Enforcement against Chinese companies listed overseas

If you are transporting 50,000 truckloads of timber across China, it can be hard to see the wood for the trees. If you are trying to audit 68 sq km of Chinese orange groves, you can easily find yourself a few fruit short of a still life. But how, exactly, do you lose track of 2,810 shops full of fluorescent trainers and dayglo “leisure wear”, spread across 21 provinces and three municipalities?

That is the question being asked this week in London, after the non-executive directors of Naibu, a Chinese sportswear company quoted on the Alternative Investment Market, admitted they had lost all contact with the company’s chairman and executive director and had no information on its operations, or its “current financial position”.

Shareholders are well aware of theirs, however: from their first trading in 2012 to their suspension last month, Naibu’s shares have lost 90 per cent.


One of the many horror stories from the Financial Times: "China’s intangible assets at home in Aim".

Some more snippets:


In 1995, timber group Sino-Forest floated in Toronto, rose to a market value of $6bn and gained US fund manager John Paulson as lead shareholder before collapsing amid allegations that its logs were illusory.

Fruit producer Asian Citrus came to the London Stock Exchange in 2005 and grew its share price sevenfold in five years — before losing 90 per cent of its value on claims that it had over-counted its oranges.

One Chinese company, shoemaker Ultrasonic, even offers hope to Naibu investors. After listing in Frankfurt in 2011, its shares fell 79 per cent in a day last year, on news that its chief executive, and much of its cash, had vanished. They recovered when he turned up a few weeks later claiming he had simply lost his mobile phone.


The article further looks at three key aspects:

The functioning of the exchanges
What does it say about London’s Aim that it enabled Naibu’s owners to float just 9 per cent of their shares, gain a £68m valuation for the company and — in the case of two of the top three original shareholders — offload entire stakes, amounting to 30 per cent of the group? Little wonder one FT hack suggests the market be renamed ATM. Sino-Forest’s senior executives found Canada’s market as bountiful: listing and offloading $83m of shares before their company collapsed.

The role of non-executive directors
Under the Aim rules, Naibu’s did not have to adopt the UK Corporate Governance Code, but they were required “to aspire to achieve the key elements”. Yet, in spite of claiming 30 years’ experience of the City, they seemed to do little for their £60,000-a-year part-time salaries beyond setting up an Aim compliance committee — and perhaps hanging on the telephone, in vain, to Fujian province.

The integrity of corporate advisers
Naibu’s nominated adviser, before it relinquished its licence, filled the company’s Aim admission document with claims that it was China’s 10th-largest sportswear brand — in a survey commissioned by Naibu itself — in a booming market. For its diligence, it took an initial fee of £30,000, a further fee of £170,000, and commission at the rate of 5 per cent of the aggregate sums raised.


The above is all very relevant for China listed companies on Bursa and SGX ("S-chips"). My concern in all of this is the enforcement across borders, which seems to me very complicated.

However, there might be some hope. I wrote before about China Sky, Singapore's Business Times reported regarding enforcement against its former CEO, some snippets:


Former chief executive of beleaguered China Sky Chemical Fibre, Huang Zhong Xuan, will pay a civil penalty of S$2.5 million and surrender 10 per cent of his shareholding in China Sky under a settlement agreement with the Monetary Authority of Singapore (MAS).

The civil penalty was meted out after he admitted to making misleading public disclosures and failing to make the required disclosures to the market, thereby breaching the Securities and Futures Act (SFA), the MAS said on Thursday.

The S$2.5 million penalty will be paid from the US$3.7 million in his Singapore bank account, which was frozen under a High Court injunction that MAS obtained in 2013. The surrender or cancellation of his shares will raise the net asset value per share for existing China Sky shareholders.

MAS assistant managing director for capital markets Lee Boon Ngiap said: "The offer by Huang to surrender 10 per cent of his shareholdings in China Sky is the first negotiated settlement of its kind, directly benefiting existing shareholders of China Sky. 

