Xin Hwa notes previous payments to substantial shareholders did not follow listing requirements

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KUALA LUMPUR (Aug 14): Xin Hwa Holdings Bhd (XHH) has clarified that previous payments that were made by a wholly-owned subsidiary to substantial shareholders of XHH should have been to XHH as the immediate holding company, as per Bursa’s listing requirements.

“Although the payments made by a wholly-owned subsidiary of the Company on behalf of the holding company are not prohibited by the Companies Act 2016, Paragraphs 8.23(1)(iii) of the Listing Requirements however only allowed such payments to immediate holding company which is listed,” it said in a bourse filing today, in relation to the chanelling of group funds to substantial shareholders for directors’ benefits and personal gain, including investment cost i.e. late interest.

However, XHH said the payments have since been fully repaid in tranches, with the last repayment made on Jan 23, 2019.

The integrated logistics services provider was making a clarification to a point made in a legal opinion provided by an appointed solicitor who was tasked to review an independent audit report by KPMG Management & Risk Consulting Sdn Bhd in June. XHH had attached the letter in a bourse filing on July 29.

In the KPMG audit report, the auditors highlighted that the group’s funds were channelled to substantial shareholders for directors’ benefits and personal gain, including investment cost.

Although the legal opinion agreed there is some basis to the allegation as there were advances to and payments made by a wholly-owned subsidiary of XHH on behalf of the holding company of XHH (i.e. a substantial shareholder of XHH) during the period from Jan 1, 2017 to December 31, 2018, it was initially of the view that the provisions of loan between subsidiaries and holding company are not prohibited under Companies Act 2016 and Listing Requirements.

Based on today’s filing, XHH’s lawyers appear to have clarified their position that while the previous payments by XHH’s wholly-owned subisidiary were not in contravention of the Companies Act, they were however in breach of Bursa’s Listing Requirements.

Following the report and legal opinion, Xin Hwa has pledged to improve its internal controls and corporate governance practices, as well as to strengthen its finance and accounting department.

Xin Hwa’s share price has taken a beating over the past two months since the announcement of the KPMG audit review, and lost a whopping 62%. It closed two sen or 5.88% higher today at 27 sen, for a market capitalisation of RM58.32 million.