A regulation announced by the Securities and Exchange Commission ("SEC") on 29 March 2012 will eliminate the existing exemption that allows banks and certain other types of financial institutions ("FIs") to issue long-term bills in a public offering without having them regulated as securities.
Unlike most companies, FIs and banks have historically been exempt from regulations prohibiting the offering of long-term bills, (bills with maturity exceeding 270 days) in a public offering, as these bills were not classified as securities.
On 2 July 2012, however, this exemption will cease. The day after the 1 July bank holiday, the new SEC regulation will become effective, prohibiting FIs and banks from offering long-term bills to their customers, since these bills will now be considered securities under the law. FIs and banks must now play by the same rules as other companies and will unfortunately lose out on a significant source of fund raising. However, it isn't all bad news.
Below is quick guide for companies, banks, and FIs that are looking to offer (i) long-term bills and/or (ii) bills to the public while complying with the new regulations, as well as a new opportunity for banks in the derivatives sector.
Offerings of long-term bills
According to the SEC regulations, after 2 July 2012, FIs and banks will be required to offer long-term bills exclusively to institutional or high net-worth investors or offer a total number of bills not exceeding 10 (excluding those offered to institutional and high net-worth investors but including outstanding bills Baht).
The following are some key required characteristics of long-term bills being offered:
- Face value: the bill offering must not be less than THB10 million per bill, except in an offering where the total number of bills to be issued, plus any outstanding bills, does not exceed 10, as described above.
- The following statements must appear on the face of the bills: (a) "these bills are securities and have been granted approval to be offered by private placement," (b) "non-negotiable," and (c) if the issuer is an FI, "these bills are not insured by the Deposit Protection Agency."
- The following statement must appear on the back of the bills: "without recourse except for the case where the transferor expresses her/his intention otherwise."
- Benefits from the bills: no derivatives embedded.
Offerings of bills to the public
All issuers will be restricted to offering short-term bills when making a public offering. Characteristics of the bills are similar to those of bills offered by private placement, except that the statement in item 2(a) above must be replaced with: "these bills are securities and have been granted approval to be offered in a public offering."
Opportunity: New underlying factors for derivatives debentures
This SEC regulatory reform will restrict institutions like banks from issuing structured notes (in the form of promissory notes and bills of exchange) to retail investors. In light of this reform, the derivatives debenture will emerge as the best alternative structured product for Thai banks to market to retail investors.
In return for these strict prohibitions that essentially eliminate structured notes from retail markets, a new regulation announced concurrently with the regulations on long-term bills adds interest rates to the list of acceptable underlying factors of derivatives debentures.
This will offer more flexibility to banks that issue these products because in order to offer derivatives debentures, an issuer must submit an application to the Office of the SEC specifying underlying factor(s) of the debentures. The SEC must then consider whether such factors qualify them for public offering. Unlike the new requirements for bills which become effective on 2 July 2012 however, this opportunity is available now.
A new playground for banks and sophisticated investors
There is growing speculation that the SEC is considering new regulations that will allow specific types of companies to offer structured products to specific categories of investors. Baker & McKenzie will continue to provide updates should further developments occur.