Scrap the public float rule

Today's article "Quek’s poker game for HLCap" in The Star written by Risen Jayaseelan regarding Hong Leong Capital (HLCap) raises many interesting issues:

• As off February 25, 2013 Hong Leong Financial Group (HLFG) only had 81.33% of the HLCap shares, not enough to delist the HKCap;
• Yu Kuan Chon appeared on the scene, and although he is not linked to HLFG, his holding was so large that it wasn't counted in the free float; hence the free float was deemed to be too small and the shares would be delisted;
• However, after Yu sold some shares, the 10% free float was restored again;
• Lee Jim Leng, head of Hong Leong Investment Bank, has recently exercised 1 million HLCap options, causing the freefloat to be less than 10% again, hence there is the threat that the shares will be delisted again.
• According to this announcement, the share will indeed be suspended on August 12, 2013

And there is another, unconfirmed story:

"Incidentally, there is also some market rumours that this whole HLCap saga has had some collateral damage to another key Hong Leong personality, although this theory could not be verified. Stalwart banker, Datuk Yvonne Chia, resigned as CEO of Hong Leong Bank Bhd in March. The reason cited then was simply that she was retiring. But now rumours are circulating that Chia may have had to leave because she had failed to support HLFG's buyout by selling her holdings or stock options into the HLFG buyout of HLCap. All parties related to this story could not be reached for comment."


For the minority shareholders, the events have a large impact:


"The suspension of trading of a stock is always bad news for minority shareholders as it means they can no longer sell their shares in the open market. Hence the threat of suspension had worked to force minorities in buyout situations to throw in the towel in the past."

David Webb wrote about the same issue regarding South China Morning Post (SCMP), whereby Kerry Media Ltd (controlled by the Kuok family) used rather unorthodox means (by parking 225m SCMP shares with three investment bankers) to keep the SCMP listed (as opposed to the Quek family who want to delist HLCap).

Other constructions that are being used in Hong Kong is issuing unlisted shares to the majority shareholders, Webb gives several examples of this.


Some majority shareholders want to keep their company listed at all cost, some not. Financial engineers are coming up with solutions to satisfy the large shareholders, solutions that look terribly artificial.


As usual, David Webb has a very simple and transparent solution for this problem:


"The public float rule should be scrapped. Let the market trade. The market has full information on what the substantial shareholdings over 5% are (to the nearest whole percent) as required by law. Investors can make their own choice over whether they want to own shares in a small percentage float, whether it is a large company or a small one. Investors should not have to pay, via their companies, to execute convoluted bonus share schemes just to comply with the Listing Rules, and should not be at risk of having their money frozen in suspended shares purely because of the actions of other shareholders. This rule is not serving investor interests."

Rogers, Malaysia, Enforcement and Volatility

According to this article in The Sun Daily, Jim Rogers made a 180 degree turn regarding investing in Malaysia:

Famed investor and co-founder of Quantum Fund, Jim Rogers (pix), took to the stage at Invest Malaysia 2013 yesterday to say that he is now back in Malaysia to invest and believes that the "positive dramatic changes" undertaken by Prime Minister Datuk Seri Najib Abdul Razak have put Malaysia on the right track.

"Malaysia is making positive dramatic changes. I am extremely optimistic about Malaysia and Asean. In fact I don't see any countries in Asean going the wrong way,'' he told a packed ballroom here yesterday.

.... Rogers had once said that he would never return to invest in Malaysia after getting burnt during the 1998 Asian financial crisis.


The problem with Malaysia is, that one can never be sure if changes are for real, or if it is all mere "sandiwara" (shadow play). Enforcement has been increased over the last 15 years, but hardly any big fish has ever been caught.

However, there might be some change lately. KiniBiz reported: "SC fines Naza brothers for Jetson affair":

The Securities Commission (SC) slapped a RM500,000 fine on SM Nasarudin SM Nasimuddin, SM Faliq SM Nasimuddin, and Ahmad Ibrahim last month, for failing to “carry out a mandatory offer for the remaining shares in Kumpulan Jetson Bhd”,

The article (full version only for subscribers) continued:

"The penalty is believed to be related to the brothers’ 2010 exit from Jetson, reportedly due to disagreements with other shareholders. The exit came a year after buying into Jetson via their private vehicle Superior Pavillion in August 2009."

