15 December 1999

THAILAND’S CAPITAL MARKETS

Introduction

The primary regulator of the Thai capital market is the Securities and Exchange Commission (SEC) which was established in 1992. As of October 31, 1999, 395 companies and 451 issues of securities were listed on the Stock Exchange of Thailand (SET), and the SET Index is published daily. 53 issues are currently suspended for various reasons including the effects of the Asian financial crisis and reorganization.

The SEC Act

The enactment in 1992 of the Securities and Exchange Act (SEC Act) and the Public Limited Company Act (PLC Act) led to changes in the primary and secondary markets, supervision of such markets, and the development of securities busi­nesses.

The purposes of the SEC Act was fourfold:

Pending Legislation

A draft amendment to the SEC Act is pending review by the Ministry of Finance. The amendment addresses a number of obstacles in implementing the SEC Act and prosecuting offences under the SEC Act. It also includes certain provisions recommended by the Asian Development Bank, which has provided financial assistance under the Financial Markets Reform Program.

Some of the proposed amendments are as follows:

It is not possible to predict at this time when the draft amendments will be approved by the Cabinet and sent to the National Assembly.

A draft amendment to the PLC Act is also under consideration. It includes provisions to increase the rights of minority shareholders, increase disclosure obligations of management, require greater scrutiny of inside dealings, prescribe rights and obligations of proxy holders, and authorize treasury stock.

Supervision

Before the introduction of the SEC Act, supervision of the primary and secondary markets and certain securities businesses was split haphazardly among different agencies including the SET, the Ministry of Finance (MoF), the Bank of Thailand (BoT) and the Ministry of Commerce (MoC).

Under the legal framework of the SEC Act, all power is concentrated in one entity, the SEC. It is the single superviso­ry authority with respect to:

In addition to the SEC, the act established another entity, the Office of the Securities and Exchange Commission (Office). The Office acts as secretariat and is responsible for the implementation of the SEC’s policies and measures. It is an independent organization (similar to the BoT) with separate legal status.

Members of the SEC are the Minister of Finance (who acts as chairman), the governor of the Bank of Thailand, the permanent secretaries of the Ministries of Finance and Commerce, the secretary-general of the Office and four to six qualified persons appointed by the Cabinet of Ministers.

The term of office for the members of the SEC is six years for a maximum of two terms. The SEC acts as a board of directors and meets regularly. However, its membership is not a full-time position except for the secretary-general.

The Office, however, is a full-time organization comprising over three hundred staff. The secretary-general, who is also a member of the SEC, receives support from a deputy secretary-general and two assistant secretaries-general. The Office has the following main departments:

The Corporate Finance Department is responsible for the primary market (i.e. approval of issues of securities to the general public). This department also supervises possible business takeovers. The Department of Market Intermediaries Supervision is responsible for supervising securities companies conducting securities business (i.e. broker, dealer and underwriter) and institutions related to securities businesses. The Department of Investment Management’s responsibility is to supervise securities companies mutual fund management, private fund management and investment advisory services, as well as mutual fund business–related associations. The Enforcement Department inspects the financial condition of securities businesses and is entrusted with the power to investigate unfair trading practices. Supervision of the SET, the over-the-counter (OTC) market is within the purview of the Office of Market Supervision. The Legal Department provides legal advice on rulemaking and interpretation concerning laws, notifications, rules and orders falling within the jurisdiction of the SEC and the Office.

In addition to these departments and division, there are various support departments including Office of Capital Market Policy and Planning, Office of Capital Market Research and Development, Office of the Secretary-General, Office of Information Technology, Office of Human Resource Development, Office of Internal Audit, Office of General Administration and Security Division.

Public Issuing and Offering of Securities

Public limited companies (and in case of shares, their shareholders) may offer and sell both equity and debt securities to the general public. Private limited companies can issue (non-convertible) debt securities only. The provision in the SEC Act specifically permitting the issue of debt securities by a private limited company overrides Section 1229 of the Civil and Commercial Code which provides that “debentures may not be issued by the company”.

In general, all public offers of newly issued securities require the prior approval from the Office. All persons who offer securities for sale to the general public (whether by way of initial public offer or sale of securities already issued) must file a registration statement and a draft prospectus with the Office. The Act specifically permits a simultaneous application for approval and filing or the registration statement and draft prospectus. Simultaneous filing saves time as the SEC has 45 days within which to consider the application, and there is a mandatory “cooling-off” period of 45 days after the registration statement and prospectus have been filed with the Office. Certain limited publicity with respect to the offer is permitted prior to the effective date of the registration statement and draft prospectus.

