Saturday, 5 October 2013

Sersol: projections are no projections, dilution is very real

There is a lot of speculation going on in several Malaysian and Singaporean counters lately, and even in the Singaporean counters often there is a Malaysian link.

One company in Malaysia that has been in the limelight is Sersol Bhd.

The graph of the share price and the much increased volume in the last few months:

On September 25, 2013 the company announced that Mohd Nazifuddin Bin Mohd Najib (the son of the Prime Minister of Malaysia) had bought more than 40 Million shares.

As regular readers of this blog probably know, I am not exactly a fan of mixing politics with business.

Next to that, the share price of Sersol went up a lot in relatively high volume before the above announcement was published, which looks puzzling.

Anil Netto wrote a good article about this matter.

The Malaysian Reserve published the next day information based on an interview:

If companies make projections, then all shareholders should be informed about that, so Sersol announced the following (possibly after being probed by Bursa Malaysia):

"The Board of Directors wishes to inform Bursa Securities that the reported statement above does not in any way represent a projection, estimate or forecast of the Company’s performance for the financial year ending 31 December 2014.

It is merely an expression of the Major Shareholder’s target and aspiration."

In other words, "a projected revenue" does not represent a projection in any way.

I am sorry to say, but I don't understand that, a projection is a projection, or not?

There is also another issue that I would like to point out, the company proposed (combined with a rights issue and warrant issue) a SIS (Share Issue Scheme) to its directors and employees, and the numbers are staggering:

The number of current shares is 96 Million, the maximum number of shares from the SIS Options is an unbelievable high 87 Million.

I agree, the shareholders can subscribe to rights issue and can exercise their warrants, but both do cost serious money.

The above proposal was approved on February 25, 2013, and the company did not spend one word too much on it:

"The Board of Directors of SerSol Technologies Berhad ("SerSol") wishes to announce that all the ordinary and special resolutions (as set out in the notice of Extraordinary General Meeting (“EGM”) of the Company dated 21 January 2013) have been approved by the shareholders of SerSol as tabled at the EGM held on 23 February 2013."

In my opinion, such an important matter should be done by poll voting, and the results should be announced in detail (number of shares plus percentage, in favour and against).

A dilution of 30% of the shares for directors and employees, and that after minority shareholders have pumped in additional money in the form of a rights issue and exercising warrants) is really way too high, I think the maximum should be probably 10% (even that is pretty generous).

In the current situation directors can apparently propose large numbers of shares for these schemes, and since minority shareholders have hardly any chance to win in a vote, they will get hugely diluted.

The odds are already stacked against minority shareholders, they have hardly any say (in practice), they have a quite substantial information disadvantage. If a company is successful and shareholders then get hugely diluted, I think that is not fair at all.

I think therefore that the rules should be changed, there really should be a limit on what the Board of Directors can propose in the form of a ESOS or SIS scheme.

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