Thailand Law Journal 2011 Spring Issue 1 Volume 14

The single supervision, on the other hand, integrates the supervision of all financial activities, including the supervision of firms and conduct of business into one single entity in order to enhance better coordination among the supervisor. This model, which it was introduced in the United Kingdom entirely opposes to the sectoral supervisor.⁸⁷

Thailand, taking into account these three approaches, could be categorised as the traditionally "institutional scheme", similar to some European countries. This is because there is a clear segregation of responsibility between three different authorities; namely the Bank of Thailand and SEC.

Nonetheless, there are several disadvantages arisen from the imposition of institutional scheme. It might be argued that the institutional scheme is being challenged, both by the twin peaks and integrated model, due to the pressure of market development where the delineation between banking and insurance is blurred, and the market seems to heavily involve with securities business through different securitization technique.⁸⁸

 Thai market environment is lacks of thickness, and the variety of products is poor; therefore, the numbers of issuers and investors are low, and liquidity is insufficient. This tendency is remarkable, especially in the private bond market.⁸⁹ It seems reasonable that the reliance on the institutional regime is appropriate as the development of the market is still limited, comparing with other mature market especially in London. The imposition of single authority regime will arguably impair the overall market's functioning due to the fact that most Thai firms are small or medium-size firms.⁹⁰ However, the integrated model seems to serve the interest of multi-service financial group where it involves with several line of business, which the smaller firms are of the little interest. As both smaller firms and big corporations compete in the same market, the complexity of rules applied to big corporation will be applied to the smaller firms. Therefore, the rules will be even more over-regulated than they used to be.⁹¹

2. The robustness of legal enforceability

Importantly, civil enforcement could not be achieved through SEC. Any sanction against non-registered entities or persons (to be taken by SEC), or any sanction requesting for more severe penalties need to be submitted through the process of criminal prosecution, meaning that the case must being referred to the Royal Thai Police, or the Department of Special Investigation ("DSI"). If the case is approved, providing that it have solid ground of proof, it will be referred to the Public Prosecutor. The claim must be proved beyond the reasonable doubt through the trial.⁹²

As discussed, there are many mechanism imposed by SEC in order to protect the bondholders. Nevertheless, these rules and policies incur crucial impediment to the Thai bond market as a whole. Firstly, the regulatory structure imposes limitations on institutional investors, especially institutional fund managers. This causes the secondary market to be illiquid.⁹³ The institutional investors encounter strict regulator environment, where it discourages them from trading, rather than encourage them to manage risk prudently. Institutional investors seem to be reluctant to purchase debt issue below rate “A” as they need a “margin of safety”⁹⁴; for the event of downgraded bond from A to B or BB. Furthermore, there are some of Thai companies that actively issue bonds; roughly twenty-five companies. This causes a concentration limits on the amount of debt that one institution can own from a single issuer. As said, institutional investors encounter restriction on the value of bond allowable for them to hold, for instance, pension and insurance fund are compulsorily required to hold minimum amount of local currency government bond in their portfolios. This impairs the overall market liquidity as funds tend to hold until the maturity is met; therefore any trading to rebalance portfolios in order to match liability profiles is precluded, causing low liquidity within the market.⁹⁵

Likewise, other countries in the regions also encounter several constraints of thriving institutional investor base. Importantly, the cost of transaction is still high, and the inadequate domestic debt markets, reflecting the underdevelopment of market structure.⁹⁶

Secondly, the SEC does not have leverage to initiate civil action. Any administrative action could only be done against registered entities or persons. Therefore, all serious matter, and all matter engaging with non-registered entities or persons must be prosecuted through criminal proceedings⁹⁷, wherein it is a complex and time consuming process. The complexity and difficult endeavor under securities law, this would become even more difficult if it has to meet the standard of criminal proof of beyond the reasonable doubt. This process causes time delays as there is a referral process which may take years and eventually result in no actions taken.⁹⁸

Interestingly, The U.S. law empowers the Securities and Exchange Commission (“US SEC”) with broad authorities to investigate the violation of the federal securities laws, where it could call for cooperation with other authorities in order to obtain documents or any testimonies. In addition⁹⁹, US SEC can formally authorize an order for investigation granting its staffs the power to issue subpoenas an administer oaths. In this regard, the US SEC has power to carry out civil enforcement, under the federal securities laws, and prosecute criminal cases and administrative proceedings.¹⁰⁰ In connection with civil action, the US SEC may bring civil injunction action against person or entity, as well as obtain disgorgement. This means that the U.S. SEC can seek civil monetary penalties and require the wrongdoer to disgorge illegal profits. Furthermore, the US SEC has full power to bar individual from serving as officers or directors of public company.¹⁰¹ However, for the criminal proceedings, the U.S. SEC would refer the case to the Department of Justice and the individual U.S. Attorney’s office, but it does not preclude the U.S. SEC from taking civil action for the same conduct, vice versa.

