Cover Story:A question Primus has to answer

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It is well documented that although some of the listing requirements do not apply to banks, they are more regulated than listed companies.

Apart from the Companies Act and Bursa Malaysia’s listing requirements, banks have to comply with the Banking and Financial Institutions Act (Bafia) and a few other regulations. On top of that, Bank Negara Malaysia keeps a tight rein on the banks, especially in terms of capital adequacy compliance and appointment of key office bearers and board members who must pass the test of being “fit and proper”.

For instance, Bank Negara tests the strength of the balance sheet of each bank via stress tests every quarter, something that some countries undertake only once a year. The financial strength of shareholders is also closely scrutinised.

But a lot of the information is kept within the confines of the central bank. Information on where shareholders get their financing and the strength of the shareholders, especially the individuals, is not always made known to shareholders, only to Bank Negara. It is easy to fathom why. The misinterpretation of such information can have serious consequences.

At the same time, there is a downside to this because too little information leaves much room for speculation — especially now when banks implement rights issues, which require shareholders to cough up more money when most of them would want to conserve cash.

One area where visibility is poor is the source of funding for the controlling shareholders of some banks, whether it is from internally generated funds and not through borrowings. And if it is through borrowings, could banks see the entry of new shareholders should there be a default?

For instance, in Malayan Banking Bhd’s rights issue, what was the source of funding for Permodalan Nasional Bhd (PNB), its controlling shareholder? The assumption is that PNB would have generated the funds internally, considering its financial strength and large amount of assets.

But not all shareholders of banks enjoy the stature of PNB. More recently, private equity outfit Primus Pacific Partner came under the spotlight over how it financed its purchase of a 20.2% stake in EON Capital Bhd. Primus, interestingly, has banks as shareholders and, at the same time, it has stakes in banks.

For outfits such as Primus, the scrutiny of its sources of funding is done entirely by Bank Negara. The central bank checks and verifies such information, especially if the funding comes from another bank or financial institution, as this could lead to a lot of complications.

For instance, if shareholder X borrows from Bank Y to buy a stake in a financial institution and defaults, Bank Y becomes a shareholder of the financial institution. There is nothing that Bank Negara can do to stop Bank Y from becoming a shareholder.Bank Negara tightly controls the entry of new shareholders into banks. Anybody acquiring a stake of more than 5% would need Bank Negara’s approval where, among other things, they would be grilled on their sources of funding.

Bank Negara does allow funding from other banks on a case-by-case basis. However, in most cases, it is only for interim financing or bridge financing.

For instance, when Tan Sri Rashid Hussain bought Kwong Yik Bank from Malayan Banking Bhd in 1996, the indirect funding came from foreign banks which gave guarantees to local banks that paid Maybank in ringgit. It was an interim measure and within six months, Rashid had refinanced the entire deal in an extensive fundraising exercise to remove the interest of the foreign banks in the deal.

Rashid’s holdings in RHB Capital Bhd was through Rashid Hussain Bhd, which kept the (RHB Capital) shares unencumbered.Similarly, when CIMB Group acquired Southern Bank and Maybank acquired Bank Internasional Indonesia, the money was raised largely by the banks themselves through rights and bond issues. The shares are not held by any other entity.

In the case of EON Capital, according to Primus Pacific Partner, it paid for the 20.2% block via internally generated funds. However, after being advised by its investment bank in Singapore, the shares are held by Public Nominees Asing, an entity under Public Bank.

While it is not unusual for foreign shareholders with a minority stake in banks to park their shares with the nominees, industry observers say if the shares are pledged, in normal circumstances, they are done against borrowings or some form of guarantee.But according to Primus, it has no borrowings or any obligations in one form or another with Public Bank.

In the case of Primus and its acquisition of EON Capital, the deal went through the normal rigorous scrutiny of Bank Negara. The central bank would have been aware of the circumstances as to why the shares were being held by Public Nominees.

But are all the other shareholders of EON Capital aware that the shares are being held in trust by Public Nominees and that there are no borrowings tied to it? Certainly not.

Alternatively, should they have been told where the shares were? Probably, by Primus or Bank Negara, considering that it involves another local bank.

Light must be shed on why the controlling block of shares is held by a nominee company owned by another bank. Until then, Primus cannot avoid scrutiny.

This article appeared in The Edge Malaysia, Issue 749, April 6-12, 2009.