Get it right
With more than 20 years' experience as a chief financial officer, I have had the opportunity to work through many crises, including the Asian financial crisis, the so-called "Hamburger Crisis" and the latest European financial crisis.
During these challenging times, I have seen many financial regulators introduce various "protection" mechanisms in their respective countries. Below are some examples I would like to share with you.
Five years ago, the Bank of Thailand – our regulator – launched a currency control scheme where foreign investors were required to deposit 30 per cent of their total investment with a Thai bank. Recently, we saw the Swiss National Bank announce that it would “no longer tolerate” an exchange rate below 1.20 Swiss francs per euro, and would buy foreign currency in “unlimited quantities” to keep the Swiss franc down, similar to the move in Malaysia 13 years ago when Bank Negara Malaysia pegged the ringgit to the US dollar at a value of 3.80 ringgits to the dollar.
In China, where Minor International operates The Pizza Company and Sizzler, we learned first hand that the Chinese government controlled fund flows through a “loan gap” ratio. Simply put, there is a maximum limit on foreign debt, whether in the form of bank loans or shareholders’ loans, as a proportion of equity. For example, for an equity size of less than US$3 million, foreign debt can be no more than 42 per cent of your equity. For an equity size between $3 million and $10 million, the maximum foreign-currency debt allowed is 100 per cent of your equity. Moreover, in order to draw down the foreign currency loan, you are required to have Fa Piew, a Chinese term for invoices that are allowed as qualified expenses, eligible as proof to draw down the foreign-currency loans. Non-Fa Piew are invoices that do not have proper contracts or receipts as evidence and cannot be used to draw down loans. In addition, the central bank also controls the maximum and minimum interest rates that can be charged.
As a foreign partner in Harbour View Hotel, one of our joint-venture properties in Vietnam, we realised that any shareholder loans must be approved in advance by both the State Bank of Vietnam and the Ministry of Planning and Investment. Otherwise, neither loan repayments nor interest payments can be remitted out of the country. Typically, the loan contracts must state clearly the terms and conditions including tenor, interest rate and repayment schedule.
And through our recent acquisition of Oaks Hotels and Resorts in Australia, we discovered that Australian companies are allowed to apply for consolidated tax payments. This is advantageous for companies with several subsidiaries, particularly with entities that are still generating losses, as they can be consolidated with other profit-making entities for tax calculation. But in order to put this structure in place, the company needs to ensure that it passes the “Thin Cap” control, where maximum debt allowed for tax deduction is 75 per cent of the total assets of the company and its subsidiaries, deducted by investment in subsidiaries and total non-debt liabilities.
These are just a few examples of situations in which Thai companies should be cautious, as more and more companies are expanding overseas, especially with the Thai baht becoming stronger. Overseas investments will generate wealth in the country in the long term. So get it right.
Pratana Mongkolkul is group chief financial officer of Minor International. Follow her articles in Hi! Managers on every fourth Wednesday of the month.
