S-chip cases highlight need for a tighter leash on major shareholders
By Goh Eng Yeow 9 March 2009
It was a ghastly week for S-chips, China plays which are listed on the Singapore Exchange (SGX).
Financial problems plaguing the major shareholders of two S-chips - cosmetics firm Beauty China and waste-treatment firm Sino Environment - have threatened the health of the firms themselves.
This has, in turn, cast a pall over the rest of the S-chip sector.
Ordinary shareholders, with no say over the running of either firm, could only watch the unfolding drama helplessly as they were sucked into a financial calamity not of their making.
On Tuesday, investors in Beauty China were told that their major shareholder, Mr. Wong Hon Wai, had been approached to sell his 38.6per cent stake in the firm.
Over the next two days, it emerged that he had pledged his entire Beauty China stake to get a loan, and that this stake was being force-sold by the lender on the open market to help repay the loan.
Not surprisingly, the information did not go down well with investors and the stock plunged 64per cent in a week.
On Thursday, it was the turn of Sino-Environment Technology Group to make its own confession to investors late at night. Trading of its shares had been suspended since that morning.
Its major shareholder Sun Jiangrong had pledged his entire 56per cent stake in the firm, together with other assets he owned, to get a loan of $120million from hedge funds and he had difficulties repaying it.
Suffice to say, his personal financial problems quickly posed serious problems for Sino-Environment as well.
The hedge funds had threatened to sell the shares on the open market.
Such a move would cause the control of the company to change hands. This might, in turn, plunge the company into a financial crisis, as it would have to make immediate repayment on a $149million bond issue triggered by the change of ownership.
In both cases, no advance warnings were made by either Mr. Wong or Mr. Sun.
Some would argue that the financial arrangements both men made on their shares are material information which investors should learn about via stock exchange announcements.
Investors may not be willing to invest in a given firm if they know its major shareholder has already, in a sense, signed away the rights to his shares in exchange for a loan.
After all, they are putting their money in only because of their faith in the major shareholder, who is often the key man running the firm.
Will such a person have the same sense of commitment or ownership, if he has ‘cashed out’, so to speak?
Many investors are enthralled by tales of those who get rich by putting money into firms run by corporate titans such as banker Wee Cho Yaw, who set up his banking empire 50 years ago.
These bosses put their hearts and souls into businesses they established, making sure that every cent they earned was ploughed back into the business.
But it seems to be a different ball-game for the current generation of businessmen in their haste to make as much money as possible.
It raises the question as to whether the SGX’s one-size-fits-all rule book is adequate to handle problems thrown up by the likes of Sino-Environment and Beauty China.
Surely, more should be done to press company bosses to disclose financial arrangements they have made over their shares.
A check on the announcements made over the years by Sino-Environment and Beauty China drew a blank, while their latest annual reports merely disclose that the two men’s stakes were kept in nominee companies.
Many of these businessmen spend the bulk of their time outside Singapore, as their firms mostly operate abroad.
It is going to be difficult, even at the best of times, to monitor actions they might have taken over their shares, even though it is in the rule-book that they should make disclosures over any changes promptly.
An early warning bell was sounded when Mr. Wing Hak Man, the former chairman of waste-water treatment firm Bio-Treat Technology, turned up in Singapore more than two years ago, alleging that his shares had been fraudulently transferred out of his name.
It has been tough to get to the bottom of this murky ownership issue. The High Court told Mr. Wing last month that it was not appropriate for him to commence proceedings against Bio-Treat here as its operations are abroad and those he is suing are non-Singaporeans.
But there is firm action the SGX should take to address these problems. For a start, the bourse operator should insist that major shareholders in overseas firms keep a certain portion of their shares with the Central Depository (CDP) as proof of their commitment to the company.
They should also disclose any financial arrangements they may have entered into, with regard to the rest of the shares.
If a loan has been made out to a listed firm on condition that its major shareholder maintains a certain stake, those shares should be left with the CDP for safekeeping.
The major shareholder should also give an undertaking that these shares cannot be pawned to avert any calamity which the company may suffer, should he subsequently encounter a financial misadventure.
As legendary investor Warren Buffett once observed: ‘It is only when the tide goes out that you learn who’s been swimming naked.’
The global financial crisis is putting companies everywhere under all sorts of stress. Let’s overhaul the rules quickly on this one issue. The price for inaction will be costly.
