The Thai bond market, with massive valuations surpassing 16.7 trillion baht as of the end of the third quarter of 2023 and continuous prospective growth, is a crucial mechanism in the capital market and the Thai economy. Net market value could rise by over 386 million baht per year if legal restrictions on bond trading are unlocked.
Bonds are key instruments for the government and private sectors to raise funds for large-scale projects. With fixed-rate returns, bonds are pivotal options for investors, including retail investors as well as those in high net worth (HNW) and ultra-high net worth (UHNW) groups and also institutional investors as defined by the Securities and Exchange Commission (SEC).
However, the Notification of Capital Market Supervisory Board Tor Jor 16/2565 (No.2) still limits bond trading in the secondary market. Tor Jor 16/2565 (No.2) issued by the SEC substantially restricts trading based on types of investors except those being changed as an inheritance.
For example, if bonds are initially offered only to institutional investors in the primary market, they cannot be traded to other investor types in the secondary market, such as HNW and UHNW investors.
Such restrictions are aimed at preventing issuers from selling bonds to ineligible investors, as regulations governing issuance and offering to each investor group have different levels of strictness.
It should be noted that some countries allow bonds offered to non-retail investors in the primary market to be sold to retail investors in the secondary market.
The Monetary Authority of Singapore rolled out its Bond Seasoning Framework, which allows some bonds to be sold to retail investors — not only big institutional investors and accredited investors in the primary market.
The objective of the Bond Seasoning Framework is to allow retail investors to access corporate bonds, which means more investment options, and also to facilitate bond issuers wishing to trade with retail investors.
However, since regulatory guidelines regarding bond trading and investor protection between Thailand and Singapore contain some differences, the authorities must be careful if they apply other countries’ regulations and adapt them to ensure they are relevant to the Thai bond market.
To address such a problem and better secure the investors’ confidence, the SEC may consider introducing a bond seasoning project.
This concept is a conditional unlocking for bonds issued and offered to institutional investors in the primary market, allowing sales to HNW and UHNW investors in the secondary market.
The SEC may set additional conditions in three areas:
1. Issuer qualifications: based on size test, listing test, issue rating, and credit risk or issuers’ ability to pay back debt based on their financial performance, particularly profits before tax and interest deductions and net profits as well as cash flow.
2. Bond characteristics: bonds that can be traded under the project must be corporate bonds known as “plain vanilla bonds,” which require bond holders’ representatives, while bonds offered to institutional investors in the primary market must pass at least nine-month periods. This is to disincentivise bond issuers who seek to avoid stricter rules concerning trading with HNW and UHNW investors compared to institutional investors.
3. Participation conditions: bond issuers must apply for permission to sell bonds to HNW and UHNW investors. They must also disclose key financial ratios, in addition to prospectus and filing forms, which will provide detailed information so that investors can study more before buying them.
This concept aims to increase investment opportunities for HNW and UHNW investors and decrease risks for institutional investors facing emergencies or in need of liquidity. They will also help strengthen liquidation for the Thai bond market in general.
Taking into consideration benefits and costs, easing regulations may bring a net benefit of at least 386 million baht per year to the Thai bond market. If this project is well received by investors, the SEC may consider revising the Notification of Capital Market Supervisory Board No. Tor Jor 16/2565 regarding transfer listing by allowing bonds issued and offered to institutional investors in the primary market to trade with HNW and UHNW investors in the secondary market.
This article is part of a series on “Thailand’s Capital Market Regulatory Guillotines” by TDRI and the Capital Market Development Fund.
Writer : Konchawan Kanthasut is a researcher and Urairat Jantarasiri is a senior researcher at TDRI
First Publish : On Bangkok Post 14 FEB 2024