China Sky Chemical Fibre

[dzwm87]

a separate question but does anybody know where I can get a complete list of S-chips stocks in SGX?

Thanks

[Qiaofeng]

China Sky case highlights a conflict between an ID’s role as AC chair and his firm’s role”
By MAK YUEN TEEN

MOST of the troubles faced by Chinese companies listed in Singapore – S-chips – can be attributed in the first instance to management of these companies and poor internal controls and accounting systems within these companies, even though independent directors in some of these companies may have contributed to the problems due to their lack of independence, competence or commitment.

On April 22, China Sky Chemical Fibre issued an announcement in response to a number of queries from the Singapore Exchange (SGX) which should set off alarm bells not only among investors but also among the local professional accountancy body and the regulators. It is unusual in that some of the most significant queries relate to the actions of a Singapore independent director, who is also a practising accountant.

China Sky has two Singapore independent directors, Er Kwong Wah and Lai Seng Kwoon. Both sit on multiple boards, including a number of S-chips. Indeed, in a report published in The Business Times on July 27, 2009, Mr Lai was referred to as ‘Mr S-chips’.

In that report, Mr Lai was quoted as saying: ‘I’m an ID who, I think, doesn’t have a very glorious record . . . I have gone through an S-chip that has fraud, an S-chip that is experiencing bond and liquidity issues, I have gone through an S-chip that has a controlling shareholder pledging all his shares, and I have an S-chip with missing accounting records.’

To that list, we can now add that Mr Lai has now also gone through an S-chip where he is a major source of its problems.

Among other issues, the SGX asked China Sky to identify the director whose firm was reported to have provided professional services to the company under its disclosure of interested person transactions (IPTs), and to explain certain discrepancies in the disclosure of IPTs in the 2009 and 2010 annual reports.

It has now emerged that Mr Lai’s accounting firm, SK Lai & Co, provided significant accounting-related services to China Sky, while Mr Lai was an independent director and chaired the audit committee (AC).

The payments for these services were recurring IPTs and amounted to some $112,000 in 2008, $183,000 in 2009 and $72,000 in 2010. The services relate to assisting in the review of the company’s internal, accounting and reporting controls, reviewing quarterly financial statements and results announcements, and providing consultancy and advisory services for various accounting procedures, including the consolidation of a subsidiary.

As the AC chairman, Mr Lai has a primary responsibility for overseeing the areas for which his firm is providing accounting-related services, and is therefore put in a position to review his own firm’s work.

Further, the AC oversees the external auditors, who are expressing an opinion on the financial statements, while his firm is advising management on the controls and accounting procedures which underlie the preparation of these financial statements.

The amount of fees involved suggests that the work of his firm was substantial.

In my view, there is an unacceptable conflict between his role as AC chair and his firm’s role in providing accounting-related services. While the company has claimed that the IPTs are conducted at arm’s length and that each member of the AC abstained from voting on matters in which he is interested, it still begs the question as to how SK Lai & Co was appointed when there are many accounting firms that can provide such services.

Primary beneficiary

Further, the AC is also tasked with reviewing the IPTs, but Mr Lai’s firm is the primary (only) beneficiary of the transactions which were reported. It has now also turned out that there were significant errors in the reporting of these IPTs.

The 2010 corporate governance report of the company includes a statement that the independent directors have confirmed that they do not have any relationship that could interfere, or be reasonably perceived to interfere, with the directors’ independent business judgment.

The nominating committee, chaired by Mr Er with Mr Lai as one of its two other members, was reported to have reviewed and confirmed the independence of the independent directors – that is, their own independence. The query from SGX has now resulted in a further statement that the board assesses Mr Lai to be independent despite his significant business relationships with the company, because of his ‘unequivocal ability to exercise strong independent judgement’, ‘to act professionally’, ‘to maintain a high standard of duty and care’ and to ‘observe the ethical standards of his profession’.

It is a mockery of our corporate governance regime if a director can still be considered to be an independent director given such significant business relationships and conflicts.

In The Business Times report mentioned above, Mr Lai was quoted as saying: ‘Of course, given my experience, I would want to get onto more boards.’

Mr Lai was also further quoted as saying: ‘Given the spectrum of experience I have on S-chips’ boards, I would like to humbly submit that I am better positioned to deal with the issues surrounding them.’

In the China Sky case, I would also like to humbly submit that some of those issues are of Mr Lai’s own doing.

________________________________________________________

'Mr S-chips' believes in longer gestation period

Lynette Khoo
Mon, Jul 27, 2009
The Business Times



(SINGAPORE) A longer gestation period for S-chips before they get listed? But how does that gel with market interest in a speedier route to listing?

This is the dilemma the Singapore market is facing.

