SINGAPORE: Temasek companies to face more issues over parentage

Regional regulators likely to continue raising ownership queries on forays

Straits Times
Monday, April 3, 2006

By Chua Kong Ho

A look at the regulatory framework in certain Asian countries suggests that Temasek-linked companies will continue to face hurdles over their parentage as these companies fan across the region seeking investments.

Many of these countries restrict foreign ownership of companies in certain strategic sectors, the most common being banking, aviation, energy, telecommunications and defence-related businesses. Some of these rules further restrict the breadth of investments that a single foreign investor can make in the same sector.

Some industry insiders liken the restrictions to a supermarket restricting patrons buying certain items on sale.

"The supermarket may say that a customer can buy only $100 worth of this exotic fruit, but the question is whether the supermarket sees a customer's child as a proper customer, or merely a tool by the parent to circumvent the $100 limit," saia senior investment banker who has worked on past Temasek deals, on condition of anonymity.

"The crux is in the interpretation. The parent can insist that the child is independently making the purchase, but some supermarkets may not accept the argument."

Indirect holdings

Temasek Holdings and its stable of companies have been coming up against sceptical regulators in several Asian countries as they expand regionally in search for growth.

In the latest example, DBS' bid for Korea Exchange Bank reportedly hit a snag because its largest shareholder, Temasek, is not a bank.

South Korean regulations forbid non-banking entities from owning more than 10 per cent of a nationwide bank, in order to prevent cash-rich conglomerates from controlling the banking sector. DBS denied that the bid failed because of its parentage, insisting that it failed over a disagreement over price.

Last year, the Indian authorities did not approve a joint bid by Temasek-linked Singapore Technologies Telemedia and Telekom Malaysia for 48 per cent of mobile phone operator Idea Cellular.

The reason: SingTel, which is majority owned by Temasek, already holds a stake in Bharti Tele-Ventures and Indian rules do not allow the same company to hold two cellular licences in the same region.

In Malaysia, Temasek had to trim its stake in Southern Bank last year, after it emerged that its total shareholding had breached the key 5 per cent mark, through indirect holdings through related companies.

Temasek indirectly controls Malaysia's Alliance Bank and is therefore required to seek central bank approval before it can buy more than 5 per cent of another Malaysian bank.

Industry watchers believe that such parentage issues will only increase with Temasek's growing portfolio of assets across the region.

Said Mr Emmanuel Daniel, managing director of financial services consultancy The Asian Banker: "Temasek is almost single-handedly causing foreign regulators to examine 'single presence' issues. From a banking regulator's point of view, the concern is of the risks that a single investor having stakes in several banks poses to the system."

Temasek said in response to queries by The Straits Times that "Temasek and Temasek-linked companies are run strictly as commercial entities."

Their "respective boards and management teams make their own investment, business and operational decisions, with no intervention by their shareholders."

The Singapore investment company also pointed out that 68 per cent of Temasek-linked company (TLC) boards are made up of independent directors, and only one of the directors on Temasek's board is a nominee by the Ministry of Finance.

Ownership matters

But the concerns of foreign regulators over the relationship between Temasek and TLCs are real.

And Temasek is well aware of the challenges, going by an internal document prepared by Temasek to coach its executives on how to handle questions from media over its purchase of a 12 per cent stake in Britain's Standard Chartered Bank (Stanchart).

Among the questions listed in the internal document are those concerning how Temasek will manage potential conflicts of interest and "single presence" ownership issues in countries such as China, Thailand and Indonesia, given that both Temasek and Stanchart have their own investments and operations in these countries.

Temasek's standard response is that the parent and TLCs are separate entities run independently.

Despite some high-profile cases of resistance, Temasek and its stable of TLCs continue to be very successful in making cross-border investments.

Temasek made nearly $13 billion of investments, mostly in Asia, last year.

At the TLC level, PSA invested in various container terminals in Hong Kong; SingTel bought a 45 per cent stake in Pacific Bangladesh Telecom; while Mapletree Investments will set up a 56 per cent hectare logistics park in Vietnam Singapore Industrial Park II.

Globally, some cross-border deals have encountered heavy politicking on nationalistic grounds. These include Dubai Ports World's blocked takeover of some United States ports and Israeli software firm Check Point Software Technologies' dropped takeover of US firm Sourcefire.

Greater openness

Ms Veronica O'Shea, managing partner of law firm Herbert Smith's Singapore office, believes that despite some resistance, the tide of liberalisation is still moving towards more openness, with many previously protected industries in the region now being open to more foreign investment.

She said: "National governments often seek to balance the competing priorities of satisfying the electorate by aiming to protect their national interests, while also being sufficiently open to attract significant flows of foreign capital and investment."

On Temasek's part, the Singapore firm will "continue to build understanding among foreign governments, regulators and various stakeholders of how Temasek and TLCs operate as independent and commercial entities."

It added: "We have also always sought the best advice possible to ensure that we comply with various local laws and regulations in the markets where we have investments.

"We have also shared our experiences on board governance, shareholder-board and board-management governance and practices with our partners in Asia."

And despite the occasional setbacks, overseas expansion is here to stay.

Temasek said it "will continue to seek opportunities to maximise long-term shareholder value" and that it "expects likewise of its portfolio companies."

Date Posted: 4/3/2006