SGX has done its best with SDRs – now it’s up to the public to respond
IT HAS been about two months since Singapore Depository Receipts (SDRs) on three Thailand-listed companies commenced trading on the Singapore Exchange (SGX). Local trading volume has been modest so far, but this is perhaps to be expected, given that it is still early days and spreading investor awareness here takes time.
Whatever the case, it is important that the authorities press ahead with their plans to introduce more foreign-listed SDRs from around the region, in order to broaden the range of available stocks to local investors.
In the case of the Thai SDRs, each represents beneficial interest in the underlying non-voting depository receipt (NVDR) on shares of a company listed on the Stock Exchange of Thailand (SET).
An NVDR is an instrument issued by SET subsidiary Thai NVDR, to facilitate trading by reducing the barriers of foreign ownership limits. NVDRs themselves are listed and traded on the SET.
SDR holders are entitled to the economic benefits afforded to those who hold the actual underlying shares, such as receipt of dividends declared, but are not eligible to directly exercise voting rights.
However, an SDR is fungible with the underlying shares through an issuance and cancellation process. Through their broker, an investor may request for conversion of SDR into underlying securities, and vice versa. The time frame for conversion is estimated at three common business days during which SGX and SET are open.
The SDR initiative has clearly been well-conceived and executed. First and most important, the stocks selected appear to be of good investment grade, since all three Thai companies are constituents of the benchmark SET 50 index.
This is important because in the two previous periods when foreign companies featured on the local exchange, most were of dubious quality with major governance concerns.
The first was when about 200 Malaysian stocks were hurriedly selected to trade on an over-the-counter segment of the local market known as Clob International, following the split between the joint Singapore-Kuala Lumpur Stock Exchange in 1990.
As most were speculative and lacking in genuine fundamentals, their prices were mainly driven by rumours and hearsay. All crashed to near-worthless status in 1998 when the Malaysian authorities declared Clob an illegal market at the height of the Asian regional crisis, and ordered the migration of all shares back to the Kuala Lumpur Stock Exchange.
The second was what has now become known as the infamous “S-chip saga”, when China companies were brought in en masse from 1999 to fill the void caused by Clob’s collapse.
Again, most were of poor investment grade. Once fraud and accounting irregularities began to emerge from 2003 onwards, the entire sector crashed, once again to near-worthless levels.
A second reason to hope that SDRs will take off is the availability of good, objective research. Thus far, Phillip Capital has been providing coverage for the three Thai SDRs, and hopefully more local houses will weigh in.
Third, it is good to see local brokers advertising the initiative, with some such as CGS-CIMB even offering commission rebates for trading the SDRs.
Fourth, SDRs have been classified as excluded investment products, which means they should be easily understood by retail investors and can be traded with no restrictions.
It seems the authorities have pulled out all the stops to ensure that the SDR initiative succeeds, by offering local investors exposure to possibly the best companies from around the region. It is now up to the investing public to respond.
