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Thailand is moving to beef up investor protection in the rapidly growing domestic bond market after a recent run of defaults in short-term securities. The Securities and Exchange Commission of Thailand has been meeting representatives from the bond industry over the past few weeks to sound out proposals and gather feedback. New rules are expected to be introduced next year to reduce the risks facing individual investors in both short-dated and long-dated bonds.
"We hope that the amended framework will provide better protection for investors," an SEC spokesperson told IFR. One of the draft proposals would require the appointment of a representative, equivalent to a trustee, in all long-term corporate bonds that are offered to high-net-worth investors - defined as investors with at least 70 million baht ($2.14 million) in net asset value or 10 million baht in annual income.
The representative will be tasked with taking care of the investors' requirements in the event of a default, covenant breach or litigation. Currently, a representative is only required if the bond is offered to the general public. Also under consideration is the appointment of a financial adviser to perform due diligence on any public offering of bonds rated below investment grade. At the moment, one is required only in public issues from unlisted companies.
The proposals are also set to require companies to seek SEC approval for any sale of long-term bonds to HNWIs, subjecting them to stringent conditions, such as good corporate governance, with auditor reports that comply with accounting standards. Public offerings are also to be tightened, and issuers which have corporate governance problems or are in default will be rejected. The SEC is also pressing for more transparency and additional disclosures, such as key financial ratios, history of default or breach of bond covenants over the past three years. Lead managers and underwriters must ensure that all information is fully represented to investors, who may be required to sign a risk acknowledgement form.
Sales intermediaries, including securities firms, will also have to do due diligence on the credit and product screening prior before selling to HNWIs. "This will put more cost burdens on the issuer, and will have an impact on the primary markets as issuers will be deterred from selling bonds," said one DCM head in Bangkok. Efforts to tighten investor protection come as Thai high-net-worth investors are showing increasing appetite for higher-yielding bonds, despite a spate of defaults in short-dated paper called bills of exchange.
Some 10 companies have defaulted on bond payments in 2016-17, of which an estimated 15 billion baht ($459 million) was still unpaid at the end of September, much of which was in bills. The default rate, however, is still low, equal to around 0.46 percent of Thailand's 3.2 trillion baht total outstanding corporate bond market. The SEC and Thai Bond Market Association are worried that yield-hungry investors are taking on risks they do not fully understand. The SEC recently reminded equity investors to study the prospectus carefully before subscribing to an initial public offering, and similar warnings are being given for bond investors.
In a statement released in early November, SEC Assistant Secretary-General Charuphan Intararoong said debt issuers had recently "used the channel for offering to a limited number of investors for the wrong purpose by extending such offer to high-net-worth investors who knew little information on the issuer". The new rules will be implemented in two stages on April 1 and July 1, said the SEC spokesperson. The new regulations also address HNWI investments in short-term bills of exchange, limiting private placements to no more than 10 investors and requiring bond representatives if bills are sold to HNWIs, among other restrictions. From July, the SEC is mooting a total ban on sales to HNWIs and the public.

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