INVESTING / ALTERNATIVES TO THE SET

TCRs open window to overseas markets

SRIWIPA SIRIPUNYAWIT

Local investors who have grown disappointed with the Thai market and would like to pursue better returns abroad could soon have the opportunity, in the form of Transferable Custody Receipts (TCRs).

The Securities and Exchange Commission is studying the possibility of introducing TCRs by the end of this year to allow institutional and retail investors alike to diversify their risks.

Currently, individual investors can only invest in overseas securities through foreign investment funds (FIFs) issued by local asset management firms.

The key target market for TCRs is likely to be people who don't have easy and direct access to foreign markets, says Ekapon Sawaengsri, an SEC assistant director.

However, since the product entails higher risk and complications when compared with domestic investment, investors will need to have a certain degree of sophistication and knowledge.

How do TCRs work? Essentially, they allow local investors to purchase foreign securities that are held in deposit by custodians, who are also the issuers of the TCRs to local investors who purchase the securities. The custodians will in turn invest directly in overseas markets.

In this case, the custodians will be securities brokers and commercial banks. To ensure liquidity in the local market, the TCRs will be listed on the Stock Exchange of Thailand.

The process will begin after the custodians or issuers conduct market tests to assess the demand. The chosen securities will be "high quality or blue chip" stocks listed only on recognised exchange such as the New York Stock Exchange.

"For example, IBM, Microsoft, Google and the like are qualified stocks to be selected by the custodians," Mr Ekapon said.

The custodians will issue TCRs to local investors for the purchase of securities. Issuers will be responsible for monitoring corporate activity, shareholders' rights and other benefits and for fairly distributing the instruments to local investors.

To exit a TCR investment, local investors have two options. They can sell the TCRs back to the custodians, which will involve a cancellation fee. Alternatively, they can sell the TCRs in the SET.

Local pricing of the securities is likely to reflect a premium as a result of domestic demand and liquidity in the market.

"Setting the right prices will be a very important task as the stocks will become unattractive if the prices turn out to be too high when compared with those in the foreign markets," Mr Ekapon said.

Apart from the commissions charged by custodians, investors will also be charged issuance and cancellation fees that will fall in a range of 1% to 2%.

Key advantages of TCRs, Mr Ekapon said, are that local investors will be provided with more chances to diversify their portfolios. "This is much easier than asking foreign companies to list their securities on the Thai stock exchange."

As well, the products will expand business opportunities for brokers and banks.

However, investors need to appreciate that currency risk will be a very important factor, especially given the persistent weakness of the US dollar. Most of the TCRs will be in US dollars and returns will be converted back to baht. "Therefore, it's inevitable that the investment will be exposed to currency risks while local investment is not," says Mr Ekapon.

The extent of liquidity risk is hard to predict because demand is uncertain. "And if investors decide to sell TCRs back to the custodians, then they will be charged a cancellation fee."The ability of the custodians to monitor overseas markets and digest and distribute information to local investors will also be very important. They will need to quickly and effectively react to changing situations, and even overcome time-zone limitations.

"With all the aforementioned factors, TCRs are definitely more risky than investing locally," says Mr Ekapon. "Therefore, investors should be fairly sophisticated and well-informed."

Currently, the SEC is in talks with the SET, the Bank of Thailand, the Association of Securities Companies and commercial banks about the best ways to introduce TCRs within this year.

Bangkok Post
Wednesday January 31, 2007