The Securities and Exchange Commission (SEC) will study the possibility of adopting depository receipts (DRs) as an instrument for local retail investors to engage in direct investment abroad.

Brokers or mutual-fund firms might act as third parties by issuing DRs with foreign securities as underlying assets to local investors, and the securities would be tradable in the Thai stock market, SEC secretary-general Thirachai Phuvanatnaranubala explained yesterday.

"Issuing DRs is like doing a dual listing, only the main company has nothing to do with the deal. A mutual fund or securities firm that has been approved for investing in a foreign country would act as a middleman," said Thirachai.

"For example, a securities firm invests Bt100 million to bring Google stock in to be traded as a security in the local market using the DR method. The main Google stock remains traded in the US market, and the price is not linked to the price of Google DRs in the Thai market. This method would help the Bank of Thailand (BOT) control limitations on outflow, because the money would flow out only once," he said.

With this instrument, the central bank would feel at ease about allowing retail investors to invest abroad.

"Right now, the BOT is concerned that allowing retail investors to do so would make it difficult to limit the outflow. So we must decide which method can ensure that transactions are under the central bank's supervision. The use of DRs is one method we will study," said Thirachai.

He said the method had been successful in Latin America and could help trading volume in the market grow 20-30 per cent.

At present, local investors are permitted to invest abroad but only indirectly, via holding unit trusts of foreign investment funds (FIFs) operated by mutual-fund companies. Plus the amount invested in each FIF is restricted by the central bank.

Thirachai also said another method the SEC had come up with involved quota limitations on outflow. He said the BOT could provide securities firms with a quota that the brokerage houses would distribute to their customers.

But he said there was an inherent weakness in this method.

"If retail investors all wanted to invest abroad directly at the same time, but the quota was not high enough, there might be some unfairness in distributing it to investors. Questions could arise as to why some got the quota but others didn't," said Thirachai.

Attempts to encourage retail investors to invest abroad directly are in line with the SEC's plan to develop the Thai market into one in which retail investors are allowed to engage in direct offshore investment.

However, before reaching that stage, the SEC would like securities firms to try it themselves first. The SEC board recently granted its approval for them to invest abroad.

"There's US$800 million (Bt28.7 billion) left over from the $1.8-billion quota the BOT granted to asset-management firms. We'd like securities firms to include foreign investment in their portfolios," said Thirachai.

With the announcement that the securities industry will be liberalised within the next five years, the SEC expects to see a trend towards mergers and acquisitions.

"The Stock Exchange of Thailand has proposed that the Revenue Department waive some tax restrictions if one listed company merges with each other. We'd like to add that this should apply to mergers of non-listed financial institutions, as well."

The SEC board has also granted approval for securities firms that do not possess a full set of licences - brokerage, underwriting, trading and advisory - to request them all at once as a single licence.

This measure will take effect once the Cabinet approves it and it is announced as a ministerial regulation. Thirachai expects this to be completed next year.

"We encourage brokerage firms to have a single licence rather than multiple ones. If liberalisation occurs, the securities firms can move forward to conduct transactions abroad with a single licence," said Thirachai.

Thirachai said the SEC was open to hearing which regulations were too strict and had a negative effect.

Piyarat Setthasiriphaiboon

The Nation