Excellent article by Eugene Kang in the Business Times (Singapore), even more important in the Malaysian business context, where situations like conflict of interest, related party transactions, holding shares under trustees, mixing politics and business etc. is all very common. Some snippets:
"Interlocks between firms in the same industry are referred to as horizontal interlocks. From a governance perspective, directors are required to discharge their duties and responsibilities as fiduciaries of their firms. However, an interlock between rival firms can create serious conflicts of interest if it prevents an interlocking director from exercising his objective judgement and discharging his fiduciary duties to both firms. In certain jurisdictions, horizontal interlocks attract anti-trust scrutiny. For instance, the Clayton Antitrust Act in the US currently prohibits, with certain exceptions, one person from serving as a director of two rival firms."
One prime example in the Malaysian context was the joining of forces between AirAsia and MAS and the huge conflict of interest that occurred, about which I wrote here and here.
"Vertical interlocks are formed between firms in a buyer-seller relationship. A director that represents a buyer owes a duty to secure the lowest possible price from the seller. Conversely, a director that represents a seller owes a duty to secure the highest possible price from the buyer. When the same director represents both firms, it is easy to see how a conflict of interest arises."
The Tune Group is a prime example of a network of both horizontal and vertical interlocks, owning a travel agency through which one can book an hotel room from Tune Hotels, can book an AirAsia X ticket, which is branded by and using a long list of other services from AirAsia (which itself has other daughter companies in Thailand and Indonesia), using Tune Insurance as the insurance company, etc.
One example how things can go horribly wrong is Metronic Global, about which I wrote several articles. Metronic Global was basically a sub-contractor for a related party and had a huge amount of receivables from that party, which it still hasn't been able to receive after many years. Worrisome is that the current management hardly seems to do anything about it, although the amount of money involved is huge (more than RM 40 million). The investigative accountant report highlighted some very serious issues.
A similar situation of vertical interlock arises at Ranhill Energy, about which I wrote here.
The authorities (Securities Commission and Bursa Malaysia) should play a much more active role in these kind of cases. Conflict of interest was one of the primary reasons behind the huge destruction of capital in the Asian Crisis in 1997/98.
Showing posts with label Metronic global. Show all posts
Showing posts with label Metronic global. Show all posts
Monday, 9 June 2014
Monday, 9 December 2013
Metronic Global: finally the Investigative Accountant Report released
Finally Metronic Global's summary of the Investigative Accountant Report by Ferrier Hodgson MH Sdn Bhd is released today. The report is regarding the long outstanding related party trade receivable of RM 47 million. A large sum of money for this struggling company.
The report was expected to be completed by June 2013, there is no mentioning of the reason for the large delay.
More information about these issues can be found here.
The players:
Some important paragraphs from the report:
6. It is noted that:
a) Despite MHPSB having received almost all the payments from JKR, it had only remitted approximately RM18.69 million to MESB during the Financial Years 2008 to 2010 with the balance of RM46.53 million remaining outstanding to date.
b) Notwithstanding Ernst & Young (“EY”)’s advice to the management to review the recoverability of the Outstanding Related Party Receivables (“ORPR”) on 28 February 2008, it appears that certain directors who have knowledge of the status of the progress claims and payments between JKR and MHPSB, have failed to disclose the said information to the Board, Audit Committee and EY for their assessment on the requirement of provision of doubtful on the ORPR.
The "certain directors" are not mentioned, but I assume they might be the ones mentioned here:
7. Based on the findings, it appears that the material and significant information on the payment status between MHPSB and JKR has not been conveyed to the audit committee and the full Board as well as EY to assess the recoverability of the ORPR and to enable timely efforts to be made to recover the ORPR. It also appears that the Board, at the material time, has not acted upon the audit committee’s suggestions for immediate action to be taken to recover the ORPR save for the Board’s instructions to obtain the Letter of Undertaking (“LOU”) and Deed of Assignment (“DOA”) which was subsequently disputed by MHPSB.
