Sunday, June 10, 2007

SC To The Fore

I am an admirer of Datuk Zarinah, the head of Malaysia's Securities Commission. While there have been certain things it could have done better (such as the long non-suspension of Transmile), overall the SC has been more proactive. As in any normal markets, accounting frauds, accounting irregularities and even outright CBT are part and parcel of the overall scene. Recently we have "special situations" at Nasioncom, Transmile and even Southern Bank. Now, probably the biggest hole relative to the company's market cap, we have Megan Media. Kudos to Where Is Ze Moola who has been harping on Megan's problems long before the situation became public. Megan Media Holdings Bhd., a Malaysian maker of computer storage products, said the Securities Commission has started an investigation into its accounts after the company discovered irregularities in a unit.

A probe into a unit showed ``substantial irregularities'' that may lead to a RM456m asset shortfall at the division. The financial position of Memory Tech Sdn., owned by Megan Media, has been ``materially misstated,'' Megan Media said, citing a preliminary report by accountant Ferrier Hodgson MH Sdn. The company said today it may consider legal proceedings to recover funds lost. The company has suspended its financial controller. The accounting probe discovered there was a ``deliberate falsification'' of performance, it said.

Since Zarinah's tenure, the SC has been more proactive. I know there have many phone calls to many companies and individuals behind the scenes from the SC, either to guide, question, warn, caution, remind these "special issues" people/company. The SC has done a lot of work behind the scenes, so its not fair to assume that they only appear when companies are already blotting the radar.

I believe the Sc has shown much more independence and now appears to NOT need "approval" to proceed with prosecution. This is an excellent opportunity to further elevate the status of KLSE in the eyes of global investors. Much will depend on: "how fast the SC prosecutes"; how successful are the prosecution; the level of transparency in the wrongdoings; the protection accorded to minority shareholders; and the proper punishment being meted out (not slaps on the wrists again, please). Another area which requires more attention is "profit guarantees" in propspectuses. Many do not meet these guarantees and we do not see much repercussions. Another issue worth mentioning is Mesdaq companies where the risk is much higher, and the profit projections seemingly much more "wildly optimistic" to lure in investors. I think a proper liability scheme should be shared by the investment bank bringing these questionable Mesdaq companies to list only to implode within 2 years: as that makes a mockery of the prospectus, profit projections and integrity of the business model. Investment banks should be made to earn their fees.

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