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Published on April 8, 2008

Demutualisation? What demutualisation? With public hearings coming up, the dialogue about changing the Stock Exchange of Thailand (SET) into a creature of a different breed needs to be kept open; the debate must continue.

"I don't see the point of demutualising [the SET]," said ING Funds managing director Maris Tarab. "What we need are more liquidity and more quality listed companies."

This is not the first time such suggestions have been made by a high-profile asset manager to weary-eyed finance journalists. Almost eight years ago, the Boston Consulting Group, which is now entrusted with the SET's four-month demutualisation study, made similar recommendations. It said the number of listed firms should be increased and a wider product range provided by the post-1997 exchange, including, for example, derivatives and exchange-traded funds.

In 2000, then-SET president Kittiratt na Ranong promised to try to turn the exchange into a private body within a year.

Seven hot summers and a coup later, these recommendations have largely been achieved. The privatisation of key state enterprises like PTT and the introduction of derivatives like futures and options have added much-needed mojo to the Thai capital market. But not much else has changed.

The SET ended 2000 as the worst-performing market in Asia. Last year, its adjusted return on investment was minus 4 per cent, among the lowest, said Securities and Exchange Commission assistant secretary-general Tipsuda Thavaramara.

Demutualisation, the move from a broker-centric to an investment-centric bourse, is not a panacea that will revive the sleepy SET. But Maris's concerns, shared by many investors large and small, can be partly sorted out through the process of demutualisation. The SET's transaction cost is among the most expensive, because of a poor bid-ask spread and high commission fees.

There is little dispute about the ability of demutualisation to slim down transactional costs, pretty up operating margins and boost market cap and liquidity. At last month's conference on the future of the SET, the Boston Consulting Group's Antonio Riera said trading volume growth in Asia-Pacific stock exchanges was driven largely by the process of demutualisation. In 2006, the percentage of share trading handled by demutualised exchanges was 71.2 per cent, compared with 10.4 per cent by mutual bourses. And that partially addresses the question of liquidity.

Pakistan is now in the final stages of demutualising the Karachi Stock Exchange. And while the similarity with Thailand may be limited to a coup and internal political turmoil - although in Pakistan's case, with blood on the streets - its Demutualisation Ordinance is now awaiting only the signature of President Pervez Musharraf. Such a change in the law is a precondition for demutualisation, along with improving on infrastructure, organisation and public opinion, says Andrew Sheng, who took the Stock Exchange of Hong Kong public in 2000 and witnessed its transformation into a US$16.5-billion (Bt521 billion) regional heavyweight.

Phillip Securities (Thailand) managing director Suchai Sutasthamkul believes if the SET fails to adjust its current operational structure, it may "miss out" on this "global trend" that started with the consolidation of major bourses, such as the New York Stock Exchange's acquisition of Euronext last year. He said the first step was to make regulation of the exchange independent of the SET and optimise its cost structure and profitability.

Association of Securities Companies chairman Kampanart Lohacharoenvanich, who is also president of Trinity Securities, champions reform of the SET before demutualisation.

"No need to rush," he said.

However the SEC, which has publicly supported privatisation of the SET, believes the two processes of reform and demutualisation can run parallel.

"But only if there is a clear cut direction," Suchai said.

Clarity in governance must come, too - mainly who will get to sit on the board. The Hong Kong government, which has a 6-per-cent stake in the Hong Kong exchange, made sure corporate greed was bridled by appointing eight "public interest" directors to complement the six other board members elected by shareholders.

The waning influence wielded by brokers in a demutualised SET may be a reason for the slow change. Also, about seven years ago there was something akin to genocide of brokers when commission fees were liberalised. With almost half of the 40 brokerage firms gone amid aggressive fee cutting, Kittiratt retracted and saved the day.

Brokers still rely too much on investment income. Tipsuda said it amounted to 36 per cent of their core business income. By minimising brokers' "exclusive rights", demutualisation would, at least psychologically, speed up liberalisation of the capital market.

With minimum commission fees to be removed in two years, brokers are looking to add value to their services. International brokers are more or less immune, since they will trade only in a few big-cap stocks.

Singapore Exchange CEO Hsieh Fu Hua said these diverse opinions amounted to a need for all stakeholders to rally behind the mindset that the SET was a business and not a pseudo-mutual "utility".

Ki Nan Tsui,

Siriporn Chanjindamanee

The Nation