The Thai legislature has approved a new Financial Institution Act (FIA) which will replace and consolidate into a single Act the existing principal bodies of legislation that regulate Thai financial institutions.
What will the FIA do
- Consolidate a number of acts under a single umbrella act;
- Increase the applicable single shareholding limit and change the circumstance in which the single shareholding limit can be waived;
- Change the circumstances in which the overall foreign shareholding limit can be increased;
- Impose disclosure requirements for shareholders holding 5 per cent or more of the shares in financial institutions;
- Change the regulation of financial business groups;
- Promote good governance, monitor and approve director appointments and impose personal liabilities on the directors;
- Provide the procedure to accommodate the merger of financial institutions.
The FIA will come into force 180 days after being published in the Royal Gazette. It is anticipated that the FIA will come into force in the second half of 2008.
Summary of Key Features
Type of operating entity
A commercial bank, finance company or credit foncier company (each a “financial institution”) must operate as a public company under a licence from the Minister of Finance (“MoF”) on recommendation from the Bank of Thailand (“BoT”).
Shares of a financial institution can have a par value of up to Baht 100 and can be issued as ordinary shares, non-voting preferred shares or other types of preferred shares as approved by the BoT.
Single shareholding limit
The single shareholding limit for a commercial bank will be increased from 5 per cent (under the existing Commercial Banking Act) to 10 per cent of the issued shares. There will be an obligation on any shareholder to disclose to the BoT any shareholding at or above 5 per cent. The BoT has discretion to increase the 10 per cent single shareholding threshold. However, the circumstances in which it can exercise that discretion are not prescribed or limited by the FIA. The BoT will also have the ability to set out criteria which, if met, will mean that the relevant financial institution will not need to seek the BoT’s consent to exceed the 10 per cent single shareholding limit. In any case, the overall foreign shareholding limit will still apply. These limits will apply to all financial institutions under the FIA.
Foreign shareholding and foreign directors
The overall foreign shareholding limit for commercial banks remains at 25 per cent of the voting shares but the BoT has discretion to increase this limit up to 49 per cent if it considers it appropriate. The circumstances in which it can exercise the discretion are not prescribed or limited by the FIA. The same limits and ability to waive them also, in effect, apply to the number of foreign directors.
The MoF, on recommendation from the BoT, has the discretion to waive the 49 per cent foreign shareholding limit and the limit on the number of foreign directors where “there is a need to remedy the operational standing or to improve the stability of any financial institution or the financial institution system”. Such waiver can be made subject to any conditions including a time limit if thought fit. This discretion is similar to the one afforded currently but sets a wider set of circumstances under which it can be exercised and, in this respect, could be viewed as granting a wider discretion.
The single shareholding limit and limits on foreign shareholding and directors do not apply to branch office of foreign commercial banks in Thailand and commercial banks which are established and licensed as Thai subsidiaries of foreign commercial banks.
Again, these provisions apply to all financial institutions under the FIA.
Sanctions for the violation of shareholding requirements
A person whose acquisition of shares in a financial institution results in a violation of the single shareholding limit is required to dispose of the excess shares within 90 days of the acquisition date. However, the BoT is authorised to grant an extension of up to an additional 90 days. Failure to dispose of the excess shares within the prescribed period could result in the BoT seeking a court order to sell the excess shares at a public auction or through other means. A person who holds shares in violation of the single shareholding limit will not be entitled to claim dividend payments or cast votes in respect of the shares held above the limit.
A financial institution that is in breach of the limits on foreign shareholding or foreign directors may be subject to a maximum one time fine of Baht 1 million and a maximum daily fine of Baht 10,000 during the period of violation.
Investments by financial institutions
The FIA prohibits a financial institution from directly or indirectly owning more than 10 per cent of the issued shares of any company. In addition, an investment in a single company by a financial institution must not exceed 5 per cent of the total capital fund of that financial institution and the aggregate investments in all companies must not exceed 20 per cent of the total capital fund. However, where a financial institution “needs to hold shares in any company due to debt restructuring, debt repayment, debt enforcement, security for a loan or to carry out supporting business of the financial institution”, the BoT may, at its discretion, waive or increase the limits on investments. Subject to certain exceptions, the FIA also prohibits a financial institution from holding shares or other securities which “relate” to shares in another financial institution that engage in the same type business. The definition of “relate” has not yet been set out.
Financial Business Group
With permission from the BoT, a financial institution may establish a “financial business group” or group of companies engaging in finance business. For this purpose, “finance business” includes the business of commercial banking, finance, securities, life insurance, hire-purchase, leasing, asset management, factoring, non-life insurance, financial advisory, investment advisory, securitisation, credit card, personal loan, fund transfer, lending, venture capital and other businesses as prescribed by the BoT. A financial business group may comprise (a) the financial institution and one or more subsidiaries; or (b) a holding company of the financial institution and one or more other subsidiaries of the parent. In the case of shareholding structure in (b), the single shareholding limit and limits on foreign shareholding and directors will also apply to the parent holding company of the financial institution.