Comparing with the U.S. law, it is obvious that the SEC is lack of power in bringing civil actions against wrongdoer. Civil action would further reduce time delay in the criminal referral process, , and enable the defendants to immediately response or defence against the claim, likewise the U.S. law, rather than pending for the completion of criminal referral process before responding to such public allegations.¹⁰² The IMF has further indentified the necessity of empowering the SEC to take civil action in its report on the Financial Sector Assessment Program by stating that “proving violations of complex and often technical securities law requirements is a difficult endeavor. It becomes even more difficult when a criminal standard of proof is required. While a high criminal standard of proof may be warranted if the sanction involves imprisonment, a lesser civil law standard of proof may be appropriate”.¹⁰³

3 Disclosure and market transparency

The corporate bond market in Thailand is significantly smaller than the public debt market. In 2009, the issuance of corporate debt reported by the TBMA amounted to THB 1,010.10 billion, wherein it includes THB 560.94 billion of short-term commercial paper.¹⁰⁴ These ratios represent approximately fifteen percent of the total debt issued and outstanding.
In essence, the main impediment of Thai corporate bond market is a reflection of the prolonged weakness in private investment. This shortcoming is analytically contributed by three factors; (i) institutional investors are only allowed to purchase an investment graded bond; A or above, as required by the law; (ii) the primary underwriters are banks, where they are likely to have preference for making bank loan rather than underwriting debt issues; and (iii) there are restrictions allowing only certain types of companies from issuing debt.¹⁰⁵

Financial literacy of most retail investors seems to be the most concern of Thai regulators. Thailand relies heavily on the mission of ensuring orderly market and investor protection, and the exceedingly prescriptive approach, where it overemphasis on the merit evaluation of each case, instead of setting up general principles and monitor adherence to those principles. As a result, there is the regulatory cost for private sectors making them being less competitive; having less flexibility for their business operation so that the innovation of new products and new services could be hardly done.¹⁰⁶

To some extent, SEC has to review each of debt offering to its perceived merits: first, adequately of disclosure is assessed; then, a value judgment is made on the merits of such offering. SEC assumes itself that it is better informed than investors and can better decide the merits of transaction on its behalf¹⁰⁷, regardless the fact that the market is notorious for the problems of moral hazard and adverse selection caused by information asymmetry.¹⁰⁸ As a result, as the market is control by the regulators, and there will be a contradict value between regulators and participants that the regulators want more disclosed information from participants, while the participants try to disclose as little as possible. Therefore, the cost of monitoring and compliance are increased, as well as undue delay, operating inefficiency and missed opportunities. The attitude of market participants will be impaired, as they are likely to depend on the regulators on the disclosure standard and the quality of information, which should practically be determined on the basis of market force and the participants’ market strategies.¹⁰⁹ Moreover, market participants seem to have less incentive to comply with the rules set by the regulators once they have met the criterion. This problem increases the cost for the both the regulators and market participants. For the regulators, they need to monitor before and after the issuance of bond which requires cost for monitoring the overall market in order to create a good compliance. For the participants, especially the bond issuers, the debt offering needs to fulfill the requirement set by the regulators in order to acquire the approval, wherein they are required to meet a number of standard after the issuance of the bond has been done, such as they have to submit an assessment report.¹¹⁰

The imposition of merits-based evaluation is similar to the debt offering mechanism in other emerging market in Asia¹¹¹, such as Malaysia where any person issuing or offering debentures, including private debt securities, would require the approval from the Securities Commission (“Malaysia SC”), according to section 32 of the Securities Commission Act 1993, except Islamic securities.¹¹²

On the contrary, the disclosure-based regulations, as being implemented in mature market such as the U.S. market and the Swiss securities scheme, concern only the fulfilment of necessary requirement of disclosing proper information, regardless the value of application for registration.¹¹³