The SEC Act facilitates continuous offers of short-term debt securities. It is not necessary to file a new registration statement and draft prospectus with the Office each time new securities are offered. Rather, it is only necessary to notify the Office of any changes in information previously filed.

It is reported that starting in January 2000, the SEC will place increasing importance on good corporate governance and internal controls in evaluating applications to issue securities. On 15 December 1999, the SET’s revised listing regulation came into effect.

Exemptions

The SEC Act and Notifications provide for certain exemptions from filing a registration statement and draft prospectus based on the nature of the securities sold and on the nature of the offer (i.e. the size of the offer and categories of investors). Securities exempted are:

Also exempt are:

Professional/institutional investors must comply with Section 65 of the SEC Act and file a registration statement and draft prospectus with the Office if they sell securities acquired under the professional/institutional investor exemption to persons who are not professional/institutional investors. They cannot benefit from the Baht 20 million (in case of shares) or the 35 investors’ group (in case of both shares and debentures) exemptions.

Debentures

An important feature of the SEC Act is the introduction of a broad definition of debentures, that is, “any debt instrument of whatever nature, excluding bills, divided into units, each with equal value and a predetermined rate of return, issued by any company to a lender or purchaser representing the right of the holder of such instrument to receive money or other benefit.”

Two groups benefit from the introduction of this definition. Firstly, investors are better protected because issues of any debt instrument (other than “bills”) will fall within the provisions of the SEC Act. Secondly, private limited companies, while specifically permitted to issue debentures under the SEC Act, can now avail themselves of a larger menu of debt instru­ments. In current market conditions in which it is difficult to obtain long-term loans from commercial banks, a number of major corporations have issued their own bonds.

Another novelty was the introduction of the trustee concept. Although it is a concept developed in common law countries, it has found its place in many civil law countries specifically where trustees are required as investor representatives in issues of secured debentures. Having a legal system which was strongly influ­enced by civil law, Thailand did not have such a concept in its laws until the introduction of the SEC Act. This was an important factor preventing a market for secured debt instruments from developing.

The introduction of the trustee concept may facilitate securitization, a popular and effective method of off-balance sheet financing which has proven particularly popular in the United States and Europe. Thai companies with large car and mortgage loans, credit card, lease and even simple loan receivables should benefit, most notably banks and finance companies. (Securitization permits banks to sell assets for which they would otherwise have to maintain capital under the BoT’s capital adequacy requirements.)

Foreign securities offerings

A subject overlooked by the draftsmen of the SEC Act is the offer and sale of foreign securities in Thailand.

The approval and registration statement provisions of the SEC Act were clearly not drafted with a view to apply to offers and sales of foreign issued securities. A not unlikely scenario is that as part of an initial public offer of securities on a foreign securities exchange, the issuer wishes to offer and sell a tranche to Thai investors. Two sets of provisions of the SEC Act could come into play; firstly, provisions concerning the approval required in connection with offers and sales of newly issued shares and debentures by (promoters of) limited companies. Even though it was not clear from the wording used in these provisions, currently it is interpreted by the Office that this approval requirement would apply where securities issued by a foreign company are involved. On the other hand, the provisions which deal with the requirement to submit a registration statement and prospectus to the Office are broader (Section 65). They require promoters of a public limited company; a company or owner of securities to file a registration statement and draft prospectus with the Office.

Therefore, offers and sales of securities by foreign limited companies appear to be subject to the SEC Act. It is doubtful whether offers and sales of securities by entities established under foreign law which differ from limited liability companies would fall within the jurisdiction of the SEC.

However, foreign issuers and sellers of securities could avail themselves of the exemptions discussed above. In addition, if the offer and sale are not conducted publicly (i.e. not through public media) such offer and sale would probably not be considered to be a public offer.

Secondary Markets

The Stock Exchange of Thailand was established in 1974 under the Securities Exchange of Thailand Act B.E. 2517 (SET Act). With the introduction of the SEC Act, the SET Act was repealed. The SET’s activities are overseen by the SEC. The SET has become a truly self-regulatory organization. Its board of directors comprises 11 members of which five are appointed by the SEC, five are appointed by the members of the SET, and the manager of the SET. The board must appoint one of the directors, other than the manager, as chairman. The board only concerns itself with securities trading and any matters concerning the primary market are within the auspices of the SEC and the Office. Nevertheless, any company wishing to secure a listing on the SET needs to obtain the approval of the board of the SET after having received approval from the Office.

The board of the SET has the power to prescribe rules and regulations with respect to, for example, listing of securities, admission of brokers, securities trading and disciplinary measures. Such rules and regulations must be approved by the SEC.

