Bumi Armada loses court case

Bumi Armada (defendants) lost its court case against Tozzi Industries (plaintiff), according to this judgment:


For the foregoing reasons, we grant the plaintiff’s claim against both defendants with damages to be assessed. We also order the defendants to bear the costs of this trial on liability, to be taxed if not agreed following the assessment of the damages. Costs of the assessment will be dealt with separately.


Probably nothing major, but still noteworthy.

Ananda Krishnan playing the listing-delisting-relisting game again?

Article from The Star: "Billionaire Ananda Krishnan exploring taking Astro private".

Some snippets:


According to industry sources, Ananda, who owns 40% of the pay-TV operator, is looking at a corporate exercise to take out the rest of the shareholders in the company via his private vehicle Usaha Tegas Sdn Bhd.

“The exercise is still in preliminary stages and details have yet to be finalised. Usaha Tegas feels that the market is not valuing the company fairly,” said a source.

Listed at RM3 a share in October 2012, Astro’s share price has hovered below that level.

The above is what I call the "listing-delisting-relisting" game, a popular pass time for Malaysian tycoons with Bursa listed companies.

I don't like that "game", since minority investors have no realistic chance to defend themselves, being "threatened" with holding shares in an unlisted company. Unfortunately, nothing much has changed, Bursa does not see this as a problem.

Another snippet:

Based on previous takeover exercises, Ananda is known not to stinge on taking his companies private, and is likely to offer a fair price to shareholders for the takeover.

"Not to stinge"? I don't agree with that statement at all, for more background on the Bumi Armada delisting and relisting, please read the following blogpost: 2 Billion: "a little money"

10 Largest Malaysian IPOs

Below is a list of the ten largest IPOs in the last ten years on Bursa Malaysia.


                              == Market Cap ==
Company          IPO date      IPO       Now     Change
Petronas Chem   26/11/2010    42,480    53,600     26%
Maxis           19/11/2009    40,650    44,836     10%
IHH             25/07/2012    24,891    54,855    120%
Felda           28/06/2012    19,335     5,363    -72%
Astro           19/10/2012    15,592    15,199     -3%
Bumi Armada     21/07/2011    12,124     4,165    -66%
Westports       18/10/2013     9,037    14,356     59%
Malakoff        15/05/2015     9,000     8,400     -7%
UMW O&G         01/11/2013     6,702     2,000    -70%
AirAsia X       10/07/2013     2,963     1,452    -51%


Some comments:

• 6 out of 10 companies are still below their IPO price, that is not impressive at all
• if one would put the same amount of money in each stock, then one would have a loss of 5%
• on average the companies IPO-ed about 3.5 years ago
• for international investors, the RM is down by about 20% versus the USD since 3.5 years ago, so the results are much worse
• the market cap off all 10 companies together has risen though, since their combined IPOs
• it is mostly IHH saving the day, with EPF continuing to buy IHH shares aggressively even at a rich PE of around 60
• Maxis, Astro, Bumi Armada and Malakoff are all "listed-delisted-relisted" cases, Bursa should really take decisive action to discourage this kind of financial engineering which comes at the expense of the minority shareholders, it is long overdue
• quite a few resource related companies on the list, they have not fared well lately

There was once a time when companies were listed at single digit PEs supported by profit guarantees, the valuation was set by the authorities. Needless to say, there was a lot of interest by investors, and some IPOs were oversubscribed by 100 times.

Those days are over, companies nowadays set their own price, which is of course correct. New, "sexy" terms were introduced by financial engineers, like "cornerstone investors", "greenshoe options" and "stabilising manager".

But from the above data, it seems the IPO price is often quite rich these days, and not much upside (if any) is provided in exchange for the risk that IPO investors take.

Combined with my previous posting about poor earnings growth for the Top 30 companies (not surprisingly there is quite some overlap), things don't look that impressive.

Bursa can hold as many international roadshows as they want, but at the end of the day, it is the fundamentals and valuations that count. And they really have to improve.

Buying on margin is a bad idea, including for employees (2)

First of all, to add to my previous story, The CEO of Bumi Armada has resigned per January 1st, 2015 due to "Family Reasons".


