By Wayne Arnold
International Herald Tribune
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 deposed Prime Minister Thaksin Shinawatra's telecommunications assets, and a legal confrontation between them is looming.
The troubles 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 charges of alleged corruption that culminated in the September coup.
With Thaksin in exile, both governments have stressed 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 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.
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 up 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 Thailand's largest 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 Lee, the prime minister, in China in late October, Thailand's new 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 falling 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 end up not conforming to the limit, through a merger or general offer, are given a year to rectify the situation.
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 prosecutors of foot-dragging to buy time for an amicable settlement.
Temasek's efforts to blunt public criticism have not appeared very effective. Last month it said it would set up an office in Bangkok headed by a former Singapore air force chief and a private secretary to Thailand's crown prince, Tongnoi Tongyai, who resigned the day before from the board of a rival cellphone operator.
A week later, Temasek withdrew Tongnoi's appointment and the crown prince issued a rare statement criticizing Tongnoi for abusing his position, denouncing him as cunning and immoral.
"It really shows a lack of understanding of the full political dynamics," Broadfoot said of Temasek's decision to hire Tongnoi.
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."
Lee family's role in the Shin Corp deal
Published Wednesday, October 18, 2006 by Singapore Election
17 Oct 06
Lee Kuan Yew, the patriarch of Singapore, is believed to have played an important role in convincing his son, Prime Minister Lee Hsien Loong and daughter-in-law, Madame Ho Ching, that Thaksin was a sure bet because of his strong grip on power, according to a well-informed financial source.
Thaksin was a recipient of Lee senior's leadership award. And he was seen as the kind of person Singaporeans could do a deal with.
When Ho Ching, who is chief executive of Temasek, decided to buy into Shin Corp last year, she did not insist on Temasek's financial adviser, in this case Goldman Sachs, conducting a due diligence investigation into the Thai company, then owned by the Shinawatra family.
Due diligence is normal procedure for a prudent investor, often going beyond a company's solvency and assets and probing civil and criminal litigation matters, conflicts of interest, insider trading and press and public records that identify problems with a target company.
Temasek was assured that, with Thaksin in power, all legal obligations and any problems arising from buying into Shin would be taken care of. The takeover was struck on a personal basis.
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