From Asiaweek 16th June 2000
Business: Conspiracy Theory?
Sometimes a great story is buried so deep on the inside pages of a newspaper that you wonder whether the news editor missed it completely, whether he (or she) was just too busy, or whether there was some ulterior motive. I am not much into conspiracy theories, but Tuesday's announcement from Kuala Lumpur that chain listings rules will be scrapped was not given much prominence in the Malaysian press. Sure, every newspaper carried the story, but none gave it the display it really deserved.
So what's big deal about allowing chain listings? The way rules worked until now in Malaysia in common with other markets around the world -- was that no company could list its subsidiary on the local bourse unless the subsidiary's profit contribution to the parent company was less than half of parent's total profit. In many markets, regulators are much stricter. In those places, if a subsidiary contributes more than 25% of the parent's total profit it can't be listed. The rule is necessary -- otherwise listed companies will make a mockery of the stock market. A profitable property investment company, for example, with four huge tower blocks could divide itself into two separate companies owning two towers each and list them both. The listed subsidiaries could then divide their own business up further and list them as well. Indeed, technically, a company owning a single 50-storey building could have fifty subsidiaries owning separate floors. I know I am stretching things here, but my point is if rules were lax, there would no shortage of people taking advantage of them.
Malaysia once had strict rules, with a cap of 35% profit contribution for a subsidiary seeking a listing. That was raised to 50% during the Crisis because the government was aware that companies needed to raise cash by floating off some of their profitable bits. Now Malaysia's Securities Commission has waived all the listing rules. The argument is that the Malaysian economy has recovered and such rulings don't make sense.
In trying to figure out what does make sense here, let's look at who might gain from this ruling change. The biggest beneficiaries, Kuala Lumpur analysts tell me, are going to be companies within the Renong Group. Renong was once a company directly owned by UMNO, the dominant ruling party. Since 1990 control has passed to a group of well-connected businessmen or close confidants and former business partners of Malaysian Finance Minister Daim Zainuddin. Daim denies that he or UMNO has a single share in Renong. But Renong's ownership has been subject to all sorts of rumors, many of them emanating from the court testimony of former Deputy Prime Minister Anwar Ibrahim who was UMNO's Deputy President for six years before his ouster from power and subsequent arrest.
Still, suffice it to say, Renong is a politically well-connected company. Coming out of the crisis, the Renong Group was Malaysia's biggest single debtor with over 20 billion Ringgit ($5.5 billion) in debt, which was more than 5% of total loans in the Malaysian banking system. It has restructured part of the loans but needs to restructure or pay down a lot more just to keep above water. The Renong Group has a lot of profitable subsidiaries which can be listed on the stock exchange, thus raising cash for the parent and getting the parent itself a better valuation. But up to now, listing rules have prevented this from happening.
Construction affiliate UEM has been wanting to list its toll road subsidiary Projek Lebuhraya Utara-Selatan or PLUS, and Renong has been trying to do the same with its Prolink subsidiary (which owns and operates Malaysia's second causeway to Singapore). Meanwhile another Renong affiliate, Time Engineering, has been hoping to list its telecommunications unit Time dotCom. UEM and Time shares soared on the news of the listing waivers. What's a bit strange is that long before the rules were relaxed on Tuesday both UEM and Time had announced plans to list the subsidiaries -- even though such listings were then against the rules. The management of the companies have been telling analysts and investment bankers that they were confident the rules would be changed soon. PLUS makes up most of UEM's profits. Prolink makes up more than half of Renong's profits. TimeDotCom this year will account for most of Time Engineering's profit.
It is now legal in Malaysia for a company to list a subsidiary which contributes 80% of its total profit. Sure, there are lots of caveats in the law about abusing the waiver, but it is still technically possible. And that's just ridiculous.
Coming out of the Crisis, companies in Asia have found it a lot harder to raise funds from banks so they have had to rely on stock markets to fund their growth. That trend is going to increase as the recovery takes hold. Banks are just not going to be willing to fund Asian companies the way they did before the Crisis, and bond markets in the region are just developing too slowly to help. But if the stock markets are to fund companies, the rules must be transparent, minority shareholders must be provided adequate protection and not every Tom, Dick and Harry should be allowed to list his company. If a company is so desperate to raise money, why doesn't it try a rights issue instead of listing its big subsidiaries? Investment bankers will tell you that's because no one would want to buy new shares of the parent at the high price management would set in a rights issue exercise -- and too big a rights issue at a lower price would substantially dilute the stake of the controlling shareholders.
The ruling waiver only hurts Malaysia. It will make Malaysia less attractive to foreign investors who have long had a problem with corporate governance there. It will also make it hard for profitable companies that really need to raise money through the market if foreign funds were stay away from the market in droves. That will eventually hurt Malaysian economy.
http://cnn.com/ASIANOW/asiaweek/