Soaring an awe-inspiring 116 percent, the Stock Exchange of Thailand was the world’s best-performing market in 2003. But success and speculative excess weren’t too far apart, prompting one local observer, Kanjan Spindler, a veteran columnist at the English-language Bangkok Post, to fret that the bourse had become “the best-performing casino in the world.”
Now Thirachai Phuvanat-naranubala, the head of Thailand’s Securities and Exchange Commission, wants to take some chips off the table in a drive to tone down the country’s notoriously volatile, retail-driven markets. In an interview with Institutional Investor, Thirachai says his agency is scrutinizing stocks whose price movements or trading patterns suggest possible manipulation and will clamp down hard on brokers whose clients dare to skirt the rules. “If any broker doesn’t toe the line, we will come down with all our weight,” he says, threatening to seize assets if necessary.
A former deputy governor of the Bank of Thailand, Thirachai came to office in January with a broad agenda of reform. He is determined to stiffen Thailand’s lax corporate governance system, pushing for greater transparency and accountability. Among other plans, he wants to have outside experts verify that votes at annual shareholder meetings are fair and ensure that investors understand complicated transactions, particularly those among Thailand’s many closely affiliated companies. These deals, Thirachai notes, are often thinly disguised attempts by directors and executives to borrow company money to fund personal projects.
“I’m amazed when I find out that shareholders approve these things. They aren’t getting enough information,” says the 52-year-old regulator, who spent much of his career at the central bank overseeing banks and other financial services companies.
The need for reform is clear. Thailand has paid a price for its stock market trading and governance shortcomings. Deep, smoothly functioning markets are crucial to sustainable long-term economic development. But Thailand’s markets continue to be a punter’s paradise. In an overwhelmingly retail market, day traders increased their activity sevenfold in the second half of 2003, accounting for up to a third of SET volume at times. That’s an eerie reminder of the past: Driven by speculative retail buying, the market soared nearly 600 percent in the six years before 1994, then lost nearly 90 percent of its value by 1998. The government shuttered 56 financial institutions, mostly lenders to real estate speculators who leveraged themselves to the hilt by selling shares to stock market investors. Since then big foreign institutions have mostly stayed away, depriving Thailand of the liquidity and stability that would allow more local companies or the country itself to fund important projects.
But implementing Thirachai’s ambitious program will require a deft touch. Prime Minister Thaksin Shinawatra has opposed broad-based market reforms for fear that they might undermine his aggressively stimulative economic approach, which produced remarkable 6.7 percent GDP growth last year. Thaksin has said repeatedly that he wants to target individuals or specific companies that are breaking the rules rather than force everyone to comply with more onerous regulations that might curtail trading. “The prime minister is very concerned with how the market does because it’s a broad barometer of confidence in the economy,” says Thanong Khanthong, business editor of The Nation, another local English-language newspaper.
Thirachai lacks a political base of his own, and Thaksin, a billionaire who founded the country’s most successful mobile phone company, Advanced Information Services (part of his family’s Shin Corp.), isn’t shy about confronting his own ministers. He has shuffled his cabinet eight times in just over three years in office. He fired respected Bank of Thailand governor Chatu Mongkol Sonakul in 2001 in a dispute over interest rates; publicly blasted Thirachai’s predecessor, Prasarn Trairatvorakul, when he pushed too hard on reforming Thailand’s markets; and in March returned deputy prime minister Somkid Jatusripitak to the job of finance minister, where he had been replaced a year earlier by Suchart Jaovisidha. The finance minister serves as chairman of the SEC’s board and is technically Thirachai’s boss. If he could muster the votes from his fellow board members, Somkid has the power to unseat Thirachai.
Much of the investment community and the Stock Exchange of Thailand are wary of radical reforms that could cut commissions or frighten away potential listees. “There are two camps,” says The Nation’s Thanong. “The regulators and then the others, like the prime minister and SET officials and investors and brokers.” Even the regulators aren’t united: The stock exchange, which has opposed several of the SEC’s proposed reforms, shares many of its securities oversight duties. A third entity, the economic crime division of the Royal Thai Police, is empowered to investigate and prosecute any market-related abuses it detects.
