On 1 August 2016, a new regulation of the Capital Market Supervisory Board (CMSB) governing securities underwriting activities1 (the "New Regulation") came into effect, overhauling another regulation of the CMSB implemented in 2009. The New Regulation governs securities underwriting in a number of ways, including allotment procedures, the operations of a securities underwriter (e.g. dealing with subscription amounts, dissemination of information, and dealing in securities while acting as a securities underwriter), and characteristics that prevent an operator from acting as a securities underwriter. The New Regulation covers debt instruments, shares, share warrants, derivatives warrants, units in real estate investment trusts (REITS) and infrastructure trusts (IFTs). In this second half of our series of client alerts on the New Regulation, we cover regulatory developments in the underwriting of shares and units in REITs and IFTs.
Units subject to the New Regulation
Debenture warrants and Thai non-voting depository receipts were removed from the definition of "securities" under the New Regulation. Key reasons for the removal are that there have been no debenture warrants on the market, and the underwriting process for Thai non-voting depository receipts is significantly different from that for securities that are subject to the New Regulation.
Furthermore, the New Regulation also adopts requirements that were applicable to the underwriting of shares in the previous regulation to the underwriting of REITs and IFTs. We will first look at the new requirements applicable to the underwriting of shares, before looking at those for IFT and REIT units.
More stringent criteria for acting as an underwriter
Previously, the sole characteristic that prevented an operator from acting as underwriter of shares was being a parent company or a subsidiary of the issuer or the selling shareholder (the "Offeror"). The requirement is put in place to prevent conflicts of interest. Adapting the qualifications for acting as a financial advisor, the New Regulation provides a new set of criteria for considering whether there are any conflicts of interest between the Offeror and underwriter, thus preventing the latter from acting as such. Please see the table below for these criteria.
Click here to view table.
In considering certain criteria, the New Regulation contains an interpretation provision so that references to a person or their shareholding also includes their related parties, such as major shareholders, authorized directors, and persons mentioned in item 3 in the table above, and their shareholdings. In particular, the New Regulation requires that shares that a person may acquire as a result of their exercise of rights in convertible securities shall be included in the shareholding calculation in items 1 and 2 in the table above as well. Given this, special attention and proper due diligence should be exercised at the very beginning of the preparation process for each transaction.
As the new criteria may lead to unintended consequences, they may be exempted in case of participation by certain government-related entities, such as government authorities and non-listed state-owned enterprises. The Office of the Securities and Exchange Commission also has the power to grant a waiver of the criteria.
The criteria above also applies to the underwriting of trust units. In determining whether there are any relationships that would constitute a conflict of interest, one must consider relationships between the person to be appointed as underwriter and the person or entity who will transfer assets to the trust instead of the Offeror.
More relaxations of restrictions on allocation of shares or trust units
The relaxation is provided in different ways. Previously, a mutual fund in which more than 50 percent of units were held by an underwriter or its restricted persons was considered a restricted person, and was not entitled to the allocation of shares or REIT units underwritten by the underwriter. This requirement was deemed obsolete, as mutual funds also have to comply with investment requirements, and the New Regulation removes mutual funds from the list or restricted persons accordingly.2
The New Regulation also provides relaxations if the restricted person is a fund or an institutional investor, including life and non-life insurance companies. To be eligible for the exemption, the restricted person must meet other conditions prescribed under the New Regulation. It is also subject to the allocation limit of not more than 25 percent of the total offered shares, and the allocation to the restricted person must be disclosed in the registration statement and prospectus.
The restriction on the allocation of shares and the exemption thereof apply to the allocation of trust units as well. However, the New Regulation provides a lighter allocation limit for trust unit offerings, allowing up to 50 percent of the total offered trust units to be allocated to the sponsor, its related persons, and restricted persons who qualify for the exemption.
Trading restriction expands to trust units and includes trading by management and employees
The New Regulation adds trust units to the list of restricted securities that an underwriter cannot trade. Restricted securities in each transaction vary, depending on the type of the securities that an operator is underwriting. However, a few exemptions for dealing in restricted securities are added to the New Regulation. These include trading that occurs as a result of the restricted person holding a position in derivatives contracts which were entered for hedging purposes (previously, the underwriter could only trade restricted securities if that underwriter was an issuer of securities for which the underlying assets were restricted securities). Dealing in the shares of either SET 50 constituents or SET 100 (those ranked in Nos. 51 – 100) constituents is also allowed, provided that certain prescribed conditions are met.
The New Regulation also prohibits the underwriter in an initial public offering from selling relevant shares or trust units from the subscription closing date until 15 days after the listing of the securities, unless an exemption in the New Regulation applies.
Another new requirement is that the underwriter has the obligation to ensure that its management and employees who are involved in the underwriting task also comply with the trading restrictions. It can be challenging to prove compliance with this requirement. Simply notifying the management and employees of the requirement may not be sufficient (another provision which requires related securities companies of the underwriter to comply with the trading restriction clearly states that the underwriter must notify the related securities companies of the obligation to comply). A suggested action is to have the underwriter's management and employees acknowledge the restrictions in writing.