The Stabilization Package
The Stimulus Package
Bond Market Development
Annex I: Report On Economic Reform Legislation
Annex II: Bond Market Development Master Plan
On November 25 1999 the Minister of Finance (MOF) released an updated progress report on Thailand's economic reform. The report includes chapters on the following subjects:
- a macroeconomic framework and policy;
- financial sector restructuring;
- the economic stimulus package of March 30 1999;
- measures to encourage private investment of August 10 1999;
- a social safety net; and
- structural reform.
Only legislative reform to deal with the financial crisis is discussed herein.
The MOF report mentions the following steps to restructure, and thereby stabilize the financial sector in Thailand:
- intervening in ailing financial institutions;
- strengthening supervision and prudential guidelines;
- providing a recapitalization scheme for financial institutions; and
- addressing the problem on non-performing loans.
The eighth letter of intent to the International Monetary Fund laid out the following tasks and milestones:
|Regulatory and Supervisory Framework|
|Based on established prudential norms, recapitalization plans to be submitted by all banks needing to raise additional capital through end-2000.||Done|
|Memoranda of understanding (MOUs) to be signed with those banks needing to raise additional capital through December 1999 (performance criterion at sixth review).||Done (all banks had sufficient capital to end-1999)|
|Based on established prudential norms, recapitalization plans to be updated by all banks needing to raise additional capital through end-2000.||January 31 2000|
MOUs to be signed with those banks needing to raise additional capital through June 2000 (performance criterion). Similarly, MOUs to be signed with finance companies
January 31 2000
New Financial Institutions Law, covering banks and finance companies.
Based on new Financial Institutions Law:
|Soon after enactment of law|
|Cabinet approval of revised draft of amendments to the Currency Act.||November 30 1999|
|Cabinet approval of new Central Bank Act.||November 30 1999|
|Bank of Thailand to complete preliminary draft law establishing new deposit insurance scheme.||November 30 1999|
The November 30 1999 milestones in the eighth letter of intent were net yet met as of January 1 2000.
The government announced an economic stimulus package on March 30 1999, which focused primarily on increasing government spending and private consumption. On August 10 1999 the government announced a set of measures to encourage private investment, consisting of tax and tariff measures, equity investment measures, measures to promote the recovery of the real estate sector, and measures to improve financing for small and medium enterprises.
The MOF report summarizes the measures taken by the government to improve the foundation for long-term growth, including legal reform, privatization, tariff reform and bond market development.
The MOF report mentions two new supporting laws: a new Financial Institutions Act and a new Bank of Thailand Act.
Financial Institutions Act
A new Financial Institutions Act is being drafted to modernize the regulatory framework. Because the scope of operations of different types of financial institutions has increasingly overlapped with financial liberalization, the new act will standardize the regulatory framework of banks, finance companies and credit fanciers. It will provide a legal basis for consolidated supervision of financial conglomerates. In addition, regulations will be significantly tightened in the following areas:
- insider lending;
- foreign exchange exposure;
- financial institutions' non-financial activities;
- Bank of Thailand's prompt corrective actions against troubled institution;
- resolution of insolvent institutions;
- mergers and takeovers;
- disclosure standards; and
- penalties for and prevention of fraud.
According to press reports, key provisions of the draft law include the following:
- to strengthen the governance of local institutions by establishing new qualifications for directors and senior management, to build "collective accountability" for directors, and to place strict limits on credit to directors and management. Shareholdings above 10% in financial institutions will require regulatory approval;
- to strengthen the governance of regulators by streamlining the authorities, and to establish clear rules and codes of practices to limit abuse of power and regulatory discretion;
- to establish new guidelines for financial groups, including investment limits and cross-shareholding regulations;
- to increase central bank authority to oversee internal controls and risk management procedures at local institutions;
- to increase central bank authority to ensure fair consumer contracts and public disclosure of information;
- to require independent auditors to report fraud to the central bank which will be authorized to order external auditing by third parties of parent companies, subsidiaries and associated firms of financial institutions;
- to set strict capital adequacy rules where corrective action, regulatory intervention or licence withdrawal is required, and to clarify exit procedures for intervened institutions;
- to allow the central bank to act as the injured party in cases of fraud or other violations of the law, with the authority to bring criminal actions;
- to extend the statute of limitations to two years for certain crimes and expand the definition of 'computer-related crimes'.
