Chapter on Clob to close with little impact


  • Business
  • Saturday, 04 Jan 2003

By PAULINE S.C. NG

THE Central Limit Order Book, known fondly or otherwise as Clob, will soon be put to rest. Scheme B of the Clob solution, implemented on Dec 31, marks the final denouement of a saga most will only be too happy to see buried for good. 

Under Scheme B, some 166 million shares, with a total value of RM293 million, would be released for trading on the Kuala Lumpur Stock Exchange (KLSE) on a weekly basis, over a nine-month period ending Sept 29, 2003.  

The release of the Clob securities is expected to have minimum impact on the KLSE as it represents a mere 2 per cent of all Clob securities, or a fraction of the 98 per cent released under Scheme A.  

Market players agree. Observes one: “The amount staggered to be released under Scheme B is so small it’s very unlikely to have an impact.”  

As it was, Scheme A was a total non-event where impact was concerned. Contrary to earlier fears that the release of such a huge number of securities would result in market volatility, the Clob shares hardly caused a ripple in the market. 

It helped that the release, which began on July 3, 2000, was staggered over a period of 56 weeks until July last year.  

“In the first batch, the market was bad, most people just hung on to their shares. And then prices fell even more,'' the market player says.  

Well, the market is even quieter these days. Year-on-year, it closed at 646, a hefty 50 points or 7 per cent lower than in 2001. 

Regional markets haven't fared all that much better either. Singapore's market ended 2002 at 1,341 points compared to its close in 2001 of 1,624.  

There has been little to excite market-wise, on both sides of the causeway. On the other hand, spats between Malaysia and Singapore over various issues continue.  

By most accounts, Singaporeans are still sore on a number of issues, Clob being one of these.  

“Many of them have vowed never to buy Malaysian shares again,” says a Singapore-based dealer who feels that Malaysia's actions in the Clob controversy has lost it “a valuable chunk” of Singapore's retail market. 

But investors and punters are the same everywhere. They will be back in the KLSE “if it has a prolonged bull market and not one where it takes back all it gives,” adds the dealer. “If there are opportunities to make money, things could be different.”  

While he thinks there is a need to get Singaporeans to look at the Malaysian market more seriously, he also feels they are cautious about sudden changes in policies. “There was some interest earlier last year when the market was good, but when we asked the remisiers, only 10 per cent to 20 per cent had actually bought any stocks,” says the dealer.  

Whatever one's feelings about Clob, it is undeniable Singapore investors still harbour a great deal of bitterness over its demise. 

But what choice did the Malaysian authorities have in the financial crisis of 1998, but to make the over the counter exchange defunct? 

In early August 1998, the National Economic Action Council (NEAC) wrote to the Stock Exchange of Singapore, suggesting that it was perhaps time to consider closing Clob down. 

The NEAC said that when the Kuala Lumpur and Singapore stock exchanges separated in 1990, it was the understanding that the Stock Exchange of Singapore (SES) would allow Clob to operate for a while with a view to closing it in a few years. “Eight years have passed and perhaps now is a good time to consider closing it down since at this point it won't be missed,” NEAC said. 

At that time, some 129 counters were traded on Clob, of which 112 were Malaysian stocks. NEAC pointed out the continued existence of Clob undermined the KLSE as it allowed the unbridled shorting of Malaysian shares by Clob's foreign participants. 

The SES said by way of reply that it had no intention of doing away with Clob and that stock exchanges around the world were in fact increasingly facilitating cross-border trade. It maintained there had been no significant short selling of Malaysian shares on Clob, as was evidenced by the little buying-in of these shares by the SES. 

Weeks later, the Malaysian government decided to flex its sovereign muscle, choosing to do it on the National Day. In a press conference, the KLSE announced new rules that would ensure all shares listed on the KLSE were traded on the exchange itself, or through a stock exchange recognised by it.  

It pointed out that as Clob was not a recognised exchange, shareholders of Malaysian listed companies should register their shares with the Malaysian Central Depository Sdn Bhd. The KLSE maintained the new rules were intended to improve overall market transparency and to ensure an orderly and fair market in the trading of Malaysian securities.  

But more was to come. A day later, the government shocked global financial markets with its sudden announcement of sweeping foreign exchange controls which it defended as necessary to prevent currency speculators from wrecking further damage to the ringgit and Malaysian economy.  

The result of the moves was many. But for Clob that had survived previous crises – such as when the KLSE was working towards a deadline to become completely scripless – it was the end of the road.  

At that juncture, many in the private sector jostled to come up with solutions for the Clob impasse; for about 21 months, some RM10.5 billion worth of shares belonging to 170,000 Clob investors were left frozen in Singapore's central depository accounts. 

The government eventually settled on a solution offered by a private company, Effective Capital Sdn Bhd, over those of TELEKOM MALAYSIA BHD, United Engineers (M) Bhd, and Bintang Melewar, a company controlled by the Negeri Sembilan royal family. 

Effective Capital, owned by Singaporean businessman Akbar Khan, made a RM5.8 billion cash offer for the Clob shares that he would help repatriate to the KLSE.  

While his offer was at a 45er cent-premium over the market price of the shares as at Sept15 when they were last traded on Clob, Singaporean investors cried foul over what they saw as a purchase at discounts of up to 85 per cent on prices then prevailing on the KLSE. 

Akbar defended his actions; he said he was buying in bulk and running the risk of long-term exposure to the market given that the shares could not be off-loaded immediately. 

Clob investors who chose to transfer their shares under Scheme A, paid Effective Capital a fee of 1.5 per cent of the value of their shares as at Feb 15, 2000. (Under Scheme B, investors pay an administrative fee of 1 per cent of the average market value of the securities over five market days – Oct 23 to 29 – to the Securities Clearing Automated Network Services). 

According to financial reports filed with the Registrar of Companies, Effective Capital made a profit of RM152 million for its 2000 financial year, but after a tax rate of 47 per cent, that was whittled to a net profit of RM81 million. 

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