Lai Seng Kwoon, who is independent director of six S-chips, says nine months is too short a time for private companies to ready themselves to function as public companies upon listing.


'I personally think that the gestation period should be longer to get the companies ready to become a publicly-listed company,' the practising CPA told BT.

'But, of course, there are business considerations. Some people want to list fast.'

Before listing, a company would be told that it requires two independent directors (IDs) on the board as part of the listing requirements, and have IDs introduced to it by the IPO professionals.

But these IDs join the company only about three months before listing, so the trust and understanding with the management may not yet be firmly rooted by the time the company is listed.

Then comes the requirement of quarterly reporting, along with compliance with other listing conditions, which all seem foreign to the newly-listed company.

'They may hear it from the lawyers and the IPO professionals but, many times, it may not click. It makes the job of an ID easier if they could think like a listed company before they are even listed,' Mr Lai said.

Professionals need to be around to mould the mindset of key management personnel and help them think and act like a publicly-listed company earlier, Mr Lai said. But there is the concern among deal makers that the company may not get listed eventually.

Then perhaps SGX should make it mandatory for directors and senior management of S-chip companies to attend training courses on corporate governance, Mr Lai added. The tendency is that people would not spare the time to attend courses if they are not required to go.

Mr Lai has had his fair share of dealing with troubles facing some Chinese firms, being an ID of six S-chips, of which four are battling different sets of issues.

Dealing with the grouses of shareholders who got burnt by investments in troubled S-chips and 'dousing fire' at various shareholders' meetings have become a common part of his job as an ID.

'I'm an ID who, I think, doesn't have a very glorious record,' Mr Lai said. 'I have gone through an S-chip that has fraud, an S-chip that is experiencing bond and liquidity issues, I have gone through an S-chip that has a controlling shareholder pledging all his shares, and I have an S-chip with missing accounting records.

'Of course, given my experience, I would want to get onto more boards.'

He added: 'I look at it very differently. To me, it is a professional engagement. I go in and I have a certain task and responsibilities, and intend to execute them to the fullest and to the best of my abilities.'

But investors need to be educated, too, he said. 'When they make money, they think it's their right. But when they lose money, they think someone owes them an explanation.

'I, as a director, would like to see the share price go up, and go into an AGM with shareholders saying we have done a good job. But the IDs are not there to run the business but to be more like a watchdog to ensure compliance with corporate governance, disclosures, and that everyone's interest, not just the shareholders, are taken care of,' he said.

Mr Lai went on to talk about the onerous task of being an ID, and the nights he spent pondering the issues at hand. He also runs his own accounting firm, SK Lai & Co, which has some 20 employees.

But the experience of being an ID on the boards of a unique profile of S-chip companies has been enriching in its own way.

'Given the spectrum of experience I have on S-chips' boards, I would like to humbly submit that I am better positioned to deal with the issues surrounding them,' Mr Lai said.

BT
_________________________________

2 Related Articles to the China Sky Saga

[Sfsh12]

The latest SGX announcement by one of the ID of China Sky has made it even more interesting, for those who are following. Mr Er Kong Wah has claimed that he has no knowledge of and has not approved of the announcements made yesterday and today by China Sky because he was travelling and had no internet access to emails and a computer.

In this day and age, can anyone claim to be unreachable just because he or she is travelling? Can important matters of a listed company come to a standstill because it's ID was travelling?

[dzwm87]

Possible.. but one thing for sure.. with the ID not vouching for the company, this isn't good news for the shareholders!

[freedom]

the CEO and relevant acting officer got time for SGX query but no time for special auditors? I remember one of the reason they are not appointing special auditors is waste of precious time of its CEO and staff.

[dydx]

What a bloody mess! Apparently the review officer and his bosses in SGX's Issuer Regulation Dept. no longer trust China Sky's directors including the IDs, who together have exhibited the behavior of fighting the authorities. This is going to be very tough!

[Sfsh12]

The Directive By SGX for China Sky to appoint Special Auditor was announced on 16 Nov. As the lead indepenent director, should Mr Er have made known his stand publicly earlier? There was an EGM on the 30 Nov, would minority shareholders vote in favour of the resolution if his stand was known then? Would the author of the article below, a shareholder of China Sky, have written to BT at all, arguing in defence of China Sky?


Article in BT.

