its combined stake in Shin below the 49 percent legal limit for foreign ownership of a telecommunications company.

Temasek has said only that it plans to sell about 11 percent of Shin to comply with Thai stock market rules. Those stipulate that a listed company must have at least 15 percent of its shares “free floating.” Companies that do not conform to the limit, through a merger or general offer, are given a year to comply.

The criminal allegations against Temasek and its partners are separate, and center on accusations that one or more of the minority shareholders in the Shin deal was an illegal “nominee,” or proxy, for Temasek, enabling it to skirt the foreign ownership limit.

It is unclear, however, when any criminal case over Shin would go to trial. The Thai Ministry of Commerce handed the case to prosecutors in early October, and Thai critics accuse the prosecutors of stalling for an amicable settlement.

But analysts say time is on Temasek’s side; with few potential buyers willing to step into the political hornet’s nest, Shin’s share price has been rising on hopes that Temasek will eventually sell. With no court date in sight, analysts say Temasek may be able to hold out for the situation to improve.

“If I were Temasek,” said Kawatra at Kim Eng, “I wouldn’t do anything either.”

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