8. IA also note that the subsequent dispute by MHPSB and the representation by JKR on the outstanding amount due and payments to MHPSB have raised doubts on the veracity of the LOU and DOA provided by MHPSB in favour of MESB which have been adopted by the Board, audit committee and the external auditor to facilitate the assessment of the recoverability and the justification for the provision of doubtful debt on the ORPR.
9. IA advises that MESB seek legal advice on whether certain statutory offences may have been
committed and/or whether the relevant directors may have failed to act/discharge their duties as follows and if so, the potential legal action(s) to pursue against them including for the recovery of payments made or for loss resulting from such failure, if any:
a) The common law and statutory duty of directors to act with reasonable care, skill and diligence pursuant to Section 132(1A) of the Companies Act 1965;
b) Section 132(1) of the Companies Act 1965 to act for a proper purpose and in good faith in the best interest of the Company in the discharge of the duties of his office; and
c) Sections 367 and 369 of the Capital Markets and Services Act 2007 on the offences by bodies of persons and by employees and agents which includes directors who knowingly authorises or permits the making or furnishing of any false or misleading statement to Bursa Securities.
The company has not yet announced if it wants to seek legal advice, and is going to pursue the above matter vigorously. Apart from that, the authorities should also consider to take action.
The report was expected to be completed by June 2013, there is no mentioning of the reason for the large delay.
More information about these issues can be found here.
The players:
- MGB: Metronic Global Berhad
- MESB: Metronic Engineering Sdn Bhd, a fully owned subsidiary of the above
- ORPR: Outstanding Related Party Receivables of RM 47 million
- MHPSB: MH Projects Sdn Bhd, the company that owed this amount and who had two directors that were also directors of MGB (hence the related party transaction)
- EY, Ernst & Young, the auditor of MGB who until 2008 approved the accounts, in 2009 disclosed an "emphasis of matter", in 2010 qualified the accounts and in 2011 resigned as auditors
- IA: Investigative Accountant, Ferrier Hodgson MH Sdn Bhd
- CPC: Certificate of Practical Completion
- JKR: Jabatan Kerja Raya, issuer of the CPC for the Alor Setar Hospital
Some important paragraphs from the report:
6. It is noted that:
a) Despite MHPSB having received almost all the payments from JKR, it had only remitted approximately RM18.69 million to MESB during the Financial Years 2008 to 2010 with the balance of RM46.53 million remaining outstanding to date.
b) Notwithstanding Ernst & Young (“EY”)’s advice to the management to review the recoverability of the Outstanding Related Party Receivables (“ORPR”) on 28 February 2008, it appears that certain directors who have knowledge of the status of the progress claims and payments between JKR and MHPSB, have failed to disclose the said information to the Board, Audit Committee and EY for their assessment on the requirement of provision of doubtful on the ORPR.
The "certain directors" are not mentioned, but I assume they might be the ones mentioned here:
7. Based on the findings, it appears that the material and significant information on the payment status between MHPSB and JKR has not been conveyed to the audit committee and the full Board as well as EY to assess the recoverability of the ORPR and to enable timely efforts to be made to recover the ORPR. It also appears that the Board, at the material time, has not acted upon the audit committee’s suggestions for immediate action to be taken to recover the ORPR save for the Board’s instructions to obtain the Letter of Undertaking (“LOU”) and Deed of Assignment (“DOA”) which was subsequently disputed by MHPSB.
8. IA also note that the subsequent dispute by MHPSB and the representation by JKR on the outstanding amount due and payments to MHPSB have raised doubts on the veracity of the LOU and DOA provided by MHPSB in favour of MESB which have been adopted by the Board, audit committee and the external auditor to facilitate the assessment of the recoverability and the justification for the provision of doubtful debt on the ORPR.