Published December 2, 2011

SGX needs to relook its approach towards China Sky and Cacola

THE Singapore Exchange (SGX) has rightly made changes to its rules and regulations to ensure better corporate governance at listed companies. In particular, it has moved to impose special reporting and other requirements on foreign-incorporated listed companies, many of which are so-called S-chips or China-based businesses.
I am a shareholder of two China-based companies, Cacola Furniture and China Sky Fibrechem. These are sizeable companies which got listed on SGX just a few years ago with some fanfare and many new local shareholders.
Cacola offered 120 million shares at 32 cents apiece, raking in $38.4 million gross in November 2009. China Sky Fibrechem went public in October 2005, raising $99 million gross through 180 million shares at 55 cents.
Both companies have had a rough ride in the past few years. Today, China Sky shares are trading at 10 cents while Cacola shares are at 3 cents. But both companies still appear to have sound balance sheets, going by the latest accounts available.
China Sky's results for the third quarter to Sept 30 showed a rolling earnings per share of 3.6 cents; net asset value (NAV) of 77 cents and net profits of $6.3 million for the quarter, on sales of $182 million. China Sky has no debt and net cash of $51 million or 6 cents per share.
Cacola reported a loss of more than $2 million for the quarter due to tough operating conditions and the write-off of some receivables. But the accounts show an NAV of 17 cents and net cash of $17 million, or about 5 cents per share, and no debt.
SGX queried China Sky on several matters, including in relation to an aborted deal to buy land in China and some interested-party transactions with a director.
The company has been diligent in responding to the queries and provided detailed and substantive information. At the EGM on Nov 30 to seek shareholders' approval for the purchase of another piece of land to expand operations, directors took pains to explain various matters.
However, SGX has persisted in wanting the company to appoint a special auditor to look further into the same matters. The company has, meanwhile, had to suspend its shares from trading and appealed to SGX to reconsider its directive on the grounds that the queries had already been dealt with. SGX's persistence is coming at the expense of the company and its shareholders.
Meanwhile, the strange goings-on at Cacola have escaped the attention of SGX regulators. The company is now proposing to make a placement of 23.3 million shares to third parties at a price of 3 cents, raising a mere $700,000 for working capital purposes, mainly. Why should it be necessary for a company with no debt and $17 million cash-in-hand to raise $700,000?
Strangely, also, the major shareholders and directors of the company recently sold off their shares in the company at a fraction of the NAV and resigned their posts. Minority shareholders are obviously concerned about the state of affairs at the company.
SGX should move on with China Sky and call off its demand for special auditors as it is obvious the company does not have much to answer for anymore. On the other hand, the exchange would do well to get the new and/or old controlling shareholders of Cacola to throw more light on its finances and business affairs.

Mano Sabnani

[Qiaofeng]

The Directive By SGX for China Sky to appoint Special Auditor was announced on 16 Nov. As the lead indepenent director, should Mr Er have made known his stand publicly earlier? There was an EGM on the 30 Nov, would minority shareholders vote in favour of the resolution if his stand was known then? Would the author of the article below, a shareholder of China Sky, have written to BT at all, arguing in defence of China Sky?

Hi Sfsh,
Was Mr Er at the EGM and did he made known his stand then?



Going by the announcements.....

Mr Er ....

In practice, all Announcements from the Company, particularly, the ones concerning the Reprimand, Special Audit (SA) Directive and SGX Regulatory Actions must be approved by all Directors before issue.
The Company has released another Announcement at lunch time today as a follow-up to the earlier Announcement mentioned above. I have not granted my approval to this latest Announcement since I have not approved the earlier one and the two Announcements are in response to the same reprimand issue.
In respect of the SA Directive, I wish to state that my stand has always been to comply with the Directive in the best interest of the shareholders. I have conveyed my views to the Board, both in writing and verbally at the Board Meeting since the Company received the SGX Directive on 16th November 2011.

He appears to say he does not agree with the rest of the Board. He is saying comply with SA directive by SGX.


Mr Yeap ....
Erm.... what is he saying?
Comply or No comply?


Mr Lai...
Go figure what Mr Yeap is saying ----- Mr Lai says he is saying the same thing--- if U have figured out what Mr Yeap is saying.

What happens in the case of a divided Board?
One is Lead ID----- whom it seems was denied usage of SGXnet...

The Exchange received a request from the Independent Director of China Sky Chemical Fibre Co., Ltd (the “Company”), Mr Er Kwong Wah (“Mr Er”), on 22 December 2011. Mr Er wanted to release an announcement which contained material information of importance to the shareholders of the Company. He approached the Company Secretary to help release the announcement but was told that since the announcement is from an individual and not from the contracting Company, he was not allowed to make use of their facility. Mr Er therefore approached the Exchange. Please see the attached for the announcement by Mr Er.

More of this conundrum in the BT.....


Published December 24, 2011

Lawyers for China Sky demand apology
Asia Ascent and its MD poised to sue senior SGX executive, alleging he 'falsely and maliciously' defamed them

By LYNETTE KHOO AND MICHELLE QUAH


A WAR of words that has hogged headlines in recent days has now escalated into a nascent legal battle.

