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Tuesday, 17 November 2009
A cautionary tale for S-chip investors
One big question that emerges from the whole sorry Sino-Environment saga is why trading of its shares continued for six months after it became likely that the company would be brought down by the problems that beset it.
One big question that emerges from the whole sorry Sino-Environment saga is why trading of its shares continued for six months after it became likely that the company would be brought down by the problems that beset it.
Waste recycler Sino-Environment hit the headlines in March when its founder and chairman, Mr. Sun Jiangrong, abruptly admitted he had put the company in jeopardy as a result of excessive borrowings.
He had borrowed $120 million from hedge fund Stark Investments in August 2007 and pledged his entire 56.3 per cent stake in the firm as collateral.
But he failed to disclose to his board this personal financial arrangement when it gave the go-ahead for a $149 million bond issue 10 months later, whose
caveats included an undertaking that he should stay in control of the firm.
The early exit clause for bondholders to get back their money was activated when Mr. Sun defaulted on a loan payment due to be repaid to Stark in February. This caused the hedge fund to seize control of his shares.
Traders are now asking, given the dire financial straits which the company found itself in because of Mr. Sun’s misadventure, would it not have been prudent to stop the trading of Sino-Environment shares at that point?
Instead, the company’s shares were traded well into September before they were finally suspended.
One major unresolved question is how many fresh investors were lured into trading the counter during this period. They may have to write off their entire investments.
It now transpires that while they were happily trading the stock, there were developments brewing in the company which, had they known of them, would have stopped them in their tracks.
There were warning bells in the form of repeated extensions given by the Singapore Exchange (SGX) for the firm to report its results for the first and second quarters.
In May, the company said that it had asked auditors PricewaterhouseCoopers (PwC) to review significant cash transactions between January and March - a period coinciding with Mr. Sun’s loan default.
Last month - a full month after trading had been suspended - the company said that the review revealed ‘certain questionable cash transactions and matters which may have a significant impact on the company’s financial position’.
The revelations carried uncanny echoes of two other China-based firms which had encountered similar problems - fibre-maker Fibrechem Technologies and corn-starch producer China Sun Bio-chem. Both had encountered irregularities over their cash balances.
At least in Fibrechem and China Sun, the investing public was spared further anguish, as trading of their shares ceased after they failed to complete full-year audits of their accounts in February.
But at Sino-Environment, investors were treated to the charade of Mr. Sun leading a walkout of his management team - Mr. You Shengquan, Professor Li Shouxin and Madam Lin Xin - in May.
Their move forced independent directors - former MP Goh Chee Wee and Dr Wong Chiang Yin - to travel to Fuzhou, China to ask them to reconsider.
As a result, Mr. Sun got himself reinstated as chairman and chief executive and refused to quit last month when asked to, after the irregularities were uncovered by PwC.
Instead, he turned the tables on the independent directors by sacking Mr. Raynauld Liang Wee Leong, the financial controller of the company’s Singapore unit, for reporting the PwC findings to the Commercial Affairs Department here and to the Chinese authorities.
Some market watchers now want the firm’s shareholders to convene a special general meeting to oust Mr. Sun.
But since the shares are effectively worthless - as the firm is no longer traded - it is unlikely that this will happen since most of them will have to write off their investments.
The sorry saga highlights the inability of independent directors to grapple with the problems that confront S-chips when their bosses go rogue.
For traders, it is difficult to decide which is the worse nightmare for independent directors - China Sun or Sino-Environment.
In China Sun, independent directors reflected their impotence when they had to reinstate the chairman only days after suspending him for failing to turn up for a board meeting to explain the firm’s missing cash. At Sino-Environment, independent directors were made to look like fools when they failed to sack the chairman, after retaining his services when he had threatened to leave in May.
Even punishing Sino-Environment by threatening it with delisting may now be, at best, a symbolic move by SGX.
Trading of the company’s shares is unlikely to resume in the light of what has transpired. There is also no guarantee that the SGX will be paid its listing fees.