One broker (UBS) commented:


"UBS downgraded its medium term and normalized outlook for oil where its Brent forecast for Q414E/2015E is now at US$77.50/US$69.75 with some recovery to US$80/US$85/US$90 in 2016E/2017E/2018E. In the next 1 year, UBS' forecast is even lower than the forward prices. While we believe that its medium term cash flow is secured by contracts already won, FPSOs are typically used in deeper waters and marginal fields. Hence, in the current environment of volatile oil prices, oil companies could take longer to evaluate projects and award contracts.

Meanwhile, the market could perceive CEO Hassan Basma's resignation on Friday for family reasons (and also the sale of his 4.5m shares in the company since end-Nov) as lack of leadership in the company until the issue is addressed by the board and / or new CEO is appointed."


The company offered pre-IPO a lot of shares (probably at an interesting price) and a lot of options to the CEO.

When the price of oil tanked the share price went down from above RM 2.00 (corrected for the recent rights issue) to the current RM 1.03.

The CEO's shareholding was sold due to margin requirements, he still has "an interest in 50,624,803 unissued shares of Bumi Armada Berhad arising from outstanding options granted to him pursuant to the Company's Employee Share Option Scheme". These options are most likely out of the money and not worth much at the current share price of Bumi Armada.

In other words, although the CEO might have managed the company well, his financial results have been hugely downgraded due to circumstances beyond his control, the price of oil.

It is quite astonishing why the company choose to reward the CEO the way it did. Instead, the company could have given the CEO certain long time targets that are in reach of his control, with an adequate financial reward for reaching them.

And I am afraid the CEO might not be the only one in this predicament, other key persons in the management of Bumi Armada might have received similar structures.

For the minority shareholders, they must hope a good CEO can be found soon.

Buying on margin is a bad idea, including for employees

I wrote before:


"Bumi Armada is especially painful since the stock is not only trading way below its IPO price, but also below the price of its recent rights issue. Also, there seems to be persistent insider selling, even recently at these lower prices."


Today Bumi Armada announced:


"The Disposals were undertaken due to Margin calls on loan facilities taken by Mr. Hassan Assad Basma to purchase the said shares."


At least that makes clear why the CEO of Bumi Armada was selling shares at such a low price (RM 1.02, only a fraction of the IPO price, corrected for the recent rights issue).

But surely the management of any listed company should know that buying shares on margin is a hazardous thing to do?

Interestingly enough, I wrote about this same issue before, that time on Astro, from the same stable of companies:


"Last week Astro had a town hall meeting with their staff to talk about the share price fall and it is really up to the company to handle the situation because no organisation will like to have a group of disgruntled employees. There may be the pressure of margin calls for those who had taken financing to buy their allotment of shares. There might be employees who might not have the ability to hold on to their shares."


I am quite astonished about this all, it almost looks like certain employees are encouraged to buy shares of their company on margin. But that sounds like horrible advice, surely that can't be right. What will the mood of the employees be when the shares tank and they are forced to sell their shares, as now has happened?

I think the authorities should look into this issue.

Good articles (2)

When a prospectus becomes a doorstop (KiniBiz)

Recently, an 800-page prospectus found its way to tiger as well. Yes, 800 pages! Let that sink in for a moment. Do you feel the weight of 800 pages on your investing shoulders yet? Yes? Moving on.

In the spirit that the prospectus is similar to a scientific report, Tiger proposes a form of abstract, something short that covers everything the prospectus would cover, but without going into too much detail.

Maybe the prospectus could include an executive summary, maybe about 10 pages, 15 at most? Why not add forecasts in the executive summary, like the old times? With forecasts alongside the plan the company has in place for the proceeds raised from the listing, prospective investors can get a clearer view of what the company is offering, and in turn may be a better sell for the company.

Transparency, a plan, and recommendations from a few trusted local banks? That sounds like a recipe for a successful fund-raising to Tiger.

At the same time, the shorter (and lighter!) document would definitely be more palatable and more easily digested than 800 pages. By simplifying the document, companies are given the opportunity to present themselves to a barely tapped market of investors, due to the ease of reading of the summary.


Tycoons see their O&G investment value cut by almost half

With the oil and gas (O&G) sector being the hardest hit in the current market rout, tycoons who own significant stakes in these companies have seen a huge loss in their net worth.

These tycoons had collectively had their shareholding in these companies valued at some RM15.89bil when O&G stocks were trading at their highest prices. The fall in global crude oil prices and the plunge in the value of O&G stocks on Bursa Malaysia saw the value of their shareholding cut by almost half to some RM7.86bil yesterday.


