Posted by Terence CHUA Tong Liang, Year 4 undergrad at the School of Accountancy, Singapore Management University
“SGX has been tyrannous in the use of its strength”, Yeak Wai Kong, one of China Sky’s former independent directors said in Court through his lawyer at the High Court in April 2012. He claimed that “SGX has clearly breached the rules of natural justice” by not giving him an opportunity to respond.
The court hearing took place just four months after SGX had taken China Sky to court for the first time in history for failing to comply with their regulation but withdrew their application dramatically a month later. The then chief executive of China Sky, Huang Zhong Xuan had said in minutes of a meeting released to the court stating that, “the company’s position was similar to that of a bullied child.”
This case highlighted how investors had been misled by the disclosures (or lack of) made by the company. In the below case, Huang Zhong Xuan had sought to mislead the public by attempting to give the impression that the counterparty was an independent party when they were actually related parties.
He also admitted to not giving full and proper disclosure regarding the Fujian land acquisition. This is another common tool of how they tunnel cash out of the company by acquiring land from a related party at an extremely rich valuation. Such fiasco’s are not uncommon, in 2009, Chen Tonghai, the former chairman of Sinopec was convicted of accepting 28.7 million yuan (US$4.2m) in bribes for helping associates with land transfers and awarding of contracts.
The case also highlights the difficulty that investors will face in determining the legitimacy of the deal. In determining whether the company had “overpaid” for the piece of land, I suggest that investors could perhaps do a background search on the piece of land acquired and how much similar land around the area were acquired for to determine whether the price paid for the land is fair.
Lastly, the Exchange which had been roundly criticized for lacking teeth in their fight against exerting pressure on the errant companies need to put up a tougher stance in sending a deterrent message against errant companies. Only then, will investors have confidence in investing in the Gateway of Asia.
AsianExtractor: Unearthing Accounting Fraud in Asia 