Related Party Transactions, "a national sport in Asia"

I have often warned about Related Party Transactions (and its closely related cousin "Conflict of Interest"). Basically, these should be avoided by companies, and if they are unavoidable due to the nature of the business, they should be done in a very transparent and upfront manner.

In Malaysia, RPTs (and Conflict of Interest situations) are of course almost a way of life, many of the Corporate Governance abuse cases described in this blog handled about them.

GMT did recently some research regarding Hong Kong and Singapore companies.


Over 90% of all companies were engaged in some form of related party transactions in 2014. It makes us wonder if the remaining 7-8% simply forgot to declare them! These transactions averaged 7% of combined sales and expenses which is highly material to profit. A whopping 13% (46 companies) had related party transactions in excess of 20% of combined sales and expenses. However, of these, 31 were state owned enterprises (SOE) which clearly do a lot of business with other SOEs. Who knows whether they conduct business at market prices or in line with government policy? What we’re really interested in are those private companies with a large amount of related party transactions because that’s where minority shareholders are at greatest risk. That leaves us with just 15 companies which we list in alphabetic order below:

Some of GMTs findings (unfortunately the names of the companies are left out, I guess one has to subscribe to their services for that):

• Company 1: The largest related party balances of any company GLOBALLY, at US$6.2bn. It is paid interest income on amounts owed to it but doesn’t pay interest on amounts it owes. This boosted 2014 pre-tax profit by 20%.
• Company 2: Two CEOs have been sent to jail in the last decade.
• Company 3: Around 45% of expenses routed through two companies owned by the founder. One of these paid the founder an estimated US$22m in dividends over the past two financial years.
• Company 4: Building the world’s 5th tallest building in China, financed with a US dollar loan from a related party.
• Company 5: Over 35 pages of connected party transactions.

As a safeguard, RPTs have to be evaluated by the independent directors (INEDs), if the deals are properly done at arms length.

However, as David Webb put it: 

Once appointed by the board, the INEDs are re-elected by shareholders at the next annual general meeting, and thereafter by rotation (typically standing every three years, if they survive that long). Unfortunately, the controlling shareholders are allowed to vote in these elections, so they nearly always determine the outcome. Yes, the sheepdog is appointed by the flock, not by the shepherd. It is a clear absurdity that the controlling shareholders effectively appoint the people who are supposed to prevent them from abusing the company. This is shareholder democracy Hong Kong-style.

In fact, INEDs are often so closely allied to the executive directors that, if the company is taken over, the INEDs resign at the same time as the executive directors, and the new controlling shareholders will appoint new "independent" directors of their choice.

GMT concludes with "Now we’re working on the rest of Asia". I certainly hope they don't skip Malaysia, there will be lots of juicy material to be found.

AirAsia X lodges complaint with SC

According to this article in The Star, AirAsia X has lodged a complaint against GMT Research with the Securities Commission.

First of all, I have to admit that I haven't read the original article by GMT Research (I have read though the freely available articles).

Secondly, filing a complaint with the SC is not akin to suing a company, everybody can file a complaint with either SC or BM.

The article is not very specific about the reasons behind the complaint, only one item is mentioned:


“GMT has accused AAX, among others, of practising or allowing profit shifting between AirAsia Bhd (AAB) and AAX by way of transfer pricing of the service fees and costs charged by AAB,” it said.


A reference is made to article 177 of the CMSA:

In other words, even if what GMT wrote was not correct (I am not sure about that, no concrete example with supporting evidence is given), then still it must be proven that either GMT didn't care that the information was wrong, or that they knew that the information was wrong. Looks to me rather difficult to prove.

For two more links from GMT Research about AirAsia: here and here.

AirAsia and AirAsia X are probably the most hyped companies listed on Bursa, the public is bombarded by PR campaigns on a weekly (sometimes daily) basis. Many times "rumours" are picked up by the media, which are then denied a few days later. Twice (free) PR, all very much in the Richard Branson style.

Both AirAsia and AirAsia X have however hugely disappointed in the last few years, despite using very aggressive accounting techniques.

Naturally, that combination will attract critical comments, may be not so much in Malaysia, where the mainstream media seems rather cosy with AirAsia (AirAsia is of course a large advertiser) but more so outside.

It is (at least for me) disappointing when one of the most hyped companies, having one of the worst post IPO performances, can't stand some critical comments.

Especially given the recent events in Malaysia, where "shooting the messenger" is (as always) very widespread.

GMT on AirAsia: "New Dog, Old Tricks"

On Vimeo a video is released giving some (but not all) of the issues that GMT Research has raised on AirAsia.

The video can be found here.

It is reasonably detailed and I recommend the viewer to pause the image when numbers are being shown.

Tony Fernandes has immediately described the report as "rubbish", and that he will proof the writers of the report wrong. Not an unexpected reaction.

However, what is needed is a more sophisticated reaction, not the kind of reaction from Nobel (listed in Singapore).

Airasia has announced a pretty decent reply a few days ago, however, there are some shortcomings.

First of all it prides it self on transparency, but good transparency is something else than good governance or good accounting.

For good governance for instance a neat corporate structure is needed, something AirAsia (and its mother company) doesn't have. The amount of related party transaction between the many parties (each with different shareholders) is simply overwhelming.

Regarding the good accounting: AirAsia has always accounted very aggressively, in my opinion much too aggressively, and in AirAsia X's case to an extent that is doesn't make sense at all (deferred tax when it continues to make losses).

Regarding the first part (the consolidation has just not been possible), surely it could have been presented in some form or shape in the year report, what the consequences would be of consolidating.

Good however that from the second quarter onwards the company will include the numbers.

For me, AirAsia has always relied much too much on a combination of financial engineering and marketing hyphe, something I don't like at all.

This report by GMT is a refreshing, different approach from the usual stuff we normally read in the Malaysian media.

Who will be right at the end of the day? I guess we have to wait and see.

AirAsia is however warned, and could thus take appropriate actions, for instance by raising more capital.

Another unrelated but interesting video by GMT can be found here, some of its contents:

• WorldCom & Enron explained
• Goodwill & impairments
• CP ALL: A very over-leveraged buyout
• Youku: Growth through acquisitions
• Curious Assets
• Wilmar: Leveraged Chinese carry trade
• Reliance Infrastructure: Capitalising expenses?
• Chinese Concessionaires: Paper profits
• P&G H&H: Corporate governance
• Larsen & Toubro: Cutting off the lifeline