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Ban players from pawning shares
S-chip cases highlight need for a tighter leash on major shareholders
By Goh Eng Yeow
9 March 2009
It was a ghastly week for S-chips, China plays which are listed on the Singapore Exchange (SGX).
Financial problems plaguing the major shareholders of two S-chips - cosmetics firm Beauty China and waste-treatment firm Sino Environment - have threatened the health of the firms themselves.
This has, in turn, cast a pall over the rest of the S-chip sector.
Ordinary shareholders, with no say over the running of either firm, could only watch the unfolding drama helplessly as they were sucked into a financial calamity not of their making.
On Tuesday, investors in Beauty China were told that their major shareholder, Mr. Wong Hon Wai, had been approached to sell his 38.6per cent stake in the firm.
Over the next two days, it emerged that he had pledged his entire Beauty China stake to get a loan, and that this stake was being force-sold by the lender on the open market to help repay the loan.
Not surprisingly, the information did not go down well with investors and the stock plunged 64per cent in a week.
On Thursday, it was the turn of Sino-Environment Technology Group to make its own confession to investors late at night. Trading of its shares had been suspended since that morning.
Its major shareholder Sun Jiangrong had pledged his entire 56per cent stake in the firm, together with other assets he owned, to get a loan of $120million from hedge funds and he had difficulties repaying it.
Suffice to say, his personal financial problems quickly posed serious problems for Sino-Environment as well.
The hedge funds had threatened to sell the shares on the open market.
Such a move would cause the control of the company to change hands. This might, in turn, plunge the company into a financial crisis, as it would have to make immediate repayment on a $149million bond issue triggered by the change of ownership.
In both cases, no advance warnings were made by either Mr. Wong or Mr. Sun.
Some would argue that the financial arrangements both men made on their shares are material information which investors should learn about via stock exchange announcements.
Investors may not be willing to invest in a given firm if they know its major shareholder has already, in a sense, signed away the rights to his shares in exchange for a loan.
After all, they are putting their money in only because of their faith in the major shareholder, who is often the key man running the firm.
Will such a person have the same sense of commitment or ownership, if he has ‘cashed out’, so to speak?
Many investors are enthralled by tales of those who get rich by putting money into firms run by corporate titans such as banker Wee Cho Yaw, who set up his banking empire 50 years ago.
These bosses put their hearts and souls into businesses they established, making sure that every cent they earned was ploughed back into the business.
But it seems to be a different ball-game for the current generation of businessmen in their haste to make as much money as possible.
It raises the question as to whether the SGX’s one-size-fits-all rule book is adequate to handle problems thrown up by the likes of Sino-Environment and Beauty China.
Surely, more should be done to press company bosses to disclose financial arrangements they have made over their shares.
A check on the announcements made over the years by Sino-Environment and Beauty China drew a blank, while their latest annual reports merely disclose that the two men’s stakes were kept in nominee companies.
Many of these businessmen spend the bulk of their time outside Singapore, as their firms mostly operate abroad.
It is going to be difficult, even at the best of times, to monitor actions they might have taken over their shares, even though it is in the rule-book that they should make disclosures over any changes promptly.
An early warning bell was sounded when Mr. Wing Hak Man, the former chairman of waste-water treatment firm Bio-Treat Technology, turned up in Singapore more than two years ago, alleging that his shares had been fraudulently transferred out of his name.
It has been tough to get to the bottom of this murky ownership issue. The High Court told Mr. Wing last month that it was not appropriate for him to commence proceedings against Bio-Treat here as its operations are abroad and those he is suing are non-Singaporeans.
But there is firm action the SGX should take to address these problems. For a start, the bourse operator should insist that major shareholders in overseas firms keep a certain portion of their shares with the Central Depository (CDP) as proof of their commitment to the company.
They should also disclose any financial arrangements they may have entered into, with regard to the rest of the shares.
If a loan has been made out to a listed firm on condition that its major shareholder maintains a certain stake, those shares should be left with the CDP for safekeeping.
The major shareholder should also give an undertaking that these shares cannot be pawned to avert any calamity which the company may suffer, should he subsequently encounter a financial misadventure.
As legendary investor Warren Buffett once observed: ‘It is only when the tide goes out that you learn who’s been swimming naked.’
The global financial crisis is putting companies everywhere under all sorts of stress. Let’s overhaul the rules quickly on this one issue. The price for inaction will be costly.
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