Before Thirachai even had a chance to settle into his new job, he got a taste of the difficulties ahead. In early February he announced that the SEC would follow through on an earlier initiative and require that investors put up a 10 percent cash deposit on security transactions at their brokerages to rein in speculation abetted by a net settlement system that permits day traders to buy and sell shares without putting any money down. A few weeks later Finance Minister Somkid, in his first day on the job, arranged a meeting at the stock exchange with Thirachai’s staff; Vijit Supinit, Thirachai’s former boss at the Bank of Thailand, who now heads the SET; and several senior trade association officials representing brokers and investors. When the brief morning get-together concluded, Thirachai’s planned implementation date of April 1 had been pushed back to July; more important, it was decided that the 10 percent rule would apply only to stocks where there was evidence of speculation or manipulation.
“Adjustments in regulations are normal, but they must be done in a way that the public understands,” Somkid told reporters after the meeting.
Thirachai’s predecessor also ran into roadblocks. In November previous SEC chief Prasarn had first proposed tackling speculation with the mandatory 10 percent down payment to trade any stock. The SET index promptly lost 6 percent of its value, and Thaksin issued what The Nation called a “sharp rebuke of the SEC,” arguing that the rule was too broad and would harm the stock market. Prasarn tabled his proposal and shortly thereafter said that he would retire in mid-December. A longtime SEC employee who helped guide the agency through the brutal period just after the country’s economy and markets completely collapsed in 1997 following a prolonged speculative binge, Prasarn left with little public acknowledgement of his service.
Thirachai, however, is determined to push ahead with his own ambitious set of market and governance reforms. “My efforts toward greater transparency and governance are still very much on course,” he tells II. “I will certainly make an impact, but I’m not certain I will survive.”
Thirachai, who attended the London School of Economics on a Bank of Thailand scholarship, has high regard for Prasarn. Criticism of his predecessor was “unfair,” says the new SEC chief. “Dr. Prasarn was certainly moving in the right direction.”
One of Prasarn’s key targets was Thailand’s shoddy corporate governance rules, which Thirachai also believes are “the biggest point to deal with.”
In April 2003 the SEC, under Prasarn, charged Poosana Premanoch, the former managing director of mobile phone operator Total Access Communications, and Ajchara Boonsajai, a former director, with diverting 118.3 million baht ($31.3 million) in 1999 from a corporate account that was supposed to be part of a security deposit to buy property for TAC. According to the SEC charge, they used the 118.3 million baht to purchase a 30.7 percent stake in the available float of local insurer Interlife John Hancock Assurance (an affiliate of the U.S.'s John Hancock Life Insurance Co.), which they later sold at a profit. The two then returned the 118.3 million baht to TAC’s account, says the SEC, but pocketed the profit, which the agency alleged was an “unlawful gain.” The two denied the charges, according to the SEC, which plans to pursue the matter in court.
Prasarn didn’t just try to bring corporate executives to justice. Early in his term he suspended several public auditors who, he charged, were covering for clients’ dishonest accounts, and in March 2000 he established the Institute of Directors to train board members in best practices. He reduced the percentage of shareholder votes needed to call an extraordinary general meeting from 25 percent to 5 percent, so that minority stockholders could more easily force executives to explain important decisions in a public forum. And he set up an arbitration board to hear small investors’ complaints about unfair treatment from companies.
“Not every investor has the resources to go to court,” says Prasarn, who now runs Kasikorn Bank (formerly known as Thai Farmers Bank), one of the biggest lenders in the country. “Our approach was to empower them rather than to protect them in every respect.”
The near lack of corporate governance, coupled with a weak legal system and restrictions on overseas stockholders, has hindered Thailand’s ability to attract needed foreign capital. In 2002 the California Public Employees’ Retirement System, with $164 billion in assets, declared it would no longer invest in Thailand, citing worries about corporate transparency and human rights abuses. Reluctant foreign investors also point to Thailand’s 2003 finish in a tie for 70th (out of 133 countries) in research group Transparency International’s global corruption perception index. The ranking puts Thailand on a par with Bosnia-Herzegovina, the Dominican Republic, Egypt, Ghana and Morocco.