What the article doesn't mention is that most of these tycoons have bought the companies at a much cheaper price and are thus still sitting on a handsome profit.

Quite different from the minority investors who bought these stocks recently (or at overpriced IPO prices) and are feeling the losses.

Bumi Armada is especially painful since the stock is not only trading way below its IPO price, but also below the price of its recent rights issue. Also, there seems to be persistent insider selling, even recently at these lower prices.

Somewhere in the (may be not so distant) future there must be a moment where it makes sense to start dabbling in these stocks. For the time being, catching a falling knife is not always the best thing to do.

Minorities are often the losers in the de-listing, re-listing game

Excellent article by Rita Benoy Bushon, CEO of the MSWG, published in The Star of May 10, 2012.

"Ze Moolah" commented on it in his blog.

I hope the authorities will take notice.


Regulatory conundrum?

THE fact that a growing number of previously publicly traded companies are now seeking to re-enter the stock exchange have compelled me to revisit an issue I have often critiqued in the past: the de-listing and re-listing of companies on Bursa Malaysia.

In recent memory, Maxis Communications Bhd (privatised in 2007) and Bumi Armada Bhd (privatised in 2003) have both rejoined the stock exchange albeit in different forms, while Astro All Asia Networks plc (privatised in 2010) could be making a comeback. Meanwhile, Malakoff Bhd is also considering a re-listing.
While it is entirely within the legal framework to do so, a regulatory conundrum is presented when some major owners de-list their companies at very low valuations only to later re-list them at richer valuations. In such cases, the beneficiaries of these exercises are the corporate advisors and major owners, who profit from each change in direction.

And the losers are the minority shareholders, especially long term ones, who are bought out when the prices offered are low.

Malakoff, when delisted in May 2006, was estimated at RM8.8bil. It has since grown, securing several power projects here and overseas. Clearly, it was de-listed at a time when it was experiencing significant growth in its operations, which minorities were henceforth not privy to.

Bumi Armada was taken private with a price earning ratio (PE) of under four times on a forward earnings basis in 2003. After nearly a decade, it was re-listed last year at a PE of about 20 times despite more dilution due to an ESOS scheme.

Again: why were minority investors forced out at the time? Why were they not allowed to share in the growth story?

These are just two examples that demonstrate the gravity of our concern.

Fundamental investors buy counters for the long term, and plan accordingly. They willingly assume the risks in doing so (especially when a company is still finding its feet early on in its life) so that they may reap the benefits when the fruits later ripen.
But how are we to promote a mature capital market that is founded on the maxim of fundamentals and long term investing and sound corporate governance principles when corporate advisors are able to propose a cheap exit point and a lucrative re-entry point for company's majority owners?

Shouldn't there be a cooling-off period imposed before a company that had been taken private and de-listed is allowed to re-list and some conditions imposed if relisting is allowed, such as the price should not exceed the valuation price when the company was delisted.

Bursa Malaysia, which has often lamented the lack of equity market participation among the young, can take a cue from this. Surveys have revealed that only 12% of investors are in the 20-29 age group, while 59% involve those 40 years and above.

Warren Buffett (net worth US$44bil) bought his first stocks at age 11 three shares in Cities Service Company, now known as CITGO and continues to invest today, at age 81. If we are indeed seeking similar approaches among our young to buy stocks for the long term, why do we allow major owners to list and de-list their companies without imposing conditions?

We have already seen how disadvantageous the compulsory delisting rules are when minimum public shareholding spread thresholds are crossed, minorities have no choice but to throw in the towel.
Surely the authorities are aware that this loophole using the threat of de-listing is being exploited to the detriment of the minorities? Clearly, this loophole must be closed.

As I have often remarked, central to our concerns are the valuations offered. Time and again, we have seen the take-over offers priced at a level which is as near as meaningless to the minority shareholder, especially after some have profited from speculative rises in the counter. Such activity penalises the minority investor, because his or her upside has every potential of being capped while the downside risk remains in its entirety.

On a related issue, SEG International Bhd (SEGi) is the target of a privatisation bid by Navis Capital Partners Ltd and Datuk Seri Clement Hii, who are the largest shareholders with a combined 60% stake.

They are offering to buy out minorities at a significant discount to the stock's fair value and trading price, with the intention of growing SEGi into a regional player.