9. IA advises that MESB seek legal advice on whether certain statutory offences may have been
committed and/or whether the relevant directors may have failed to act/discharge their duties as follows and if so, the potential legal action(s) to pursue against them including for the recovery of payments made or for loss resulting from such failure, if any:
a) The common law and statutory duty of directors to act with reasonable care, skill and diligence pursuant to Section 132(1A) of the Companies Act 1965;
b) Section 132(1) of the Companies Act 1965 to act for a proper purpose and in good faith in the best interest of the Company in the discharge of the duties of his office; and
c) Sections 367 and 369 of the Capital Markets and Services Act 2007 on the offences by bodies of persons and by employees and agents which includes directors who knowingly authorises or permits the making or furnishing of any false or misleading statement to Bursa Securities.
The company has not yet announced if it wants to seek legal advice, and is going to pursue the above matter vigorously. Apart from that, the authorities should also consider to take action.
Saturday, 7 December 2013
Ranhill Energy: is the fine really adequate? (2)
I wrote before about Ranhill Energy and the fines and reprimands that were handed out by the Securities Commission. Fast and good action, although I questioned the size of the fines, which appears to be extremely small compared to the size of the deal that was on the table.
According to this article in The Star "Ranhill Energy to retry IPO":
"Tan Sri Hamdan Mohamad is re-submitting the listing application of Ranhill Energy and Resources Bhd to the authorities in a second attempt at floating his water and power assets, sources said.
The move comes just after four months of Ranhill Energy’s initial public offering (IPO) being withdrawn, after it emerged that there had been a disclosure breach related to the suspension of the licences of its affiliate company, Perunding Ranhill Worley Sdn Bhd (PRW), by Petroliam Nasional Bhd for an indefinite period.
Subsequently, the Securities Commission (SC) imposed a fine of RM200,000 on the company, while Hamdan, who is Ranhill Energy’s substantial shareholder, was reprimanded and fined RM300,000 for the failure to disclose the licensing issue.
To recap, Ranhill Energy was supposed to list on Bursa Malaysia on July 31, with about 70% of its RM753mil IPO proceeds to be utilised for the repayment of borrowings. The SC instructed Ranhill Energy to postpone its IPO indefinitely on July 25 in view of the non-disclosure issue. On July 26, Ranhill Energy announced that it had terminated its IPO.
According to Ranhill Energy’s prospectus, it had debts of RM1.93bil and a gearing of 1.61 times as at the end of December 2012.
Investment bankers said that for the listing to be approved this time, Ranhill Energy would have to convince the authorities that the chief executive officer and its directors would not repeat the kind of mistakes they had made with regard to the disclosure of that contract.
They added that it could be an uphill task to garner sufficient investor interest in the company’s listing, considering the recent episode."
First of all, this is one of the articles citing unnamed "sources", we need to wait first for official conformation, to often these "rumours" turn out to be not true at all.
Secondly, it mentions "Ranhill Energy would have to convince the authorities that the chief executive officer and its directors would not repeat the kind of mistakes they had made with regard to the disclosure of that contract".
I think another, more important, matter on hand is that they have to convince the SC if it would be appropriate to apply for a listing so soon again. I actually strongly doubt that, I think it simply undermines the credibility of the market if a company can reapply for an IPO so soon after it made serious mistakes in disclosure. If that would be allowed, then the punishment as meted out by the SC definitely looks insufficient and doesn't act as a deterrent at all.
There is also another matter at hand, according to this article in The Star:
That means there is a large conflict of interest for Hamdan in dealing with PRW and Ranhill Energy. It would have been much better if PRW and Ranhill Energy would merge, to remove this conflict of interest situation.
A similar, unsatisfactory, situation happened in Metronic Global, which dealt with a company controlled by two directors, about which I wrote here. The additional problem there was that the receivables were "not able to receive", and that Metronic Global didn't seem to be very urgent in proceeding with that matter.
According to this article in The Star "Ranhill Energy to retry IPO":
"Tan Sri Hamdan Mohamad is re-submitting the listing application of Ranhill Energy and Resources Bhd to the authorities in a second attempt at floating his water and power assets, sources said.