"....This is not the first instance of failure to undertake a mandatory offer at Jetson, and ironically is preceded by a case involving Teh himself. In 2008, the Commission directed Teh [Managing Director and co-founder of Jetson] to disgorge his profits to a charity of his choice after failing to make a mandatory offer for the remaining shares in Jetson after acquiring control in the group."

Hopefully for the minority shareholders of Jetson it will be third time lucky.


I can't find any other link in the media to the above fine and reprimand, the link on the website from the Securities Commission can be found here.

It is very rare for Malaysia that VIP's like the Naza brothers are reprimanded and fined. So may be there is still hope for Malaysia after all, this looks like a step in the right direction.

If the fine itself (only a fraction of the company valuation) is sufficient is another matter. Punishment for blue collar cases are notoriously light.

The timing of Jim Rogers' bullish speech might however not be the best. In developed countries markets go up through the escalator and down through the lift. In emerging countries this is even much more true. "Hot money" can be reversed in an instant and both equity markets of emerging markets and their currencies will suffer. There is a lot of volatility lately which seem to indicate outflow of funds and heightened risk.

Bursa Malaysia was hit by six (quite good quality) counters that went limit-down this Friday at or near the close:

Bursa Malaysia responded that the orders were "valid and genuine", but who in his or her right mind would dump shares like this?

"Where is Ze Moola" finds it nonsensical trades and I have to agree with that. Even stranger is that 2 other counters (The Star and JCY) were traded up that day.

Monday will give a more clear picture what is going on.

Puncak Niaga issues (2)

I wrote before about Puncak Niaga.

Puncak Niaga has responded to the issues raised by MSWG, the link can be found on  MSWG's website, the full letter here.

Although I appreciate that the company has responded, I am not exactly convinced by the answers given:


Utilisation of proceeds was unclear (i):

Company basically agrees with that, but it happens more often. That could very well be so, but it would have been much better if there was a clear reason to raise money. Also, the company just declared a dividend, what is the use of on one side raising funds and on the other hands paying out dividends? It doesn't make much sense, all these exercises only cost money (commissions and expenses).


The dilution effect of the sukuk issue (ii):

If all shareholders receive free warrants pro rate to their shareholding, then that is a zero game for all shareholders involved. In actual fact, it is even a slightly negative game, since (again) expenses are occurred. Shareholders who are somewhat more clever with buying, selling and exercising of warrants due to a better understanding will make some money, at the expenses of the shareholders who don't understand them that well. There is no free money here.


The placees were not identified (iii):

"It is market practice that the placees are not identified". Unfortunately, this is indeed true, but I don't like this at all, I think the authorities should change this rule. At an IPO the existing shareholders are revealed, at one moment in the year, the top 30 shareholders are revealed, I think there is no reason why placees should not be revealed. If they don't like that, then they should not participate. Minority shareholders deserve transparency which parties receive these opportunities that are not available to others.


The profit sharing/bond yield and conversion price were not revealed (iv):

"The whole process took so long time in which conditions could have been changed". First of all, the company was not forced to go into this fund raising exercise. Secondly, there might be a lesson here to shorten the whole process. And lastly, if the rates are not known, how can the shareholders take a informed decision about the reasonableness of the exercise? The devil is in the details, the quality of the offer depends on these ratio's.


The company should have considered a right issue I which all shareholders could participate (v):

There was uncertainty regarding the underwriting. But the company didn't clearly state that it was not possible to underwrite the rights issue. A rights issue, in which each shareholder can decide for themselves to participate or not, makes much more sense and is much fairer to all parties involved.


The high gearing ratio (vi):

The company admits there are a lot of loans at the SYABAS level, but they are to be repaid by tariff hikes. Consumers better take note of this, they will foot the bill.


Puncak Niaga is a company with lots of Corporate Governance issues: a patchy track record with losses in four out of the last five years, the company is involved in many court cases, the CEO is paid wages that seem excessive, and the above issue has raised too many questions, despite the clarifications given.

Make IPO documents readable

I have complained many times in the past about the large (unreadable) IPO documents in Malaysia, for instance here (AirAsia X, 492 pages), here (Astro, 596 pages) and here (Bumi Armada, 600+ pages).

Quantity does not substitute quality. One of the most important aspects for me is the corporate history, who invested how much for how many shares? Or, when a company is delisted and relisted, why is there such an enormous increase in valuation, what were the reasons for delisting and what has changed that the company want to list again, what assurance do minority investors have that the company will not be delisted again?