Critics also question the effectiveness of the SEC, which some feel has too often made broad-based allegations of misconduct that result in just a handful of prosecutions and even fewer convictions. In the early 1990s Song Watcharasirot, also known as Sia Song, became famous for getting wildly rich in Thailand’s booming stock market. In 1993 the SEC accused Song and a group of cohorts of manipulating the shares of Bangkok Bank of Commerce, a midtier bank, using a variety of brokerage accounts under different names. The SEC’s charges, however, didn’t hold up in court. The Supreme Court cleared Song of any wrongdoing in 1996.
Bangkok Bank of Commerce was at the center of a number of alleged swindles that eventually forced Thirachai’s current counterpart at the Stock Exchange of Thailand, Vijit, to resign as head of the central bank. Some of Bangkok Bank of Commerce’s customers, including members of the Thai cabinet, were allowed to borrow huge sums of money secured by land that subsequent government inquiries found to have been grossly overvalued; the funds were used to play the market and to attempt corporate takeovers. The bank was stuck with about $3 billion worth of nonperforming loans, and the government shut it down in 1996. Parliamentary investigations determined that Bank of Thailand officials, including Vijit, had been aware of the burgeoning bad debts but failed to take action. Amid harsh criticism of the central bank’s regulatory controls, Vijit stepped down as governor of the central bank, once one of Thailand’s most respected institutions, in July 1996. A committee set up by the Thaksin administration later cleared Vijit, a longtime political supporter of the prime minister, of any wrongdoing during his six-year governorship. (Vijit declined an interview request from II.)
In the aftermath of so much financial devastation and scandal, Prasarn tried to bolster the Thai market’s image and standing by taking aim at the speculative trading at the SET, most recently as practiced by the bourse’s many day traders. Among their favorite ploys is to buy a single stock several times, creating the illusion of widespread investor interest and driving up the price. Sometimes a buyer will try to facilitate the price hike by spreading rumors about the likelihood of an exciting new development at the company. In any case, the idea is to dump the shares with a profit at day’s end and use the generous net settlement rules to avoid leaving any of one’s own money with a broker, according to SEC officials.
The practice can make the SET volatile, says Mark Mobius, who heads Templeton Emerging Markets Group. “The speculation as a result of day trades based on credit could result in extreme market movements,” he says. Mobius, who runs several emerging-markets funds that total about $13 billion in assets and owns several hundred million dollars worth of Thai stocks, says that “caution is the watchword” when buying the shares.
Last September Prasarn announced that the SEC was investigating 11 of the stock exchange’s 50 most actively traded stocks because of suspicious price movements and was considering prohibiting day trading or net settlements for those shares. “Our analysis showed that if we didn’t put a check on this speculation, there would be a risk the system would be vulnerable to failure,” he says.
In the end, however, only two people, Orapin Leophairatana, a former director of debt-ridden cement maker TPI Polene (a subsidiary of Thai Petrochemical Industry Group of Cos.), and her secretary, were accused of stock manipulation. Their case, based on an alleged attempt to influence the price of TPI Polene shares, is still pending.
When Prasarn followed up this initiative with his deposit proposal in November, he didn’t anticipate the fiery response from Thaksin or the marketplace. “We underestimated the objections from the SET and the prime minister,” he says.
Though his efforts didn’t endear him to the Thaksin administration, Prasarn did make some progress with overseas investors. CalPERS, with the help of consulting firm Wilshire Associates, rates all emerging markets on a zero-to-three-point scale (three being the highest standards) based on an assessment of seven factors that range from transparency to market liquidity and volatility to political stability and labor practices. The fund will not invest in any market with a composite score below two. Thailand remains on CalPERS’s forbidden list along with countries like Indonesia, Morocco, Pakistan and Sri Lanka. But in its most recent report, issued in February, CalPERS gave Thailand a 1.99, up 0.28 points from early 2003 and just a hairbreadth from its investment threshold.
“They’re moving in the right direction and are pretty close. If they continue to progress, they’ll get well past the finish line,” says a CalPERS spokeswoman.