The move comes just after four months of Ranhill Energy’s initial public offering (IPO) being withdrawn, after it emerged that there had been a disclosure breach related to the suspension of the licences of its affiliate company, Perunding Ranhill Worley Sdn Bhd (PRW), by Petroliam Nasional Bhd for an indefinite period.
Subsequently, the Securities Commission (SC) imposed a fine of RM200,000 on the company, while Hamdan, who is Ranhill Energy’s substantial shareholder, was reprimanded and fined RM300,000 for the failure to disclose the licensing issue.
To recap, Ranhill Energy was supposed to list on Bursa Malaysia on July 31, with about 70% of its RM753mil IPO proceeds to be utilised for the repayment of borrowings. The SC instructed Ranhill Energy to postpone its IPO indefinitely on July 25 in view of the non-disclosure issue. On July 26, Ranhill Energy announced that it had terminated its IPO.
According to Ranhill Energy’s prospectus, it had debts of RM1.93bil and a gearing of 1.61 times as at the end of December 2012.
Investment bankers said that for the listing to be approved this time, Ranhill Energy would have to convince the authorities that the chief executive officer and its directors would not repeat the kind of mistakes they had made with regard to the disclosure of that contract.
They added that it could be an uphill task to garner sufficient investor interest in the company’s listing, considering the recent episode."
First of all, this is one of the articles citing unnamed "sources", we need to wait first for official conformation, to often these "rumours" turn out to be not true at all.
Secondly, it mentions "Ranhill Energy would have to convince the authorities that the chief executive officer and its directors would not repeat the kind of mistakes they had made with regard to the disclosure of that contract".
I think another, more important, matter on hand is that they have to convince the SC if it would be appropriate to apply for a listing so soon again. I actually strongly doubt that, I think it simply undermines the credibility of the market if a company can reapply for an IPO so soon after it made serious mistakes in disclosure. If that would be allowed, then the punishment as meted out by the SC definitely looks insufficient and doesn't act as a deterrent at all.
There is also another matter at hand, according to this article in The Star:
- Perunding Ranhill Worley Sdn Bhd (PRW), a company controlled by Hamdan.
- Ranhill Energy relies on PRW for contracts secured from Petronas and that this contract represented a material contribution to Ranhill group’s revenue.
That means there is a large conflict of interest for Hamdan in dealing with PRW and Ranhill Energy. It would have been much better if PRW and Ranhill Energy would merge, to remove this conflict of interest situation.
A similar, unsatisfactory, situation happened in Metronic Global, which dealt with a company controlled by two directors, about which I wrote here. The additional problem there was that the receivables were "not able to receive", and that Metronic Global didn't seem to be very urgent in proceeding with that matter.
Saturday, 1 December 2012
Finally some shareholder activism
In Malaysia, minority shareholders might not be a happy lot, but they hardly ever put up a fight. So if they do, they deserve at least mentioning.
A group of disgruntled shareholders of Metronic Global Bhd (holding more than 10% of the shares) have requested for an EGM:
to remove each of the following from the office of Director:
- Dato' Abd. Gani bin Yusof, Tan Sri Dato' Kamaruzzaman bin Shariff; Liew Chiap Hong, Mohd Kamal bin Omar; and
to appoint each of the following to be Director of MGB:
- Dato' Dr . Chin Yew Sin, Ling Yew Kong, Liew Chee How, Ng Wee Peng
The details of the reasons behind it can be found here.
Reason A concerns the receivables from related parties, a very old issue:
This should not come as a surprise for readers of this blog, since the issues have been detailed more than one year ago here and later here again.
Reason B concerns the selling of one of the rare well performing assets of Metronic:
The disgruntled shareholders have indeed valid points, but will they succeed? The shareholding structure is very dispersed, so they might indeed have a chance.
On the other hand, will it help?