Is this yet another case of a major owner and its partners muscling out the minorities from a profitable long term future?

2 Billion: "a little money"

Article at The Edge Malaysia "Ananda pares down stake in Bumi Armada"

Tycoon Ananda Krishnan and his bumiputra partners will sell roughly 15% of offshore services provider Bumi Armada Bhd in private placements to local and foreign institutional investors in a deal that will raise close to RM 2 billion.

Financial executives involved in the placement told The Edge Financial Daily that the sale of roughly 440 million shares in Bumi Armada would cut the joint holdings of Ananda and his bumiputra partners to 55% in the company. 

"It [the deal] will widen our shareholder base and raise a little money" said one financial executive.

I have written before about Bumi Armada, where minority investors were forced out under the (in Malaysia infamous) "delisting and compulsory acquisition threat". The total amount of money that minority investors missed out on is a staggering RM 2.5 billion.

When the company was delisted in 2003, the full 100% of the company was deemed to be worth only RM 440 million, which was regarded "fair and reasonable" by the "independent" adviser.

To call these unbelievable large amounts of money "a little money" is simply an insult to the (tens of) thousands of investors (who invested either directly or indirectly through unit trusts and the like) in Bumi Armada, who were forced out in the past.

To give an idea about the size, below is how RM 1 Billion looks like, with each note being worth RM 100.

Is it any wonder that Malaysia scores so badly in the GINI-coefficient, measuring the inequality in family income in a country?

I have fought the unfairness of the General Offer of Bumi Armada by filing a complaint to the Securities Commission. I attached a detailed list of the many shortcomings in the brochure. After three years I finally received an answer from Bursa Malaysia, one single line of text, nothing was wrong, not a single explanation whatsoever offered on the many issues that I had raised.

When Bumi Armada relisted in 2011, it left out in the brochure all the information about the low offer price and the delisting threat in 2003.

Both the Securities Commission and Bursa Malaysia have lately expressed their surprise about the low participation by retail investors in the local sharemarket. I don't think they should be surprised at all, they bare a lot of the responsibility for that.

Worrisome words from the Khazanah MD

http://www.btimes.com.my/Current_News/BTIMES/articles/astro31-2/Article/index_html#ixzz1csyY1UD8

"Pay television operator Astro All Asia Networks plc is best taken private at this stage of its development, the chief of its major shareholder Khazanah Nasional Bhd said.

"We feel in its current stage of development with high definition television and the Indian investment, it is time when it needs to be taken off the market. I think you get better value ... but the debt market gets developed as a result," managing director Tan Sri Azman Mokhtar told reporters on the sidelines of the Invest Malaysia conference yesterday.

"But you can see the track record of the Usaha Tegas group ... they eventually go back for a listing," he said, referring to the recent re-listing of the group's Maxis Bhd.

Khazanah, which owns about 21.4 per cent of Astro, together with other owners Usaha Tegas Sdn Bhd and Bumiputera foundations had on March 17 offered to buy out minority shareholders of Astro at RM4.30 a share.

Astro closed up 2 sen at RM4.28 yesterday."

I am getting very worried when highly influential people, like the MD of Khazanah, utter these kinds of words. Do they actually understand the implications of what they say? From a corporate governance point of view the implications are simply horrific. Like there is some sort of "game" going on, where the big players (the majority shareholders) can list, privatize and relist companies at will, at a moment and price that is convenient to them.

Taking a listed company private is a nice way to describe the process in which minority shareholders are kicked out of a company, often at low prices (sometimes at very low prices). It starts with making all kind of "threats" to shareholders holding shares in unlisted companies, shares for which no ready market exists, and with clearly less legal avenues for complaints. If minority shareholders don't want to sell, then their shares can be mandatory acquired when certain thresholds are breached. Independent advisers are supposed to come with unbiased reports, but in almost all cases they are hugely biased, favoring the major shareholders, urging the minority shareholders to indeed accept the (very) low offer price. Finally, there is a huge information bias, the majority shareholder has much more inside information about the company (both about the current conditions and the future outlook) than the minority shareholders.

Unfortunately, these practices happen a lot in Malaysia. And the fact that the majority shareholders can get away with it and the minority shareholders hardly have any chance to fight them, doesn't make it right, in the contrary. Rules have been improved somewhat lately, but there is still much to do, for instance authorities still have never bothered to come down on independent advisers that issue biased reports.