CAD director Tan Boon Gin said: "Cases like this have jurisdictional issues that make case resolution challenging. This case has come to a successful resolution through close collaboration between MAS, CAD and SGX, as well as assistance rendered by the authorities and regulators in the People's Republic of China.

Investigation into China Sky's affairs ongoing: SGX

We refer to Mano Sabnani's letter titled 'China Sky must be kept functional' (BT, March 13).

As the frontline market operator, the Singapore Exchange (SGX) is responsible for maintaining a fair, transparent and orderly marketplace in the interests of the investing public. For this purpose, the exchange requires prompt and comprehensive disclosure of information by companies. Only then can investors properly assess the risks and rewards of their investment to make their investment decisions with confidence.

If companies' disclosure is inadequate, the exchange will query them with the aim to clarify, and where appropriate, elicit disclosure. If the information is questionable or its reliability in doubt, the disclosure will be investigated so that investors can have confidence in the data used as a basis of their investment decisions.

However, SGX does not operate listed companies; it is the responsibility of the management and the board of directors, who determine the course and nature of their companies. Shareholders have the right and authority to compel the managements and boards to act for them and safeguard their interests in the companies.

Mr Sabnani and likeminded shareholders can seek an EGM or work with investor organisations like SIAS.

SGX shares the concerns of shareholders of China Sky Chemical Fibre that knowing the true and accurate state of affairs of the company is critical. However, the matter is currently under investigation. Hence, the exchange is unable to comment further.

SGX

China Sky must be kept functional

Amazing numbers, market cap of Singapore listed China Sky is down from SGD 2,000,000,000 (RM 4.8 Billion!) to only SGD 83,000,000 (-96%) before it was suspended.

A couple of fair questions in this "Letter to the Editor". Especially if the company would be a normal, operating business.

However, my gut feeling (based on the numerous red flags) tells me that this company is toast and that the net asset value per share of SGD 0.77 is not a good indication of the current situation. I would be very worried for a total loss, if I were shareholder of this company.


From The Business Times (Singapore), March 13, 2012

THE standoff between the Singapore Exchange (SGX) and China Sky Chemical Fibre has been well documented. There is now also an investigation by the Commercial Affairs Department (CAD) into some matters involving the company.

Trading in the stock remains suspended, and I am concerned about how the company is being run now and whether its business and assets are being protected.This is a large company by most standards, and it has been profitable and a leader in the synthetic leather industry in China for some years.

China Sky has more than 800 million shares in issue and, as recently as September 2007, its shares traded as high as $2.50 apiece, with the company capitalised at more than $2 billion.

The shares have since come down a long way to 10 cents each (before suspension). However, the net asset value per share remained at 77 cents at the end of September 2011.

While the market cap had shrunk to about $83 million, shareholders' equity stood at $627 million at the end of September 2011 with no debt on the balance sheet.

Meanwhile, the three independent directors (IDs) have quit the board and, recently, the CEO and CFO also resigned.

My question is: who is running the company? There are large assets and a good business at stake.

The SGX queries relating to the abortive land transfer, interested-person transactions relating to an ID and even the repair/ maintenance charges are small in relation to the size of the company and the amount of shareholders' funds at stake.

I hope we are not losing sight of the woods because of our focus on the individual trees. SGX has a duty to protect the interests of many minority shareholders who invested in this company during its IPO when there was much fanfare on its merits.

I would like to know what SGX is doing to ensure the board of China Sky remains functional, and who is in charge of operations and finance, given the resignation of the CEO and CFO. The entire assets and business of China Sky could now be at stake - vulnerable to loss of clients, staff, reputation, and even its business assets and cash reserves.

SGX should nudge the chairman and remaining directors at China Sky to strengthen the company's board and top management team quickly. There is a need to expedite the process of ring-fencing the company and its business/cash before it is too late.

I am sure many small shareholders are in the same frame of mind and are equally worried about how the company is faring at this point of time.

Mano Sabnani

YTL Cement, Padini, Maybulk, China Sky/SGX

YTL Cement's shares will be suspended from tomorrow onwards. YTL Group owns more than 90% of the shares, enough to delist, but not enough for a mandatory acquisition. Minority investors who held out for a better offer have had some success in the past, like in Metrojaya's case, or Tang's (in Singapore).

