This article first appeared in The Edge Malaysia Weekly on March 7, 2022 - March 13, 2022

We mentioned CLOB (Central Limit Order Book) several times in this series of articles. For those too young to remember, here is a brief recap of the long-running saga that unfolded with the onset of the Asian financial crisis.

CLOB International was an over-the-counter market that was extremely popular among Singaporeans for trading, primarily, Malaysian shares in the early 1990s. It was originally established after Malaysia delisted all dual-listed stocks from the Stock Exchange of Singapore (SES), following its split from the Kuala Lumpur Stock Exchange (KLSE) in January 1990. During the heydays of the super bull cycle, CLOB enjoyed massive trading volumes.

When Malaysia imposed capital controls and prohibited all offshore transactions of the ringgit in September 1998, it also froze the trading of all Malaysian shares on CLOB. Malaysia claimed that shares borrowed from CLOB were used to short the KLSE, precipitating the collapse in share prices and the ringgit. At the time of the suspension, some 172,000 Singaporean investors held CLOB shares worth an estimated RM17 billion. 

Subsequent to this, several private proposals emerged — including those promoted by Effective Capital, a company owned by businessman Akbar Khan, who was a close associate of then finance minister Tun Daim Zainuddin — to buy out the frozen shares at substantial discounts to prevailing market prices. The Effective Capital proposal was endorsed by the KLSE. Most CLOB shareholders rejected all the offers, however, given the huge losses they would entail. Acrimony mounted between both countries. The dispute dragged on until February 2000, when an agreement was struck, backed by both stock exchanges, giving CLOB shareholders two options. Should investors reject both options, they risk seeing their shares transferred to the Ministry of Finance as unclaimed shares.

Option 1: Investors pay a 1.5% transfer commission (based on closing prices on Feb 15, 2000) to Effective Capital, which would manage the transfer of their shares to individual Malaysian Central Depository System (CDS) accounts. The shares would be released over a 13-month period from July 2000; or

Option 2: Pay a lower 1% administrative fee (based on the average price over the last five trading days of October 2002) to Malaysia’s securities clearing house for the same transfer — but the shares would only be released over a nine-month period, from January to October 2003. That would be a full five years from the time the shares were first frozen.

In effect, investors were given the choice to pay more or wait in limbo for up to another 26 months (more than two years). To be fair, the KLSE had strongly objected to the formation of CLOB right from the start and repeatedly warned investors of trading on the unrecognised market. However, the blatant rent-seeking resolution offered — handing a privately owned entity hundreds of millions in windfall profit — must have undoubtedly left a sour taste in the mouth for all the affected investors. We would not be at all surprised if these aggrieved CLOB shareholders never came back to the local stock market. As the saying goes: Fool me once shame on you; fool me twice shame on me. More importantly, Malaysia’s treatment of foreign equity investors created moral hazards and raised questions over the integrity of contracts and laws for all future potential investors, hurting their confidence in the country.

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