THAI CORPORATE BOND MARKET: AN ASSESSMENT OF
THE COUNTRY'S REGULATORY FRAMEWORK
The corporate bond market in Thailand has seen significant growth in the years after the Asian Financial Crisis. Prior to that period, commercial bank plays important role as financial intermediation, wherein fund was mobilized through bank deposits. Thai Government gave an extra effort to boost domestic bond market by imposing several measures, including legal amendments and institutional reform.
With the due regard to the Government's initiatives, this paper will provide an argument that the bondholder protection mechanism in Thailand is fundamentally sound, secure, and reliable that the legal framework can ensure the certainty and market stability, while it also exhibit a high level of compliance with international standard. However, there are several deficiencies within the bond market that need to be identified. In this regard, the study will investigate related regulatory frameworks in various jurisdictions in order to provide a comparative analysis on the assessment of Thailand's regulatory regimes, and provide proposals for further development.
As a consequence of the 1997 Asian financial crisis, Thailand’s corporate bond market has experienced significant growth, whereas it previously was a financing alternative to bank loans.1 Thai authorities made an extra effort to boost the domestic market, and at the same time, to establish legal infrastructure in order to create stability within the system. Likewise in many other Asian countries, the local corporate bond market in Thailand is impeded by a number of legal and institutional problems. These problems result in a low incentive for market participation: both issuers and investors.2
The main argument of this paper is that “bondholder protection in Thailand is fundamentally sound, secure, and reliable that the legal framework can ensure the certainty and market stability. The legal infrastructure also exhibits a high level of compliance with international standard. However, there are several deficiencies within the corporate bond market that need to be identified.”
In illustrating the argument, the second part of this paper will discuss the snapshot of Thai corporate bond market. The consideration will be divided into three parts: the structure of primary market and the secondary market, and key regulators involved. The third part of this paper will analyze certain aspects of Thai bond market infrastructure under the light of legal perspective. It will include several discussions of key legislations and authorities. This section will analyze a number of arguments regarding a new development of Thai laws, for instance, the law of trust. This paper will further provide the discussion, in the fourth part, on the shortcoming and criticisms, as well as an assessment of Thai legal regime The conclusion will be drawn from comparative analysis with a variety of foreign legal regimes, for instance, a number of legal structures some of mature markets – the United States, and European countries. To further exhibit the argument, the paper will include certain comparison between Thailand and other legal regime in emerging markets. After comparing with other jurisdictions, Thailand has a certain sufficiency of legal structure that it can enhance the development of Thai bond market; however, some future measure must be addressed. The last part will provide measures for strengthening the market, and the way forward for regional integration of capital market.
It must be noted that this research paper will focus on the structure of corporate bond market and the mechanism of bondholder protection. The issue of credit rating, insolvency and securitization will, therefore, not be touched upon.
II An Introduction to Thai Corporate Bond Market
A The Snapshot of Thai Corporate Bond System
Prior to the Asian financial crisis in 1997, the role of Thai financial intermediation fell entirely to commercial bank, where funds were mobilized primarily by bank deposits. The size of domestic bond market was considerably small and undeveloped.3
The 1997 financial crisis triggered imbalance and low liquidity within Thailand’s financial structure, wherein it was further worsened by amid high non- performing loan ratios. As a consequence, the access to bank loan, which was the main channel of funding, was dysfunctional. Such intensified economic slowdown induced in the rapid growth of emerging local bond market, especially in Thailand, as the central authorities recognized the “need for liquidity”.4 In this regard, the attempt to promote better domestic bond market as an alternative channel of funding was primarily boosted by the Thai government in order to reduce the economy’s reliance on bank intermediation and external financing.5 The overview of Thai corporate bond could be considered through primary and secondary market as follows:
1 Corporate bond in the primary market
The investment in primary market allows investors to participate in the first market activities, wherein they could buy newly issued bond directly from issuer.6 None of limited companies could issue bonds.