Bank of Thailand Act
The new Bank of Thailand (BOT) Act aims at strengthening the BOT's independence and accountability, especially in conducting monetary policy. Objectives of the BOT will be limited to maintaining price stability and safeguarding stability of the financial system. The backing requirement of the baht by foreign assets will become more stringent, while the BOT will have more flexibility in managing international reserves. With a view to ensuring transparency of BOT's operations, the BOT will be required to:
- pre-announce its monetary policy direction and past performance in conducting monetary policy;
- report its operations to the cabinet and parliament; and
- disclose its financial account on a weekly basis.
Finally, rules governing potential conflicts of interest of BOT executives and staff will be tightened, especially in order to strengthen supervision of the financial system.
The status of the 11 key economic reform laws as of January 1 2000 is summarized in Annex I. In November 1999, the Constitutional Court cleared the constitutionality of the Corporatization Act that will allow the government to progress with plans for corporatization and possible privatization of selected state enterprises. The new Alien Business Operation Act was approved by parliament in a form that reduces the number of businesses subject to ceilings on foreign ownership. These two important laws are awaiting royal signature and publication in the Royal Gazette.
The government has placed importance on the development of the domestic bond market. A master plan for the development of the domestic bond market has been drafted covering primary and secondary markets, and institutional and infrastructure issues. Annex II is the Bond Market Development Master Plan.
For further information on this topic please contact Albert T Chandler at Chandler & Thong-ek by telephone (+662 266 6485) or by fax (+662 266 6483) or by e-mail ([email protected]).
Annex I: Report On Economic Reform Legislation
During the Ordinary General Session of the National Assembly ending April 10 1999, 51 bills were approved for enactment, and three bills were pending review by the Constitutional Court. Significant new legislation included:
- Trade Competition Act, BE 2542 (effective April 30 1999);
- Anti-Dumping and Anti-Subsidy of Foreign Goods Act, BE 2542 (effective June 29 1999);
- Anti-Money Laundering Act, BA 2542 (effective August 19 1999); and
- Act Regarding goods and Services Prices, BE 2542 (effective April 1 1999).
On August 10 1999 the government announced a new set of measures to encourage private investment. This new set of measures consists of four parts:
- tax and tariff measures;
- equity investment measures;
- measures to promote the recovery of the real estate sector; and
- measures to improve financing for small and medium enterprises.
The latest Memorandum on Economic Policies of the Royal Thai Government is attached to the eighth letter of intent from the Ministry of Finance/Bank of Thailand to the IMF (International Monetary Fund) dated September 21 1999. These quarterly letters of intent have provided a good forecast of government law reform programmes. It was recently decided not to sign any additional letter of intent to the IMF and not to draw the remaining balance of funds under the IMF assistance programme.
There are a number of draft laws being prepared which will have importance for the business community.
In 1998 the Thai government identified 11 bills that were being considered by the National Assembly as key 'economic reform bills'. As of January 1 2000, the status of the 11 economic reform bills was as follows:
Act on Establishment of and Procedure for Bankruptcy Court, BE 2542 (1999)
This act established the Bankruptcy Court as a specialized court, and sets forth rules governing its procedure. The new court opened on June 18 1999. The new court has jurisdiction over all bankruptcy cases, which were formerly heard by the Court of First Instance. Appeals on reorganization cases will be made directly to the Supreme Court (instead of to the Court of Appeals).
Bankruptcy Act (No 5), BE 2542 (1999)
This amendment act includes 34 amendments to the Bankruptcy Act. The principal amendments are as follows:
- Loans of 'new money'. Section 94(2) was amended to allow a creditor who advanced funds to an insolvent debtor for the purpose of allowing the debtor to continue its business operations, to file a claim for such funds in bankruptcy. Previously, an unsecured creditor who had loaned funds to a debtor with the knowledge of the debtor's insolvency was not entitled to file a claim in bankruptcy to recover such funds.