In my opinion, companies should not be taken private, unless there is a very clear reason for it (the company has hardly any business left and the liquidity of the shares is extremely low), which is often not the case at all. Shareholders invest in companies based on long term projections, it is simply unthinkable if (for no aparent reason) they are forced out of their shares, against their will.

And secondly the price offered should be fair and reasonable, beyond any doubt:

• It should be at a clear premium to its average last traded price
• It should not be at a discount to its net asset value.
• The Board of Directors should have made attempts to unlock the value of the assets (for instance by holding auctions).

For this we need better rules and much more active enforcement by SC and BM.

Below my encounter with the above mentioned Usaha Tegas group in the privatization of Bumi Armada (Barmada), and its subsequent relisting again.

In 2003 Barmada’s Minority Investors received a notice that there would be a General Offer (GO) for their shares, that the Majority Investors had no intention to continue with the listed status of the company, that no dividends might be paid, that rights issues might be necessary for further funding and that shares would be mandatory acquired if certain thresholds were reached.

Please note that the GO in itself is good, but the company should not be allowed to use the delisting threat. In this case the offer was for only RM 7 per share, with net earnings per share of RM 1 and growing nicely, an excellent balance sheet and one of the highest Return on Equity’s (more than 20%) of the whole Bursa Malaysia. The offer price was horrific low by any standard, there was no premium, the share price had been clearly higher before at which price I (and other Minority Investors) had not sold my shares. The PE of about 7 compared with PE’s of 15 to 20 of similar, much lower quality companies.

The circular was (as usual in these kind of exercises) of very low quality, lots of important information was left out (despite Full Disclosure based Regulation). In this case the Majority Investors try to paint as bleak as possible picture of the company’s future (to try to convince the Minority Investors to sell at the low price).

I filed a complaint with the Securities Commission, was asked to come to the office twice, but these talks turned out to be fruitless. I pointed at the following very important rules (emphasis is mine):

(a)    that the shareholders and directors of an offeree and the market for the shares that are the subject of the take-over offer

(i) are aware of the identity of the acquirer and offeror;  

(ii) have reasonable time in which to consider a take-over offer (A); and  

(iii) are supplied with sufficient information (B) necessary to enable them to assess the merits of any take-over offer;  

(b) that, so far as practicable, all shareholders of an offeree have equal opportunities to participate in benefits accruing from the take-over offer, including in the premium payable for control (C);  

(c) that fair and equal treatment of all shareholders, in particular, minority shareholders (D), in relation to the take-over offer, merger or compulsory acquisition would be achieved; and  

(d) in its response to, or making recommendations with respect to any take-over offer, merger or   compulsory acquisition, the directors of the offeree and acquirer shall act in good faith (E) to observe the objects, and the manner in which they observe the objects, specified in this subsection,

and that minority shareholders are not subject to oppression or disadvantaged by the treatment and conduct of the directors (F) of the offeree or the acquirer.  

My comments regarding the implementation of these rules in the Barmada case:

(A): the time to consider the take-over offer, to study the documents, to try to rally other Minority Investors, to contact the MSWG, to try to write articles for newspapers & magazines was extremely short and definitely nor reasonable at all, and the important “independent” report was send even much later to the Minority Investors, there was hardly any time to react on it.

(B): lots of important information was missing, like: What is the sales pipeline? What are the profit projections for the coming years? No recently audited Profit & Loss or Balance Sheet was given.

(C): there was no premium at all let alone for control, the price was based on an artificial low price at which certain bondholders of Barmada’s parent company were prepared to sell.

(D): this rule, which is so clear and important is never ever used by SC/BM. It should however, in any case where there is doubt, and in the advantage of the Minority Investor.

(E): by cutting the dividend, not giving a reason for that and providing inadequate information directors breached the listing rules that explicitly require this information.

(F): again, it cannot get clearer than this rule, why is it never used by SC/BM?

I contacted the MSWG, was supposed to meet the CEO but only met two analysts who didn’t know anything about the case. Later there was supposed to be a meeting with other fund managers, but I never received an invitation. MSWG did not put up any fight at all, very disappointing.