According to the Notification of the Capital Market Supervisory Board No. TorChor. 9/2552 Re: Application for and Approval of Offer for Sale of Newly Issued Debt Securities, general issuance of corporate band could be accomplished by the "public companies" through the process of “public offering” or “private placement”.7 The issuers must obtain approvals from the Securities and Exchange Commission (“SEC”) after qualifying numbers of criteria. Most firms typically appoint financial advisor, underwriters and selling agents to help them allocate the issues and with other underwriting processes, while applying for SEC’s approvals.8 The financial advisor will assist the issuer in applying for issuance approval, including providing certain data and information for credit rating process. The financial advisors and the underwriters are normally the same companies, which most of them are commercial banks, for instance, Standard Chartered Bank (Thai).9
In case of public offering, there is no limit on the number of issuances for one issuer. Nevertheless, credit rating must be obtained prior to launching an issue.10 The issuer is also required to register their issuance with the Thai Bond Market Association (“TBMA”) within one month since such issuance.11
In case of private placement12, the legal obligations is more deregulated if the issuer could meet one of these conditions: (i) there are less than ten investors involved in such issuance; (ii) the overall value of issuance is less than THB 100 million; (iii) the bond issuance is sold to the creditors for the corporate restructuring propose; or (iv) the SEC has given a special exemption. The issuer will have fewer obligations than public offering, such as the exemption of credit rating. Nonetheless, documentations concerning the issuance could not be disseminated publicly, but just only for specific investors.13
The intermediary in primary market is dealers, having function to distribute bonds issued from issuer to investors. Typically, dealers buy the newly issued bonds and resell them into the public. In case where the value of issuance is huge, dealers will form a syndicate to underwrite the issuance.14
2 The secondary market of corporate bond
The issuance of bond can be traded in the secondary market once it has gone through the process of initial transaction in the primary market. The activities in the secondary market comprise of both over-the-counter (“OTC”) system and on-exchange.15 Prior to the establishment of the Bond Electronic Exchange (“BEX”) as a response to the growing of on-exchange market, bonds were traded through OTC market, wherein it was only allowable for institutional investors. As a result, retail investors were previously excluded from the OTC market.16 The creation of BEX, having electronic trading platform as main feature, introduced investors to an additional investing instrument and the benefit of diversification.17 According to the Securities and Exchange Act B.E. 2535 (“SEA”), section 113 and 114, and the Notification of the Capital Market Supervisory Board No. TorDor. 67/2552 Re: Rules, Conditions and Procedures for Dealing of Debt Instruments, Clause 10, investors have to submit their own quotes through authorized dealers in order to purchase or trade bonds within BEX.18 For the OTC market, the Fixed Income and Related Securities Trading System (“FIRSTS”), which it mimics to OTC trading functionality, was introduce by the Stock Exchange of Thailand (“SET”) on March 1, 2006 as a platform for inter-dealer trading and for dealer-wholesale clients trading, where clients cannot post their own bids for quotes19, but have to absorb the liquidity offered through the platform. Clients are allowed to send a request for quotes to multiples dealers at one time, and could conduct a negotiation off-line.20
1. See Pongpen Ruengvirayudh and Sakkapop Panyanukul, ‘The Corporate Bond Market in Thailand’ in Bank for International Settlement (ed), Developing Bond Market in Asia (2005), 1
2. See Thailand Securities Institute, Securities Law and Derivatives (2010), 5-10.
3. See Pongpen Ruengvirayudh and Sakkapop Panyanukul, ‘The Corporate Bond Market in Thailand’ in Bank for International Settlement (ed), Developing Bond Market in Asia (2005), 152
4. Pakorn Vichyanond, Capital Market Development in Thailand (2002), 2.
5. Pongpen Ruengvirayudh and Sakkapop Panyanukul, above n3, 152.
7. See The Notification of the Capital Market Supervisory Board No. TorChor. 9/2552 Re: Application for and Approval of Offer for Sale of Newly Issued Debt Securities Clause 4.
< http://capital.sec.or.th/webapp/nrs/data/4607se.pdf> at 15 December 2010
8. See Akkharaphol Chabchitrchaidol and Orawan Permpoon, ‘Development of Thai Bond Market’ in Bank for International Settlement (ed), The Development of Bond Markets in Emerging Economies(2002), 195 See clause 5 - 7
9. Japan Bank for International Cooperation ("JBIC"), ' The Structured Bond Market in Thailand' (Research Paper NO. 35 , JBIC Institute, Japan Bank for International Cooperation, 2007) 16.
10. See the Notification of the Capital Market Supervisory Board No. TorChor. 9/2552 Re: Application for and Approval of Offer for Sale of Newly Issued Debt Securities Clause 21.
11. See the Notification of the Capital Market Supervisory Board No. TorChor. 9/2552 Re: Application for and Approval of Offer for Sale of Newly Issued Debt Securities Clause 24.
12. See the Notification of the Capital Market Supervisory Board No. TorChor. 9/2552 Re: Application for and Approval of Offer for Sale of Newly Issued Debt Securities Clause 32
13. Anya Kanthawith and Sulux Pattharamart, The Mechanism of Capital Market in the Thai Economy (2008), 290
14. Jyoti P. Gupta, I. IM. Pandey and Titapong Techa-umponkul, Emerging Bond Market in Thailand: Problems and Prospects, University of Delhi, Delhi School of Economics 39. <http://www.commercedu.com/Articles/Bond_market_thai.pdf> at 14 December 2010
16. Akkharaphol Chabchitrchaidol and Orawan Permpoon, above n8, 154-155.
18. See the Securities and Exchange Act B.E. 2535 (“SEA”), s113 s 114. and the Notification of the Capital Market Supervisory Board No. TorDor. 67/2552 Re: Rules, Conditions and Procedures for Dealing of Debt Instruments, clause 10 < http://capital.sec.or.th/webapp/nrs/data/4814se.pdf> at 15 December 2010
19. See the Notification of the Capital Market Supervisory Board No. TorDor. 67/2552 Re: Rules, Conditions and Procedures for Dealing of Debt Instruments, clause 10.
20. Capital Market Department, IMF and Financial and Private Sector Development, The World Bank, Thailand: Financial Sector Assessment Program—Technical Note—Fixed Income Markets (2009) Financial Sector Assessment Program, 20-21 <www.imf.org/external/pubs/ft/scr/2009/cr09151.pdf>at 14 December 2010