On November 27, 2012 Metronic Global announced:
"that MH Projects Sdn. Bhd, (“MH”), Main Contractor for a project previously undertaken in the ordinary course of business by Metronic Engineering Sdn. Bhd. (MESB), a wholly owned subsidiary, has been put into winding-up by the court. MH currently owes MESB an amount of RM44,450,738. MESB will submit its proof of debt to the liquidator of MH in due course and will also continue to pursue recovery direct from Jabatan Kerja Raya in line with the Deed of Assignment executed between MESB and MH previously. The Company has made a provision of RM20,057,510 on the debt and is now assessing on whether a further provision of debt should be made on the remaining balance."
And the most recent quarterly results were bad, again due to the receivables, which were not able to receive.
Metronic Global has now accumulated losses of more than RM 34 million, and that might increase further. By far the biggest item in the list of assets is still Trade Receivables, RM 54 million.
I am therefore afraid that the actions of the minority shareholders, good in itself, are simply too little, too late.
But questions need also be raised why the authorities (BM, SC and SSM) have so far not taken any action whatsoever. Surely there was enough reason to do so. And then there is still the issue of Ernst & Young, approving the year report for six years in a row, including the dubious receivables (from a related party) which eventually had to be written off.
Saturday, 31 March 2012
Metronic Global: syndicates and receivables
Article in Business Times: "Transparency will benefit all market players" by Francis Fernandez.
"Do we have market makers here in Malaysia? The answer to that officially is a resounding "NO", but the market makers, nevertheless, exist unofficially at least.
Hence recent reports that Bursa Malaysia gave verbal instructions to brokerages to stop their proprietary day traders (PDTs) from trading in Metronic Global Bhd and Ariantec Global Bhd are disturbing.
What Bursa Malaysia did is good, but why the reports on the market regulator engaging with the brokers are disturbing is because, when Bursa Malaysia gives out instructions on some particular securities, it must provide the information to all investors at the same time.
I do believe that is why it has a website. If all investors have the same information, then they will be able to make an informed decision based on facts, and not on reports that can later be denied or confirmed.
Most investors do not read the same newspapers, hence some will gain from those reports, while other will lose out".
But according to its most recent statement, nothing has changed:
Volume is very high, reaching 845 million on March 21, 2012. Remarkable, since the total number of shares is only 635 million.
"Do we have market makers here in Malaysia? The answer to that officially is a resounding "NO", but the market makers, nevertheless, exist unofficially at least.
Hence recent reports that Bursa Malaysia gave verbal instructions to brokerages to stop their proprietary day traders (PDTs) from trading in Metronic Global Bhd and Ariantec Global Bhd are disturbing.
What Bursa Malaysia did is good, but why the reports on the market regulator engaging with the brokers are disturbing is because, when Bursa Malaysia gives out instructions on some particular securities, it must provide the information to all investors at the same time.
I do believe that is why it has a website. If all investors have the same information, then they will be able to make an informed decision based on facts, and not on reports that can later be denied or confirmed.
Most investors do not read the same newspapers, hence some will gain from those reports, while other will lose out".
But according to its most recent statement, nothing has changed:
Volume is very high, reaching 845 million on March 21, 2012. Remarkable, since the total number of shares is only 635 million.
Sunday, 23 October 2011
Issues regarding Metronic Global
http://www.btimes.com.my/Current_News/BTIMES/articles/ganiy/Article/index_html
The question that comes to mind: "Why did it take the NST so long to come with this statement?". In the announcements website of Bursa Malaysia the following appeared on January 14, 2011:
"Given that the trading in the shares is not within the closed period as required under the Paragraph 14.08 of the Listing Requirements of Bursa Malaysia Securities Berhad, the Director has no obligation to make prior notification to Bursa Malaysia and the Company."
I guess that Bursa will check on these statements so all should be ok.
On the other hand, 100 million shares in the open market on one day, about 16% of all the shares of MTronic, that did raise my curiosity.