The SEC Act provides for the establishment of OTC centers for unlisted securities. An OTC may be established by 15 securities companies once a license has been obtained from the SEC. Like the SET, an OTC will be a SRO and the regulations promulgated by the OTC’s board of directors will require the approval of the SEC. The board of directors of the OTC must have no more than nine members elected from among the OTC’s founding members. The Bangkok Stock Dealing Center was established in 1995 but is being dissolved. In 1998, the Thai Bond Dealing Center was licensed by the SEC to promote debt instrument trading.

Securities businesses

Another area where supervision is how unified and harmonized is the supervision of securities businesses. The provisions on supervision of these businesses are similar to those in the Act on the Undertaking of Finance, Securities Businesses and Credit Foncier Business, B.E. 2522 (Finance and Securities Business Act) with some modifications. Furthermore, the SEC Act introduces private fund management as a new type of business for securities companies. Section 4 defines private fund management as “the management of funds for five or more persons or one or more groups of persons to invest in securities in consideration of a fee or other remuneration excluding the management of funds under the law relating to provident funds”

Securities businesses under the SEC include securities brokerage, trading, investment advice, underwriting, mutual fund management, private fund management and securities borrowing and lending. Each business requires a license from the MoF, not from the SEC. The SEC merely recommends that a license be granted.

Foreign securities companies wishing to open a representative office in Thailand have to obtain permission from the SEC. The SEC Act imposes a capitalization requirement of Baht 100 million on securities companies.

The provisions dealing with mutual fund management are substantially similar to those promulgated by the BoT pursuant to the Finance and Securities Business Act. The uncertainty surrounding the legal status and nationality of mutual funds has been dealt with in the SEC Act. An approved mutual fund will be considered a Thai juristic person and shall be separate from the securities company which establishes the fund.

The SEC Act offers protection to the mutual fund investors by requiring that a trustee (called “mutual fund supervisor”) is appointed. It is here too that the trustee concept is introduced. The supervisor sees to it that the fund manager complies with his obligations to the unit-holders. Only banks and financial institutions which can meet the requirements specified by the Office may act as supervisor.

The mutual fund management business before 1992 was monopolized by the Mutual Fund Company Limited, the only mutual fund management company which had received a license from the Bank of Thailand under above-mentioned old regulations. Approximately 14 additional licenses have been issued since the SEC Act became law.

The SEC Act lays the foundation for several support organizations including a clearing house, a securities depository center and a securities registrar. They will need to be licensed by the SEC except if undertaken by the SET. The SEC also permits the establishment of securities business associations with a license from the Office. These organizations will also be SROs.

Substantial securities transactions

Certain securities transactions need to be reported to the Office. Securities are defined in the SEC Act as shares, certificates representing the right to purchase shares or securities convertible into shares.

Persons buying or selling 5% or more of securities traded on the SET, the OTC or issued by a public limited company must report the transaction to the Office. Both buyer and seller are under an obligation to report within the next business day.

If a person has bought shares and as a result of the purchases his holding reaches or exceeds the 25%, 50% or 75% level, or exceeds 5% within 12-month period while holding shares between 25-50%, he must prepare a tender offer for all securities issued by the company within 7 business days. This is also true, irrespective of the number of shares bought, if his shareholding reaches or exceeds the foregoing level.

The tender offer bid documents must be submitted to the Office and will become effective after three days of receipt. At the same time, the offeror must submit a copy of the tender offer documents to the target company and its shareholders, and advertise the tender offer in two or more Thai daily newspapers and one English daily newspaper for three consecutive days.

The price offered to the shareholders must be the same for shareholders and other type of securities holders and must not be less than the highest price at which the purchaser had acquired such securities within 90 days prior to the tender offer.

Attribution rules

The SEC Act contains broad attribution rules. Shares held by immediate family (spouse/children) of the purchaser, partnerships in which such person or his direct family is a partner, limited partnerships in which such persons/partnerships hold more than 30% of the capital, companies in which such persons/partnerships hold at least 30% of the shares sold or companies in which any of the above persons, partnerships or companies hold at least 30% of the shares sold are deemed held by the purchaser.

These attribution rules have already had an impact on the market place and several investigations have been undertaken into certain share dealings on the SET based on allegations of breaches of the disclosure and tender offer rules of the SEC Act. Most of the suspected violations did not result from direct purchases but purchase transactions which were alleged to have been consummated by related companies.

The complex inter-relationship of the parties involved in some of the cases which were publicized resulted in the issue by the SEC of a Notification specifically dealing with the concept of parties “acting in concert” in buying shares of a target company. Such persons have to report jointly to the Office once their combined holding reaches each 5% threshold, and may need to make a tender offer if it reaches 25% or more of the shares issued by the target company. These new attribution rules indicate a significant widening of the scope of the attribution rules summarized above.

A. T. Chandler

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