Commentary: SDRs: Is this another CLOB?

Date: May 25, 2023

Almost 25 years after Malaysian shares abruptly ceased to be traded in Singapore in an episode that has become known as the infamous CLOB International saga, local stock exchange officials are launching a new, but roughly similar initiative that will allow investors here to gain exposure to companies listed not in Malaysia this time, but instead on the Stock Exchange of Thailand (SET), through a novel instrument known as a Singapore Depository Receipt (SDR).

However, although the intention of launching SDRs is the same as CLOB, namely they are meant to broaden the scope of investments available in the Singapore market to include overseas-listed companies, that is where the similarity ends.

First, CLOB was not recognised by the Malaysian authorities as an official market for Malaysian shares as it was an over-the-counter (OTC) segment that was launched hurriedly in 1990 after the split of the Kuala Lumpur-Singapore stock exchange.  In this case, both the exchanges, SET and SGX, stand ready to help resolve any problems investors may face.

As such, it had to be eventually shut down in 1998 during the height of the Asian Financial Crisis when the Malaysian government declared CLOB to be an illegal market and ordered the migration of all shares back to the KL stock exchange.

In contrast, SGX is launching SDRs with the blessing of the Securities and Exchange Commission of Thailand under the Thailand-Singapore DR (Depository Receipt) Linkage between SGX and SET that was announced in 2021.

Furthermore, more links can be expected with other Asean exchanges, all with the approval of the respective regulators.

Second, unlike stocks traded on CLOB that were mainly speculative second-liners, the three that have been selected for the initial launch on 30 May, namely Airports of Thailand, food retailer CP All and energy play PTT Exploration & Production, are all large cap blue chips which are constituents of the benchmark SET50 Index.

There is also every reason to believe that future SDRs will be issued on similar large quality companies whose shares are actively traded on the SET. In other words, instead of low-quality, pure speculative plays which comprised the bulk of CLOB shares, the new link with the Thai market should see Singapore investors able to gain exposure to the best companies on the SET.

Some technicalities

From a technical perspective, investors should note that an SDR is an unsponsored depository receipt that gives its holders only beneficial economic interest in underlying securities.

In the case of Thai SDRs, each represents beneficial interest in the underlying Non-Voting Depository Receipt (NVDR) on shares of a company listed on the SET.

An NVDR is an instrument issued by the Thai NVDR Co, a subsidiary of the SET, to facilitate trading by reducing barriers of foreign ownership limits. NVDRs are listed and traded on the SET.

Although SDR holders are entitled to the economic benefits afforded to those who hold the actual underlying shares such as receipt of dividends declared, they 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.

Last but by no means least, the treatment of SDRs will be the same like any other shares traded on SGX – the custodian will be the Central Depository (CDP), clearing and settlement will be according to SGX’s current practices and broking fees will be the same as for other stocks. In addition, market makers will ensure adequate liquidity.

Why Thailand?

According to an MAS estimate disclosed in Nov2021, Thailand is one of the top three overseas markets chosen by individual investors in Singapore, based on revenue that local retail brokers derived from various securities markets.

What about research?

According to SGX, it will partner with brokers to publish analyst reports on the companies selected on its website.

Will the initiative succeed?

Since the closure of CLOB, there have been significant developments in global capital markets. Unsponsored depository receipts are today common in many international markets, including in the United States and Europe and are widely accepted as a valid means of allowing foreign investors exposure to local stocks.

Moreover, SDRs have been classified as Excluded Investment Products, which means they should be easily understood by retail investors. However, investors should know that this does not mean they are low risk – you will still have to do your homework and understand the companies before investing by reading the annual reports of the companies which will be available in English.

Given the time and effort taken by authorities from both countries to formulate this initiative and the quality of companies chosen, there is every reason to expect the SDR initiative to succeed. This is clearly not another CLOB!


David Gerald
Founder, President & CEO