CLOB: Waiting for the best offer

CLOB stands for Central Limit Order Book, a stock market in Singapore founded 80 years ago. In the early 1990s, Kuala Lumpur ordered that Malaysian blue chips be de-listed from the main Singapore exchange. Subsequently, lesser Malaysian companies were listed on the CLOB market, and trading continued without much rancor until about 10 months ago. That was when Malaysia closed its currency and stock markets to the outside world - and prevented foreign investors who owned shares in Malaysia from repatriating their money for at least a year. At the same time, trading on CLOB, which was a parallel market for 112 Malaysian companies in Singapore, was halted.

Ever since, the CLOB shareholders have wanted to know how they can get access to their money. Recently came the fourth offer they've received in the last two months. The first three, which involved deep discounts on the face value of shares or imposed tough restrictions on trading, received little support. The latest offer from Telekom Malaysia and United Engineers Malaysia seems to be an improvement on the first three; whether it receives any better reception from CLOB investors is another matter.

From the point of view of the two Malaysian companies proposing the offer, it makes some sense. Telekom would be able to sell its CLOB stake and retire all of its $2 billion in debt if everything went smoothly. In the same way, debt-ridden UEM, which has several troubled subsidiaries, could keep its head above water.

But why would CLOB investors accept an offer that is so seriously discounted? So far, says Hugh Young, a fund manager with Abderdeen Asset Management in Singapore, Malaysia's prohibition has actually helped investors in Singapore's second-line stocks: "They've done incredibly well because retail investors no longer have CLOB to play with." Some analysts think that the Malaysian side hopes even a bad deal will look okay if enough time goes by. But this strategy could backfire. "There have always been issues like political connections and crony capitalism in Malaysia," says Mark Mobius, the emerging markets guru at Templeton Asset Management. "The CLOB deals only confirm that these concerns are not going to go away."

Yeoh Keat Seng, head of research for Merrill Lynch in Malaysia, thinks that the government in Kuala Lumpur is over-estimating the importance of allowing CLOB investors in Singapore to unload shares at market rates. After all, large-scale selling could undermine a rally that is underway. But Yeoh says the bulk of the CLOB shares are not part of the KL Composite Index, and so such a sale's impact would be limited. "Even if all CLOB shareholders sold their shares immediately, the index would not fall more than 10 percent," says Yeoh.

The current offer also undermines the credibility of Telekom, argues Yeoh: "Telekom Malaysia has been very successful in its effort to hold off any political intervention or pressure to do national service by bailing out or assisting politically well-connected entities. If the deal goes through, Telekom might be seen as yet another government company that can be used by political masters to do all sorts of things."

The Malaysian proposals to buy CLOB shares also benefit an unlikely constituency across the causeway: politicians of the ruling People's Action Party. Singapore holds a presidential ballot in late August and parliamentary elections late next year. The party obviously doesn't want 172,000 irate CLOB investors complaining that their representatives didn't support them enough..

Politics may also be influencing Malaysia. There, national polls are expected within the next four months and a downturn in the stock market would not be welcome. Large-scale selling could dramatically push down the price of many second-line stocks, which are favored by many urban Chinese investors. These are voters Malaysian Prime Minister Mahathir Mohamad wants to keep happy. Recently, the Stock Exchange of Singapore said it will make a proposal to place shares once traded on CLOB back on the KL stock exchange - in a staggered fashion so that selling pressure would be minimized. It will be interesting to see how such a proposal fares in the face of political imperatives.