Friday, April 09, 2010

EPF/MRCB Insider Trading?

The Prime Minister, Datuk Seri Najib Abdul Razak had on 30 March announced the joint venture by the Government with the Employees Provident Fund (EPF) to develop a 3,000 acres piece of land belonging to the federal government. It was subsequently speculated in the financial press that Malaysian Resources Corporation Bhd (MRCB) will be appointed by the joint venture as the master developer for the project.

I had on 31st March 2010 issued a statement questioning the project was being awarded to MRCB when it had problems with its recent fund raising exercise where “EPF had to buy up 171.4 million shares at RM1.12 each worth RM192 million which were not taken up.” This information was quoted from a Business Times report dated 4 March 2010 which had mentioned that “EPF exercised its rights to buy 171.47 million rights shares not taken up”.

MRCB has since corrected this information as reported in The Financial Daily yesterday, that “its rights issue exercise was a success” where there was actually 74.9% oversubscription of the rights to new shares.

This correction does not however answer the question as to why MRCB will be awarded the project directly without any form of open tender by the Government, in order to ensure the best design and development proposal to deliver the maximum value for the Government and EPF.

The clarification by MRCB however, raises the additional question of transparency and good corporate governance in the rights issue exercise.

At the point of the rights issue on 4 December 2009, EPF had a 30.6% stake in MRCB.

Since the rights issue was oversubscribed by 1.74 times as disclosed, EPF should have at best maintained its percentage ownership of MRCB with a 30.6% allocation of rights issued.

However, EPF was for one reason or another, allocated disproportionately a higher percentage of rights issued (171.47 million of 455.39 million, or or 37.7% of the rights issued), which had resulted in EPF owning 33.78% of MRCB.

Under the takeover rules, once an investor has more than 33 per cent of a listed company, it must make an offer to buy the remaining shares. Hence, EPF was “forced” to make a general offer to purchase all shares of MRCB at the price of RM1.50 per share on 4 Mar 2010.

EPF had in fact continued to actively purchase shares from the open market since and has increased their stake in MRCB to approximately 41.5% as of 29 March 2010.

It is hence clear now that the rights issue had been an exercise intended and engineered to allow EPF to increase its stakes in MRCB, including via the general offer which was made.

While the above may have appeared “above board” under normal circumstances, the fact that the Prime Minister announced the 3,000 acres mega-development joint venture project with EPF which is touted to appoint MRCB as the master developer on the 30 March 2010 throws up the very obvious question of insider trading on the part of EPF in the entire exercise above.

Bursa Malaysia defines “insider trading” as the purchase or sale of a companies shares effected by a person with knowledge of relevant but non-public material information regarding that company. The insider is in a position to make massive gains by selling or buying shares before information that might affect the share price of the company's shares is made public.

In fact, after the Prime Minister's announcement, the share price of MRCB spiked immediately from RM1.50 (29 Mar) to RM1.59 (30 Mar), RM1.65 (31 Mar) and RM1.69 (5 Apr) or a 12.7% gain to date. The most recent HwangDBS equity report dated 5 Apr 2010 on MRCB had upped its 12-month target price from RM1.80 to RM2.25, quoting the project as “the most lucrative land deal”.

It would be completely ridiculous for EPF to make any claims that it had no prior knowledge of the 3,000 acre joint venture project announced by the Prime Minister. Discussions on the above joint venture must have been concluded well before 30 March, for the “rumours” of the project being awarded to EPF and MRCB has been circulating in the financial circles since the end of 2009.

The fact that EPF and MRCB had engineered the exercise to enable EPF to acquire substantial additional stakes in the latter prior to the public announcement of the projects raises the suspicion of illegal insider trading and market manipulation to the disadvantage of other public investors.

We call upon the Securities Commission to investigate the above transactions without fear or favour to determine if the guilty parties should be prosecuted and criminal sanctions imposed under the Capital Markets & Services Act (CMSA) 2007 where one is punishable by imprisonment not exceeding 10 years or a fine not less than RM1 million. Civil suits may also be filed by persons who suffered losses caused by insider trading under the CMSA.

The failure of Securities Commission to investigate the above transactions will seriously jeopardise our efforts on promoting confidence and trust in Malaysia's capital market, and on helping the market to function efficiently based on adherence to internationally-benchmarked principles of corporate governance.
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