As the Thai stock market faces a downturn, Thai investors have shown increased interest in depositary receipts (DRs), which offer the same tax benefits as Thai stocks while providing access to foreign securities. However, recent speculation in the media has raised concerns among regulators and the market, raising questions about whether DR issuers actually hold the underlying foreign securities purported to be backing the DRs. This has brought the structural integrity of DR programs under scrutiny.

Why This Question Matters

In global practice, DRs are understood to be backed by the foreign securities they reference, giving investors economic exposure that closely mirrors direct ownership. When the issuer does not hold the underlying securities directly, the risk profile shifts to the strength of its custodial, hedging, and liquidity arrangements. Those arrangements determine whether DR holders receive equivalent economic and voting rights, how corporate actions are transmitted, and whether conversions or redemptions can be completed in full and on time. In Thailand, the standardized DR disclosure templates and the express allowance for global custodians indicate a regulatory focus on transparency and structural safeguards that preserve these outcomes, even if the issuer’s name does not appear on the foreign share register.

Thai Rules for DR Offerings

Thai DR offerings are governed by specific Securities and Exchange Commission (SEC) notifications and standardized prospectus forms. These instruments establish the disclosure regime for DR structures, risk factors, and the issuer’s arrangements to support the DR program.

The framework expressly contemplates the use of a global custodian, indicating that DR issuers are not required to hold the underlying foreign securities directly in their own name if sufficient controls and operational arrangements are in place for the issuer to deliver economic benefits and, where applicable, underlying securities to DR holders when required.

More broadly, the relevant SEC notifications and DR disclosure forms do not expressly require that the DR issuer hold legal title to the underlying foreign shares in its own name but instead look at the issuer’s ability to ensure continuous and adequate backing of the DRs. This means that the regulatory framework recognizes custodial structures and intermediary holding structures, including the use of a global custodian, provided that the DR issuer can deliver the economic and other rights disclosed to investors and perform on investor redemptions and corporate action pass-throughs as represented.

The law prioritizes functional outcomes and investor protection. It requires the issuer to establish and disclose robust mechanisms to ensure that a sufficient number of foreign securities are maintained to support all outstanding DRs. These safeguards must be sufficient to pass through economic benefits (e.g., dividends) and facilitate redemptions as represented to investors. The focus is on the issuer’s demonstrable ability to perform its obligations, backed by transparent and enforceable arrangements.

Based on this requirement, arrangements relying solely on derivatives to replicate economic exposure may not align with the SEC’s intended structure for DRs.

Bottom Line

Thai law does not strictly require a DR issuer to be the direct legal owner of the underlying foreign shares. Instead, it permits structures, including those using global custodians, that ensure the issuer can deliver to DR holders the economic benefits and other rights associated with the foreign shares. The regulations prioritize investor protection and functional equivalence, requiring robust, transparent, and enforceable arrangements to support all outstanding DRs.

From an investor’s perspective, understanding the accounting treatment is important, though the specifics depend on the DR program’s structure and require expert analysis under Thai Financial Reporting Standards (TFRS). Generally, if an issuer acts in a custodial or agent capacity, the underlying foreign shares and the DRs may not be recorded as gross assets and liabilities on its balance sheet. Instead, the issuer might only recognize specific pass-through obligations with relevant disclosures. Conversely, if the issuer holds the shares for its own account and has an unavoidable obligation to DR holders, the shares and DRs could potentially be recognized as financial assets and liabilities, respectively. The ultimate treatment is a technical accounting matter.

Market discussions about a potential SET-facilitated central custodian are ongoing. The SET may need to assess the feasibility of this approach, as it could reduce reliance on individual brokerage houses or the global custodian model, in line with practices in other established offshore markets, and help further streamline and strengthen Thailand’s DR framework.