- Creditor classes and voting. Certain amendments establish classes of creditors, provide for equal treatment of creditors within each class, and prescribe revised voting procedures in approving a reorganization plan. Each secured creditor with at least 15% of the total debt forms a separate class, while all other secured creditors form one class. Unsecured creditors are grouped according to similar interests at stake. Article 130 creditors (eg, those owed taxes or back wages) form one class. Previously, a special resolution (ie, a majority of creditors whose claims equal 75% of the total claims of creditors present and voting on such a resolution) was required to approve a reorganization plan. This requirement has been amended. A reorganization plan may now be approved by either (i) a special resolution of each class of creditors, or (ii) a special resolution passed by at least one class of creditors, and the total claims of all creditors who have approved the plan constitute at least 50% of the total claims of the creditors present and voting on such resolution at a meeting of all classes of creditors. Conditions are prescribed under which a creditor is deemed to have automatically accepted a reorganization plan.
- Preference periods. Generally, the preference period is three months in the case of transactions between unrelated parties, and one year in the event that the creditor is related to the debtor. (Formerly, there were two preference periods: three months and three years, the latter of which applied unless the transferee could prove good faith and consideration.)
- Court approval of reorganization plans. The criteria for court approval of a reorganization plan were clarified. The court's discretion in confirming or rejecting reorganization plans has been replaced with objective rules for court confirmation of such plans. Such rules must be approved by creditors, with the proviso that no dissenting class of creditor, nor the debtor, involuntarily receives less value under such plan than it would in a liquidation.
- Rejection of contracts. The plan preparer was given discretion to refuse to accept a debtor's assets or rights under agreements if such assets or rights carry obligations greater than the benefits that may be derived.
- Currency conversion. The amendments clarifies that, in the case of determining voting rights of creditors, the conversion of debt denominated in a foreign currency is for voting purposes only.
- Threshold debt amount to declare a debtor bankrupt. The minimum threshold amount to qualify for a declaration of bankruptcy was increased to Baht 1,000,000 for an individual debtor (formerly Baht 50,000) and Baht 2,000,000 for a juristic debtor (formerly Baht 500,000 ).
- Bankrupt status. A bankrupt person will be released from bankrupt status after three years (formerly 10 years).
Capital of State Enterprise Act, BE 2542 (1999)
This act was approved by the National Assembly in March 1999, and was published on december 16 1999. The delay in publication arose because it was submitted to the Constitutional Court for a decision following a challenge to its constitutionality.
This act is an enabling act which provides a regulatory framework for the conversion of state enterprises to either private limited companies or public limited companies, which will initially be 100% owned by the Ministry of Finance. It sets forth a process, but does not prescribe which state enterprises will be privatized nor any timetables. The bill establishes the State Enterprise Capital Policy Committee, which will conduct studies and propose for cabinet approval the principles and guidelines to corporatize part or all of specific state enterprises. For each state enterprise, a second committee, the Company Establishment Preparation Committee, will be established to work out the details of the corporatization and to draft ministerial regulations to deal with issues requiring legislative solutions. Cabinet approval is required before any state enterprise is corporatized.
Act Amending Civil Procedure Code (Petty Matters) (No 17), BE 2542 (1999)
This amendment act includes 15 amendments to the Civil Procedure Code. Certain amendments are intended to facilitate the conciliation process in court. Most of the amendments facilitate the hearing of petty matters and enforcement of judgments therein. However, Section 192 was amended to allow the court in certain circumstances to try as a petty case a counter claim or ordinary case which is not a petty case.
There was no amendment to the definition of 'petty matters', which include claims not exceeding Baht 40,000 in value.
Act Amending Civil Procedure Code (Execution of Judgments) (No 18), BE 2542 (1999)
This amendment act includes 11 amendments to the Civil Procedure Code. Certain court orders and judgments are now enforceable throughout the Kingdom. Certain appeals decided by the Appeals Court, and certain orders of the Court of First Instance, are final. The rules governing the cancellation or amendment of court orders and execution proceedings were revised to facilitate the execution process.