My complaints to SC and BM lasted a very, very long time, no information was ever given in the meantime, and finally (after almost three years) both came to the same conclusion, nothing wrong had happened. First of all very strange given all the clear evidence I had given of the opposite (I had provided many pages with detailed information about the issues involved). Secondly SC/BM both didn’t want to point out any reason at all for its decision. I was clearly stonewalled by both institutions.

Barmada has since relisted recently. After taking into account the bonus and rights issues, the current price corresponds to about RM 140 in 2003 terms, in other words a 20-fold increase in price, for each lot of 1,000 shares investors would not receive the paltry RM 7,000 but RM 140,000 (my friends, my relatives, my wife and my company owned dozens of lots in total). 

In the relisting exercise, it was important for the Majority Investor to paint a picture as rosy as possible. The contrast with the GO brochure of 2003 was very stark. Bursa Malaysia, who should look into this and assure that information is of the same level aparently turned their head the other direction. The reason why the majority shareholder of Barmada wanted to delist in 2003, the very low delisting price (at the current amount of shares the equivalent to only RM 0.20), the pressure that was put on the Minority Investors, the way Minority Investors were treated in the past, all was conveniently left out of the relisting circular although the circular contained more than six hundred (!) pages.

The total market value of the shares that were acquired by the Majority Investor from the Minority Investors has since increased by RM 2,500,000,000! In 2003 Barmada had thousands of shareholders, many of the larger minority shareholders were funds with each again thousands of unit trust holders. If a total of 50,000 people were invested in Barmada (either directly or through unit trust funds), then this would mean that RM 50,000 per person of value was created, in which they were not allowed to share.

More information about the Bumi Armada case:
http://www.apolloinvestment.com/pirates.htm
http://whereiszemoola.blogspot.com/search/label/Bumi%20Armada
http://cgmalaysia.blogspot.com/2011/08/over-prescriptive-regulation-and-bumi.html

10,000!

Crossed the 10,000 hit on my blog, and about the same number on http://www.asiasentinel.com/

For my blog, by far the most referrals came from:

http://www.whereiszemoola.blogspot.com/
http://malaysiafinance.blogspot.com/
http://ginsing70.blogspot.com/

A big thank you for these guys and to all the readers and to AsiaSentinel and blogger.com for giving me the opportunity.

I will continue trying to come up with more Corporate Governance cases, based on publicly available information. I can use the huge database from Ze Moolah's website, who is fighting the corporate misdeeds for such a long time. For me, people like him, P. Gunasegaram from The Star (previously The Edge) and a host of other bloggers and journalists are the real heroes, fighting for injustice in Malaysia, exposing the crooks.

More information will continue on the Maybulk/POSH saga, I owe the readers a clear explanation why this deal was so bad. One hint, if a company wants a huge amount of money, what is the first question you would ask? Exactly, but that question is not answered in the circular of 130 pages, the reason for the omission will be revealed. As usual in Malaysia, look for the information that is not given. But how is it possible that Bursa Malaysia and all the advisers and directors assigned to this deal approved the circular where this important piece of information was missing?

I hope that the CEO of Bursa Malaysia will come forward, explaining why he supported the POSH deal (he could have single handedly stopped it by voting against it and recommending Bank Pembangunan Malaysia to do the same) and how he deals with the clear conflict of interest in this matter by being the regulator dealing with the complaints on the circular. And why he dropped his Maybulk directorship from his C.V.

Bursa Malaysia, I think there is a lot more wrong with this "company" (it is a proper company and even listed, but I still can't believe that, it was a huge mistake).

The Bumi Armada saga will be highlighted: listing, delisting and relisting, a series of exercises where Minority Investors were not allowed to share in the growth of the company, and thus missed out on the unbelievable amount of more than RM 2,000,000,000.

Related Party Transactions and General Offers with "delisting threat", they will often feature for the simple reason that these are huge deals and Minority Investors have no realistic chance to fight them.

AirAsia won some Corporate Governance awards, in my opinion this company doesn't deserve them at all, explanations will be given.

My commitment: in this: full 100% support for the Minority Investors, let there be no doubt about that.

