Investors must be wary of NVDRs as they assess new law

Investors must be wary of NVDRs as they assess new law.

There is one more jigsaw piece that foreign and Thai investors should watch out for as they try to solve the new puzzle created by the changes to the Foreign Business Act just approved by the Cabinet. That is the treatment of non-voting depository receipts (NVDRs) and treasury stock.

NVDRs are issued by Thai NVDR, a subsidiary of the Stock Exchange of Thailand, to foreign investors who have bought shares in listed companies that are already up to their foreign-ownership limits.

NVDR holders are entitled to full economic rights, including dividends and rights issues, but are not allowed to vote, except on motions involving delisting. So, while shares are held by Thai NVDR on behalf of foreigners, they are considered non-voting shares, but, if the shares are sold back to Thai investors, they automatically become voting shares again.

There are no limits placed on the amount of a company's share capital that can be converted to NVDRs, except the limitations imposed separately by the Takeover Code.

Many listed companies have significant blocks of their shares owned through NVDRs. For example, Siam Cement (9 per cent), Bangkok Bank (5 per cent), Land and Houses (24 per cent), Golden Land (35 per cent) and Singer (12 per cent).

Singer provides an interesting example of what can happen to the balance of voting rights when a chunk of the share capital is disenfranchised through NVDRs. Since Singer's foreign parent company, Singer BV, owns 48 per cent of the share capital and 12 per cent of the shares are non-voting NVDRs, Singer BV effectively owns 54.4 per cent of the voting stock, which would make Singer a foreign company under the new Foreign Business Act amendments.

However, in this case, Singer BV may argue that it does not own any of the NVDRs and cannot influence the number of shares held by foreigners through NVDRs, which can fluctuate from day to day. Therefore, it has not intentionally obtained majority-voting control of the company.

On the other hand, if the new Act ignores the fact that NVDRs reduce a company's total number of voting shares, it will be possible for foreign investors to convert nominee shareholdings to NVDRs and maintain full economic and voting control of a listed company legally.

For example, if Temasek, which owns 96 per cent of Shin Corp through a foreign subsidiary (44 per cent) and a Thai nominee company (52 per cent), were to convert the nominee company's stake to NVDRs, its directly owned stake of 44 per cent would control 92 per cent of the voting shares without any breach of the revised Foreign Business Act.

Actually, it could convert only 25 per cent of the company to NVDRs - in this case, due to the fact that the Takeover Code imposes a limit of 25 per cent on an individual's NVDR holding - but this would still allow it to own 57 per cent of the voting shares legally.

Additionally, foreign investors can buy NVDRs through offshore nominees and there is no easy way for the Thai authorities to know whether they are connected to other foreign shareholders.

The issuance of treasury stock by a company can have similar effects on its voting share capital, but in this case it is the company's management that directly controls the process.

Thai companies are permitted to buy back their own stock in the market and the shares become treasury stock that have no rights to dividends or votes. Later the company can sell its shares back to the market when it needs the cash or would like to realise a profit.

Treasury stock is a good way for management to enhance shareholder return, if they have surplus cash that they do not need for the time being, and is generally regarded as good governance. However, since issuing treasury stock reduces the number of voting shares, it can also shift the balance of voting control to foreign or local shareholders.

Now that the Foreign Business Act is going to be changed to define as foreign for the first time a company in which foreigners own over 50 per cent of the voting share capital, it will be interesting to see which way the government jumps on the issue of NVDRs and treasury stock.

Ignoring them may leave a loophole large enough for some foreigners to drive a horse and cart through, while restricting the use of NVDRs may well result in another Black Tuesday for the bourse.

The two corporate examples above are used for illustrative purposes only, ignoring whether they may, in fact, be exempted from the new Foreign Business Act provisions. The author in no way implies that their shareholders are intentionally in breach of Thai law.

George Morgan is an independent investor with 20 years of experience in the Thai stock market.

George Morgan

The Nation
Friday January 12, 2007