Act Amending Land Code (Land Ownership by Foreigners) (No 8), BE 2542 (1999)
This act provides that a foreign investor who invests a minimum of Baht 40 million will be permitted to own up to one rai (1,600 square metres) of land for residential purposes with the approval of the Minister of Interior.
Condominium Act (No 3), BE 2542 (1999)
The amendment provides two main changes: (i) the maximum foreign ownership of a registered apartment building (condominium) was increased from 40% to 49%; and (ii) the 49% ceiling may be exceeded if the condominium is located in Metropolitan Bangkok, municipalities or other local administrative areas as prescribed in ministerial regulations, and the land area of the condominium does not exceed five rai.
Alien Business Operation Act BE 2542 (1999)
This act came into force on March 4 2000 and supersedes the Alien Business Law (NEC 281) that was enacted in 1972.
The old Alien Business Law (NEC 281) restricted foreign ownership in 63 businesses classified as Categories A (12 businesses, closed), B (37 businesses, closed with limited exceptions), and C (14 businesses, permits are possible as a matter of discretion).
The Thai-US Treaty of Amity and Economic Relations had been interpreted to provide to American corporations and individuals an exemption from the Alien Business Law for most of the restricted businesses.
The new Alien Business Operation Act prescribes 42 restricted businesses in three schedules:
- Schedule 1: nine businesses prohibited for special reasons;
- Schedule 2: 13 businesses related to national safety or security or affecting arts, culture, traditional customs, folk handicrafts, natural resources and the environment. Licences may be issued by the Minister of Commerce with the approval of the cabinet.
- Schedule 3: 21 businesses in which Thai people are not yet ready to compete with foreigners. Licences may be issued by the director general with the consent of the Alien Business Operation Committee.
There is a limited grandfather provision with respect to existing businesses. There is also the possibility of exemption under certain treaties to which Thailand is a party, as well as for businesses promoted by the Board of Investment.
In the case of a restricted business carried on by an alien, a minimum capital of Baht three million (or greater) is prescribed, to be specified in a ministerial regulation. In the case of businesses under Schedule 2, at least two-fifths of the directors must be Thai and a minimum of 40% of the shares must be owned by Thai persons (which may be reduced to 25% with cabinet approval). Businesses under Schedules 2 or 3 may have conditions attached to alien licences such as minimum debt/equity ratio, number of alien directors resident in Thailand, amount and period of investment, and technology and assets.
There are additional provisions of importance in the act, including a minimum capital requirement of Baht two million applicable to all alien businesses (not only restricted businesses), and a requirement for existing restricted businesses to obtain a certificate.
Act Amending Social Security Act (No 3), BE 2542 (1999)
This act expands the rights of employees, provides for greater benefits, and prescribes duties of employers to provide contribution for child welfare, old age and unemployment.
Act Governing Leasing of Immovable Property for Commercial and Industrial Purposes, BE 2542 (1999)
This act provides the right to lease commercial or industrial property for a term of 30 to 50 years, and introduces the right to use such leases as collateral for debt performance by means of mortgaging, the right to transfer the lease, and the right to sublease.
Act Amending Civil Procedure Code (Procedure in Case of Default) BE 2543 (2000)
This amending act allows the court to use its discretion in rendering ex parte judgments in cases where a party is in default to answer or in default of appearance, in order to protect plaintiffs against damages arising from delays in deciding the cases.
Annex II: Bond Market Development Master Plan
|Develop guidelines for government bond issuance|| || |
|Layout auction format for government bond auction|| || |
|Layout key qualifications / right and elect auction participant|| || |
|Develop primary dealer system|| || |
|Develop commercial repo market and the BOT's lender of last resort facility|| || |
|Develop inter-dealer/broker and money broker|| || |
|Code of conduct|| || |
|Guideline on short sales and securities lending and borrowing|| || |
|Delivery versus payment system for government and non-government securities|| || |
|Improvement in transfer of ownership|| || |
|Improving tax regulations|| || |
|Improve data dissemination for bond market|| || |
The materials contained on this web site are for general information purposes only and are subject to the disclaimer.