The black oval indicates the volume of the shares done at that day, it is sticking out like a sore thumb. It is even more interesting that that huge sale didn't depress the shareprice:
http://www.theedgemalaysia.com/in-the-financial-daily/180215-metronics-major-shareholder-pares-15-stake.html
"The share price remained steady despite the large disposal on the open market. The share disposal may pave the way for the emergence of a major shareholder in the loss-making company. However, there was no announcement on new shareholders in Metronic at press time."
And indeed, there would be no announcement of a new major shareholder.
In the 2010 year report it is noted that the top 30 shareholders hold only 33.7% of the shares (as of April 30, 2011), versus 50.2% in 2009. In other words, the shares have been taken up by smaller investors. But it takes a lot of small investors to take up 100,000,000 shares. Puzzling.
If they are really happy at this moment is another question, the price has dropped from 6.6 cent to 3.5 cent, a 47% drop since Dato' Abdul Gani Yusof sold his shares.
This trend of insider selling has been set in motion for a long time, in the year report 2004 the top 20 shareholders still held 85.1% of the shares.
A big issue with MTronic are the huge related party transactions and the ability to recover the long outstanding receivables from them, two clear red flags. This is from the 2004 year report, the first one since they listed:
And in the footnotes:
Up to year report 2008 Ernst & Young seemed to be ok with the situation, but in 2009 Ernst & Young wrote the following, a first warning, "emphasis of matter", without qualifying the accounts:
In the 2010 year report they changed their mind and qualified the accounts:
I am rather suprised about this statement, this has been going on since 2004 (the listing of MTronic), this was always a big issue. Ernst & Young are unable to obtain sufficient appropriate evidence about the timing of collection of these debtors, but these are mostly old receivables anyhow, so in previous years they did have sufficient evidence? Why did Ernst & Young change their mind?
Qualifying an account is a very serious red flag.
And another red flag would follow very soon:
For seven years they had been the auditor and received their fees, I think that shareholders of MTronic deserve some more information from Ernst & Young what is going on.
In the last quarterly accounts (June 30, 2011) the amounts are still outstanding, RM 44.5 million to be exact.
"In relation to the related party receivables due from the Main Contractor Related Party, subject to the finalization of the claim certification by JKR and the subsequent disbursement of payment from the Ministry of Finance, the Company expects the outstanding receivables to be fully recovered through progressive disbursements to be made by the Government of Malaysia not later than 31 December 2011."
But the market does not seem to believe that, otherwise the share would not be trading at 3.5 cent, valuing the whole company at about RM 20 million only.
The total equity is RM 53 million, not much more than the amount outstanding, in other words if the amounts are not recoverable, there is hardly any equity left. In that case the issue is also if the profits that MTronic announced in 2004, 2005 and 2006 were "real", since they were based on the recoverability of these receivables. And those earnings supported the share price at much higher levels than today, during which the major shareholders sold their shares in the market.
In the mean time, MTronic is also involved in a five material litigations, another red flag.
On June 3, 2010 Dato' Abdul Gani bin Yusof was appointed Executive Chairman of Kenmark, a company in big troubles. On March 3 2011 Bursa Malaysia fined and reprimanded the directors of Kenmark.
| 6. | Dato’ Abd Gani bin Yusof Executive Chairman (Appointed on 3 June 2010) | Public Reprimand |
"Notwithstanding that they were newly appointed, as directors, they should have exercised reasonable care and diligence. In this regard, they should have ensured that they were fully apprised of the state of operations and financial condition of the Company prior to the press conference on 4 June 2010 and issuing press statements about the Company. As directors, they were under an obligation to ensure all representations about the Company must be factual, clear, unambiguous, accurate, succinct and contains sufficient information to enable investors to make informed investment decisions and were balanced and fair with regards to the Company’s state of operations and financial condition pursuant to the listing requirements. This is more so in view of the turmoil and the need for clarity to the market and shareholders on the status of the Company at the material time."
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