Sino-Environment makes an interesting cautionary tale for investors who want to put their money into S-chips.
2 comments:
A cautionary tale for S-chip investors
By Goh Eng Yeow
17 November 2009
One big question that emerges from the whole sorry Sino-Environment saga is why trading of its shares continued for six months after it became likely that the company would be brought down by the problems that beset it.
Waste recycler Sino-Environment hit the headlines in March when its founder and chairman, Mr. Sun Jiangrong, abruptly admitted he had put the company in jeopardy as a result of excessive borrowings.
He had borrowed $120 million from hedge fund Stark Investments in August 2007 and pledged his entire 56.3 per cent stake in the firm as collateral.
But he failed to disclose to his board this personal financial arrangement when it gave the go-ahead for a $149 million bond issue 10 months later, whose
caveats included an undertaking that he should stay in control of the firm.
The early exit clause for bondholders to get back their money was activated when Mr. Sun defaulted on a loan payment due to be repaid to Stark in February. This caused the hedge fund to seize control of his shares.
Traders are now asking, given the dire financial straits which the company found itself in because of Mr. Sun’s misadventure, would it not have been prudent to stop the trading of Sino-Environment shares at that point?
Instead, the company’s shares were traded well into September before they were finally suspended.
One major unresolved question is how many fresh investors were lured into trading the counter during this period. They may have to write off their entire investments.
It now transpires that while they were happily trading the stock, there were developments brewing in the company which, had they known of them, would have stopped them in their tracks.
There were warning bells in the form of repeated extensions given by the Singapore Exchange (SGX) for the firm to report its results for the first and second quarters.
In May, the company said that it had asked auditors PricewaterhouseCoopers (PwC) to review significant cash transactions between January and March - a period coinciding with Mr. Sun’s loan default.
Last month - a full month after trading had been suspended - the company said that the review revealed ‘certain questionable cash transactions and matters which may have a significant impact on the company’s financial position’.
The revelations carried uncanny echoes of two other China-based firms which had encountered similar problems - fibre-maker Fibrechem Technologies and corn-starch producer China Sun Bio-chem. Both had encountered irregularities over their cash balances.
At least in Fibrechem and China Sun, the investing public was spared further anguish, as trading of their shares ceased after they failed to complete full-year audits of their accounts in February.
But at Sino-Environment, investors were treated to the charade of Mr. Sun leading a walkout of his management team - Mr. You Shengquan, Professor Li Shouxin and Madam Lin Xin - in May.
Their move forced independent directors - former MP Goh Chee Wee and Dr Wong Chiang Yin - to travel to Fuzhou, China to ask them to reconsider.
As a result, Mr. Sun got himself reinstated as chairman and chief executive and refused to quit last month when asked to, after the irregularities were uncovered by PwC.
Instead, he turned the tables on the independent directors by sacking Mr. Raynauld Liang Wee Leong, the financial controller of the company’s Singapore unit, for reporting the PwC findings to the Commercial Affairs Department here and to the Chinese authorities.
Some market watchers now want the firm’s shareholders to convene a special general meeting to oust Mr. Sun.
But since the shares are effectively worthless - as the firm is no longer traded - it is unlikely that this will happen since most of them will have to write off their investments.
The sorry saga highlights the inability of independent directors to grapple with the problems that confront S-chips when their bosses go rogue.
For traders, it is difficult to decide which is the worse nightmare for independent directors - China Sun or Sino-Environment.
In China Sun, independent directors reflected their impotence when they had to reinstate the chairman only days after suspending him for failing to turn up for a board meeting to explain the firm’s missing cash. At Sino-Environment, independent directors were made to look like fools when they failed to sack the chairman, after retaining his services when he had threatened to leave in May.
Even punishing Sino-Environment by threatening it with delisting may now be, at best, a symbolic move by SGX.
Trading of the company’s shares is unlikely to resume in the light of what has transpired. There is also no guarantee that the SGX will be paid its listing fees.
Sino-Environment makes an interesting cautionary tale for investors who want to put their money into S-chips.
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