Working in Thirachai’s favor, economic circumstances are far better than those that Prasarn endured. In 1999, Prasarn’s first year in office, Thailand was still trying to dig out from the devastating collapse that saw the SET index sink from a high of 1,789 in 1994 to 209 in 1998, as a speculative real estate bubble popped and Thailand spread the Asian flu. Local GDP contracted by 10 percent, 2 million Thais were thrown out of work, and the International Monetary Fund had to step in with a $17.4 billion rescue package. The government also fell.
In contrast, Thirachai inherits a market and an economy on the upswing. That has given some analysts a renewed burst of confidence. At about 700 in April, the SET index has climbed less than halfway back to its 1994 peak. “No way this is a bubble,” says Andrew Stotz, head of equity research at ING Securities in Bangkok. “We’re in the early stages of the cycle, and I don’t see it ending anytime soon. I’m maximum bullish.” Even ex-regulator Prasarn says today’s market contains only “small bubbles” of excessive speculation in some corners. Most of the gains, he says, are attributable to Thailand’s remarkable economic turnaround under Thaksin.
Thailand is undergoing a burst of private consumption thanks to rising prices for rice, rubber and other commodities, low interest rates and a surge in exports, particularly to China, which gobbled up 60 percent more Thai goods in 2003 than in 2002. The economy’s 6.7 percent rise in 2003 trailed only China’s in Asia. Thaksin is promising 8 percent GDP growth in 2004 and 10 percent in 2005.
The prime minister’s populist agenda is greasing the gains. Among his initiatives: a public health scheme in which any visit to a government hospital costs only 75 cents; a so-called People’s Bank that provides loans of up to $384 to small businesses that can’t get credit from commercial banks; the suspension of farmers’ debts for three years; and the doling out of $23,000 in loans to each of Thailand’s 77,000 villages, ostensibly as seed money to help them start businesses.
The big run-up in stock prices is “a rerating from a distressed to a normal market,” says ING’s Stotz. Albeit with a little more risk. In 2001 the average price-earnings ratio for Thai shares was five; Stotz’s projected average for 2004 is 13, which could grow to 17 or 18 in the next few years, he says.
It’s Thirachai’s job to ensure that this optimism doesn’t translate into rampant speculation that could drag the economy down again. He must do that without disturbing Thaksin’s recovery program. “The fundamentals attract investors, but we have to make sure there are no worms eating away at the apples,” says Thirachai.
The new SEC chief says he has already moved beyond the setback on the 10 percent deposit. The agency is currently working with a local accounting trade group to develop new financial reporting guidelines and has organized a steering committee that will review corporate filings to see that minority shareholders’ interests are respected. It has also created a second review group to force corporate directors to comply with existing laws. Directors who don’t appear to be following the rules will be brought in for interviews and possible sanctions, says Thirachai. The SEC is also working on a legal amendment to permit shareholders to sue directors. Thirachai asserts that the SEC has the legal and political wherewithal to improve Thailand’s trading and governance practices.
“I will use all the administrative powers we can engineer,” he vows.
By avoiding some of Prasarn’s unilateral pronouncements that spooked the markets and Thaksin and working closely with SET chairman Vijit, Thirachai says he can get results. “Past secretary generals got high marks for effort but weren’t able to accomplish all they wanted. I want to be effective.”
Observers, however, remain skeptical about just how far Thirachai can go. “He’s obviously facing big political risks,” says economist Chris Baker, co-author of Thailand Boom and Bust, a book about the country’s occasional excesses. “The message in sending Somkid back to the Finance Ministry is that the government will simply overrule whatever measure it doesn’t like. Thaksin and company think they can guide and work with Thirachai because he doesn’t have a political base. But if he decides to really take a stand on issues, then ultimately, he faces the risk of being replaced.”
The new SEC chief says he’s not worried. He would not have taken the job, he explains, without assurances from Thaksin that the prime minister wanted clean, orderly markets. And by most accounts, Thaksin, even after his finance minister pruned the SEC’s deposit plan in March, still supports his senior market regulator. It’s less clear whether Thirachai can count on Thaksin’s backing if he reaches for bold reforms that would attract foreign investors but rattle small investors and listed companies or undermine near-term economic confidence.