Conflict of Interest:
I only own shares in two Malaysian companies. The first is the closed-end fund iCapital, managed by Dr. Tan and trading at a discount to its Net Asset Value. The other might come as a huge surprise to my readers, it is MAS (Malaysian Airline System). No, not the share but the preferred one, MAS-PA, a bond like instrument that paid a few times interest and will be redeemed at full price if MAS is not bankrupt, which seems unlikely to me (even more unlikely now that Tony Fernandes is a shareholder). I will not buy any other Malaysian share, neither for my own account, my wife's or my company's. If I write that I hope that Minority Shareholders of say E&O or PMI get a better, more fair deal then that doesn't mean that I have bought the share or will do so, or that I recommend anybody to buy. I anyhow don't recommend anything, investors always should do their own homework and take full responsibility for their actions. I do invest myself, mostly in Singaporean and Hong Kong smallcap stocks, plus some large global companies. I also own some unit trusts / funds.

Over-prescriptive regulation and Bumi Armada's Corporate Governance issues

Feedback on the Corporate Governance Blueprint 2011 from Claire Barnes:

http://www.apolloinvestment.com/F110726.htm

"Dangers of over-prescriptive regulation

I welcome the declaration that "the cost to the market of over-dependence on regulatory discipline can be disproportionate to the benefits. It can result in regulations being overly prescriptive, additional costs to the market, and may foster a box-ticking culture. For this reason the SC is always guided by the principle that there should be no more regulation than necessary." (p.61)

Indeed I see excessive regulation as a significant threat to innovation and economic wellbeing, for society overall. It is certainly possible for "unproductive activity" to grow to the point where it crowds out "productive activity"; and although this is hard to measure, I believe that several mature economies may have reached this inflexion point.¹

In the specific field of Malaysian corporate governance, I believe that reintroducing a Continuing Professional Education requirement for directors (p.41) is a retrograde step.² Good directors have many other calls on their time: time spent on courses is likely to mean that much less time available for the strategic affairs of the company.

My impression is that the recent swelling of formalised compliance obligations and of the corporate governance sections of annual reports in Malaysia has been accompanied by a reduction in both extent and quality of the Management Discussion and Analysis text, the most important annual disclosure to shareholders of the current state of the business, principal challenges, and strategic priorities!

Accordingly, while I welcome the "greater focus on substance in terms of meeting corporate governance requirements" (p.47), there may be a danger that it is interpreted by expanding the number of words devoted to the formal CG regulations, when what is really required is a greater focus on the good governance of the company: sensible strategies, good disclosure, and equitable treatment of different stakeholders."

I fully agree with the above. As an example, the IPO document of recently (re-)listed Bumi Armada can be found here:

http://announcements.bursamalaysia.com/EDMS/subweb.nsf/LsvAllByID/6D07124A0BD9D883482578BF00036E2C?OpenDocument

It contains 600+ pages, is there anybody who actually reads such a document?

And most alarmingly, there is no mentioning at all what happened in 2003 when the company announced a General Offer with "delisting threat", discontinued its dividend without giving a reason (which is not allowed and can be seen as a way to pressure Minority Investors), issued a prospectus with lots of important information missing, containing an "independent" report that was (as always) useless because of its biased views and hardly giving Minority Investors any time at all to take action.

The company subsequently mandatory acquired the remaining shares at a paltry PE of 7, despite being one of the highest quality companies of the Bursa Malaysia (which was trading at an average PE of 15). Corrected for all subsequent bonus and right issues this works out to about RM 0.20 per current share.

The company was relisted again in 2011 at a PE of about 20 (despite a much weaker balance sheet and dilution due to ESOS scheme), and is currently trading for about 20 times the prices of 2003. Why were Minority Investors forced out, why were they not allowed to share in the growth? The total amount of money that the Minority Investors missed out on (and which all ended in the pockets of the Major Shareholders) is a staggering RM 2,500,000,000.

I am sure current Minority Investors would be very interested to know how (badly) previous Minority Investors were treated in the past. Also which commitment there is from the Major Shareholders not to do the same delisting "trick" as happened in 2003. However, despite 600+ pages, there is no mentioning at all of this important information.

In general: quantity is no substitute for quality. Minority Investors want good quality, non-biased prospectuses, with truly independent advice, not what is currently delivered. Bursa Malaysia should enforce this and actively punish writers of documents that are biased or where important information is left out. Shockingly, I haven't found a single piece of evidence that they actually do that. And that explains why the prospectuses and reports (especially the "independent" ones) are of such a poor quality.

More about the delisting of Bumi Armada can be found here:
http://whereiszemoola.blogspot.com/search/label/Bumi%20Armada
http://www.apolloinvestment.com/pirates.htm