INCORPORATION OF JVC IN THAILAND – MANUFACTURING SECTOR
One of our recent assignments were to assist an Indian Company (engaged in the power sector) to set up a JV Company in Thailand. The mandate given to us by the client was clear : An end-to end legal assistance and advisory in setting up the JV Company (Privately held) in Thailand (with main object of setting up a manufacturing plant) which included drafting of the JV Agreement, appointing local counsel and coordinating with bankers and auditors involved in the process. The JVC has been recently incorporated and now fully functional in Thailand.
The JVC would have a 70% shareholding by the Indian Company and the rest 30% would be held by a Thai national.
The challenges were many from working out the best investment strategy to finalizing the JV Agreement and assisting in incorporating the JVC in Thailand.
This Article is intended to provide an overview of investment in Thailand. So let’s get started.
I. Foreign Business Act
Thailand has in place a Foreign Business Act 1999 (“FBA”) which provides for certain restriction on foreigners carrying out business activities in Thailand. The FBA is similar to the Foreign Exchange Management Act, 1999 (“FEMA”) and the FDI Regulations in India. The FBA provides for the general law of investment in Thailand by foreign persons and lays down the sectors open for investment by foreigners and the conditions for such investment. One has to refer to a List appended to the FBA to find out the investment conditions as provided hereunder.
The List is divided into 3 parts as follows:
List 1 : Business not allowed to be carried out by foreigners due to special reasons like animal farming, newspaper, broadcasting, radio , land trading, etc.
List 2: Businesses related to the national safety or security or affecting arts and culture, tradition, folk handicraft or natural resource and environment.
List 3: Business which Thai national are not yet ready to complete with foreigners like Retailing all categories of goods having the total minimum capital less than 100 million Baht or having the minimum capital of each shop less than 20 million Baht, Wholesaling all categories of goods having minimum capital of each shop less than million Baht, Legal service, Engineering service, Accounting service, etc.
It is pertinent to note that a company incorporated in Thailand having 50% or more share capital being held by a non-resident of Thailand shall be considered to be a “Foreigner” for the purposes of the FBA.
Under the FBA, activities set out in:
i). Activities of List One are strictly prohibited to be carried out by a Foreigner;
ii). Those activities in List Two are allowed to be carried out by Foreigners subject to prior approval of the Council of Ministers with a minimum of 40% shareholding by a Thai national which may with prior permission be reduced to 20% and the Board of Directors must comprise of 2/5th of Thai nationals.;and
iii) Those in List Three are allowed to be carried out by Foreigners subject to the prior approval of the Director General of the Department of Business Development.
Comparing the aforesaid list with the FDI Regulations of India, it can be seen that:
i) List One is akin to the prohibited list prescribed under the FDI Regulations in India;
ii) List Two and List Three are akin Prior Approval/ Government Route.
Any activity not specifically mentioined in the said List and similar to any of the activities set out in the List would not require any prior approval similar to Automatic Route in India. As such, this is the first step that one needs to check before incorporating a business in Thailand.
In view of the above, the shareholding pattern of the proposed JVC Company of our client came squarely within the definition of “Foreigner” as per the FBA. However, the activity proposed to be carried out by the JVC was outside the purview of any of the activities specified in the List and as such no previous permission or prior approval was required for incorporating the JVC.
From Indian law perspective, the outbound investment by our client was within the scope of and in accordance with the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004. A quick reference to the definition of “Joint Venture” under the said Indian Regulations is as follows:
‘Joint Venture (JV)‘ means a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country in which the Indian party makes a direct investment.
The Department of Business Development (“DBD”) in Thailand is similar to our Ministry of Corporate Affairs and in charge of administration and regulation of companies in Thailand with Registrar of Companies being the nodal authority for incorporation.
Minimum capitalMinimum Capital for a JVC that is “Foreigner” for purposes of the FBA is 2 Million Baht. However, if the activity to be carried out by the JVC is one as specified in the List then the minimum capital would be 3 Million Baht.
III. Civil & Commercial Code Book
The Civil & Commercial Code Book III Title 22 deals with Partnerships and Companies something like our Partnership Act and Companies Act consolidated into one Code divided broadly into two parts and chapters. Chapter IV of the Title deals with Limited Companies (applicable for Private Limited Companies) – nature, formation, shares, shareholders, management, etc.
A few notable points are as follows:
i) Minimum Shareholders – 3;
ii) Minimum Nominal Value of Share – 5 Baht;
iii) Authorized Capital – Minimum 2 Million Baht for activities not requiring any prior approval;
iv) MOA & AOA – Thai translation is required of the MOA & AOA.
v) Minimum Subscription – Promoters are required to subscribe to minimum of 1 share.
IV. Incorporating the JVC
I shall now briefly explain the incorporation process-
i) Name Reservation – Similar to Indian law it is possible to reserve name of the Company from the DBD which issues a name reservation certificate valid for 30 days.
ii) MOA & AOA – The MOA and AOA are required to be thereafter registered with the DBD and simultaneously the JV Agreement can be executed between the JV Partners. It is possible to incorporate the provisions of the JVA in the AOA and get the same registered.
iii) Subscription of Shares – The entire shareholding is required to be subscribed by the Promoters of the JVC.
iv) Statutory Meeting – Once the shares have been subscribed by the Promoters, the a statutory meeting is required to be held by the Promoters deciding inter-alia therein the Board of Directors of the JVC, adoption of the MOA & AOA, the numbers of shares to be allotted.
v) Hand Over – Upon conclusion of the Statutory Meeting, the Promoters shall hand over the JVC to the newly formed Board of Directors.
vi) Call Money – The Board shall thereafter make a formal call upon the Promoters to subscribe and pay for the respective share application money and see to it that the same has been remitted.
Now the question that arises here is – Remit to whom if the Company is still under the process of incorporation?
Under the Regulations issued by the DBD, a confirmation letter issued by a commercial bank is required for any registration of a new company formation. In the past, only the receipt of capital payment signed by an authorized director was required to prove that the payment of shares was received by a company.
With this modification, if a newly formed company has a Thai director, all the shareholders have to transfer the entire share subscription price to the personal bank account of the Thai director, and request the commercial bank to issue a confirmation letter for registration purposes. The company’s bank account must be opened soon after the company formation, as all capital payments must be transferred from the director’s personal account to the company’s bank account, and thereafter, the confirmation letter issued by the bank must be filed with the registrar within 15 days from the registration date. If the JVC does not have any Thai Director in that case the Company shall be incorporated subject to filing of the confirmation letter issued by the commercial bank.
vii) Certificate of Registration – Upon receipt of the share subscription money the Directors are required to apply for registration of the JVC along with copy of regulations, copy of the minutes of the meeting, relevant information about the statutory meeting duly certified by a Director of the JVC.
Upon satisfaction, the ROC shall issue a Certificate of Registration to the JVC like Certificate of Incorporation issued by our ROC in India.
It is possible under the Code to undertake the aforesaid steps in a single day and applying to the ROC for the Certificate.
It is possible to achieve the same in a day provided the documentation and remittance is ready. In my case, we completed the aforesaid steps in 10 days time from signing of the JVA. Under the Code, if a company is not incorporated within 3 months of the statutory meeting the share subscription money must be returned to the Promoters otherwise the Directors shall be jointly liable for such money along with interest.
It is also possible to explore investment in Thailand through the Board of Investment Route by obtaining a business license from the Board of Investment, Thailand which allows for 100% Foreign Ownership of a Company in Thailand and also provides certain tax and non-tax incentives.
Our overall experience has been quite pleasant. Less of red-tape and not a single instance of delay on the part of the authorities.