Unfortunately, these important issues are not properly tackled. Instead, we get hundreds of pages of detailed information which is not really helpful at all, and only makes the documents more or less unreadable.

The Straits Times published an article "Big is not always beautiful with IPO documents" on June 10th, 2013 written by Goh Eng Yeow. The link to the full article can be found here.

Some snippets (emphasis mine in bold):


Some of us have grown tired of trying to make sense of initial public offering (IPO) documents that have become thicker than the Yellow Pages.

So the prospectus issued by Manchester United last year ahead of a United States listing was a joy to behold.

In just 152 pages, excluding appendices, the famed English football club was able to tell Wall Street investors why they should be buying its shares and the risks they faced in doing so.

It begs the question: Would Man U have been able to achieve similar brevity if it had pressed on with its listing plans here?

In all likelihood, its offer document would have ended up more like the one put out by IHH Healthcare, which made its debut about the same time. Its IPO featured a 667-page document 7cm thick and weighing about 3kg.


It is interesting that the writer uses a Malaysian company listed in Singapore as an example (a company that was also partly delisted before, listing previously delisted companies  seems to be the flavour of the day in Malaysia).

A bit further:


".....In Singapore, by contrast, where lawsuits over soured IPOs are virtually non-existent".


The same is unfortunately also very true in Malaysia, where many IPO's have shown disappointing results from the day they were listed, but hardly anyone has ever been punished for that. It is important to note that companies should in actual fact increase earnings once they are listed, since they attract a fair amount of money during the listing process, money that should help to grow earnings.

What is needed is the introduction of class action suits, which would make it more easy for minority shareholders to take action against the perpetrators. An organisation like MSWG would be able to take legal action, and disgruntled minority investors could register with them to file their claim.

I am sure that would help to level the playing field between majority shareholders and minority shareholders, and also would increase the quality of companies that file for an IPO.

The newspaper article continued:


Nor is the problem confined to Singapore apparently. When the Australian securities regulator asked for feedback on how to make prospectuses more user-friendly two years ago, the litany of complaints it attracted were woefully similar.

Australian investors complained that their prospectuses were long and difficult to read, complete with repetitive summaries and risk disclosures that resembled a shopping list.

It led Australian Securities and Investments Commission (Asic) deputy chairman Belinda Gibson to observe that prospectuses must clearly advise investors on what information they should focus on, and in language they can understand.

Asic's solution was to advise issuers to draw up an investment overview to help investors grasp the contents. It also encouraged issuers to cut down on the prospectus' length by leaving out irrelevant information and using cross-referencing to avoid repetition as much as possible.

Now, that is one approach that would be warmly welcomed by the local investment community as the battle to attract huge IPOs heats up among major bourses.

After all, a company may not want to list on a stock exchange where IPO documents read like gibberish, when Wall Street has set the trend issuing prospectuses that even a novice investor can understand.

But the big challenge would be to get investment bankers and their lawyers to change their mindsets and agree to cut down on irrelevant information.

While the aim of cramming the prospectus with as much information as possible was ostensibly to enable investors to make informed decisions, it may also be a catch-all effort to escape any legal liability in case the IPO subsequently turns sour.

One corporate lawyer says the Securities and Futures Act lays down onerous liabilities for professionals who fail in their due diligence. Their only defence is to "make all reasonable inquiries and ensure there are no omissions".

This explains why investment bankers assume a worst-case scenario each time they work on an IPO, putting in every bit of information that may exonerate them from any liability if something goes wrong.

But it raises a point made many times in this column: Are hefty prospectuses issued to protect the investment bank, or the investors for whom they are supposedly intended?

To remedy the problem, the Singapore Exchange (SGX) can try to make its rules less prescriptive as it revises its Listing Manual, and establish broad guidelines, rather than specific rules, on company disclosures.

For example, take the current SGX rule on "interested person transactions" - which sets transactions above $100,000 as the benchmark for disclosure.

Corporate lawyers note that in a $1 billion IPO where each senior executive's airfare can run into several hundred thousand dollars, that rule alone can result in several pages of disclosures on travelling expenses. That would only trivialise the prospectus.

Investors now have the equities markets the world over to invest in. To get a fighting chance to compete with far bigger bourses like Wall Street for the world's sexiest IPOs, we should at least ensure our listing documents are just as readable.


And with that conclusion I have to agree full-heartedly. I hope the authorities will take note of the newspaper article and act upon it.