I just don't like the way these General Offers with "delisting threat" are done in Malaysia, minority investors have hardly any chance to fight them, fund managers have to accept the offer since they don't want to end up with shares in unlisted companies.

Padini announced its quarterly results: higher turnover, earnings and cash, but also a high inventory (RM 229 million). Interesting.

Maybulk announced its year end numbers: "the current depressed freight market if it continues will result in many bancruptcies. The Board is confident that it will weather through these turbulent times and be able to benefit from this challenging situation in the medium to long term".

Previous articles about Maybulk and its POSH acquisition can be found here.


Another very sharp letter from Mr. Yeap (former independent director of China Sky) in the Business Times (Singapore). Would The Star or The New Straits Times dare to publish such a negative letter about Bursa Malaysia?

Has S'pore Exchange shifted its stand?

I NOTE from the media that SGX has stated: 'SGX will not discuss the court proceedings or rehearse arguments in the public. We have not done so hitherto and intend to wait for the hearing in court.'

Again, I was surprised by such a statement made by SGX.

In its announcement dated Feb 22, after making reference to the hearing in the High Court on Feb 21, SGX stated that 'Mr Yeap has now made certain representations which had not previously been offered to the SGX-ST . . .'.

I have not communicated with SGX after the commencement of my judicial review hearing in the High Court, save for my communication with the counsel representing SGX during the judicial review proceedings on Feb 9, Feb 20 and Feb 21.

If SGX was not referring to the judicial review proceedings in its Feb 22 announcement, SGX may wish to enlighten the public as to the details of any form of communication between SGX and I, in addition to the judicial review proceedings.

If SGX is unable to do so, it will follow that the SGX's statement is misleading, in that contrary to the SGX's statement, SGX was the one that first referred to the judicial review proceedings and made selective and inaccurate quote of arguments exchanged during the judicial review proceedings in its Feb 22 announcement.

It is interesting to note that SGX has shifted its stand after I have stated that I have no objection in SGX releasing the full and accurate transcript of the hearing to the public.
No doubt all concerned will be able to judge whether the SGX's statement was misleading and to draw the correct inference from SGX's shift of its previous stand.

Yeap Wai Kong
Former China Sky
independent director

Ex-China Sky director suing SGX to overturn reprimand

The fight between China Sky Chemical Fibre Co. Ltd. and the SGX (Singapore Exchange) gets more and more interesting.

From the Business Times (Singapore) by Lynette Khoo, published Feb 27, 2012:

A former China Sky independent director (ID) has dismissed an apparent Singapore Exchange (SGX) offer to settle his grievance out of court, calling it an affront to common sense.

Yeap Wai Kong, who has applied to the courts to overturn a public reprimand issued against him by SGX, said yesterday that he 'shall continue to seek redress against the Singapore Exchange'.

The High Court will hear his judicial review application for a quashing order on SGX's public reprimand against him on March 26.

Mr Yeap issued a press release yesterday in response to SGX's offer to review its reprimand if he can provide new information to show why he should not have been reprimanded.

This statement from SGX on Feb 22 essentially provides an avenue for Mr Yeap to address his issue with SGX without going through the courts.

'The 22 February announcement seems to suggest that I should bear the onus of substantiating why I ought not to be publicly reprimanded after SGX has already publicly reprimanded me without giving me an opportunity to be heard. Common sense is affronted upon the utterance of such a proposition,' Mr Yeap said. 'Even a court would have to give an accused an opportunity to be heard and a fair hearing before the court is entitled to sentence the accused.'

In a previous turn of events, China Sky hit back at SGX through the website of .... SGX itself! It used the SGX announcements site to publish a lengthy expose what had happened before, even including the personal notes taken by the CEO at a meeting with SGX officials.

Although China Sky seems to outwit the SGX for the time being, the story will probably not end well for its shareholders. The independent directors and the CEO of China Sky have resigned, and the share is suspended. Investigations are on-going.