Lawyers representing China Sky Chemical Fibre - which has publicly fought the Singapore Exchange's (SGX) attempts to compel the Chinese company to appoint a special auditor - are poised to sue a senior SGX executive.

Asia Ascent Law Corporation, which represents the S-chip, wants SGX deputy chief regulatory officer Richard Teng to apologise for allegedly defaming the firm - going as far as suggesting possible legal action against Mr Teng if he does not do so.

SGX, for its part, stands ready to take legal action against China Sky.

Asia Ascent and its managing director Leonard Chia - who are, in turn, represented by Ang & Partners - have sent a letter to Mr Teng, accusing him of 'falsely and maliciously' defaming them.

And it is demanding an 'apology sufficient to remedy Asia Ascent's damage' from Mr Teng by Dec 30 as an offer of amends under Section 7 of the Defamation Act. The section says that 'if the offer is accepted by the party aggrieved and is duly performed, no proceedings for libel or slander shall be taken or continued by that party against the person making the offer in respect of the publication in question'.

Goh Kok Leong from Ang & Partners, which is representing Asia Ascent, told BT yesterday that Asia Ascent has not informed SGX of its intention to take action against SGX.

'This is not to say that no action is being contemplated,' he said. Mr Goh is described on the firm's website as being a founding partner of Ang & Partners.

Ang & Partners' letter to SGX says Asia Ascent and Mr Chia 'have suffered and continue to suffer damage' wrought by Mr Teng's words. The comments were allegedly made by Mr Teng during his phone call with Mandarin-speaking Huang Zhong Xuan, China Sky's chief executive officer.

The law firm claims that Mr Teng said it was not qualified to act as legal counsel for the company as it lacked the relevant expertise. It added that Mr Teng said it was negligent in failing to advise the company to immediately comply with SGX's directive to appoint a special auditor.

It claims that his words were understood to mean that it is not authorised to practise law in Singapore, that the firm and Mr Chia do not possess the requisite qualifications to carry out their duties, and were negligent in their conduct of the matter.

'We are taking the position that Asia Ascent is fully qualified and entitled to advise any SGX-listed company,' Mr Goh told BT.

Asia Ascent is listed in the Singapore Law Gazette and described by insing.com as being a provider of 'legal counsel and advice to its clientele of small and medium enterprises and large corporations'.

When asked by BT about these allegations, SGX called them 'baseless' and said it had its legal advisers standing by.

'SGX considers it vital that its regulatory officers carry out their duties to the best of their ability without fear of prosecution or intimidation,' said its spokesman. 'SGX is concerned about the protection of the investing public. We will not be deterred from carrying out our responsibility by groundless threats of legal action.'

SGX maintained that 'these actions do not affect SGX's position that China Sky Chemical Fibre must comply with its directive to appoint a special auditor and do so without further delay'.

The Exchange had on Thursday refused China Sky's request to lift the trading suspension of its shares, given the company's failure to comply with its directive.

Trading of shares in China Sky has been suspended since Nov 17 at the request of the group, following SGX's directive to immediately appoint a special auditor to probe certain transactions.

SGX wants an investigation into the group's purchase and return of a piece of land in Fujian province, the purchase of new production facilities, certain repairs and maintenance costs, as well as interested-person transactions with independent director Lai Seng Kwoon.

But China Sky resisted the directive and appointed Asia Ascent as its legal adviser. When publicly chided by SGX on Dec 16, China Sky defended its position and levelled accusations against SGX.

Two independent directors (IDs) have distanced themselves from China Sky's responses to the public rap so far, saying that they have encouraged the board to work closely with SGX.

One of the IDs, Er Kwong Wah, said he had not seen or approved the drafts of announcements issued by the group on Wednesday and Thursday.

Legal practitioners and governance activists are watching this episode with much interest as this marks the first time a listed company here has defied an SGX directive to appoint special auditors.

Robson Lee, a corporate lawyer and deputy secretary of the Securities Investors Association (Singapore) (SIAS), noted that all listed companies in practice need to comply with SGX listing rules and directives.

'I've been a practitioner for almost 17-18 years. I have not seen a situation whereby such a process is not carried out when the Exchange has made such a requirement.'

Market watchers noted that SGX has acted within its powers under its listing rules to query China Sky on certain transactions and direct a probe into areas of concern.

China Sky has, however, accused the Exchange of taking 'an intimate interest in the corporate and strategic management and the day-to-day operations' of the group.

Mak Yuen Teen, associate professor at NUS Business School and a well-known corporate governance advocate, noted that SGX does not have investigative powers and is 'acting within its power' in directing the company to appoint special auditors to probe certain transactions.

'Obviously, SGX is not satisfied with the answers that were given by the company,' Prof Mak said.

In the interest of transparency, China Sky should comply with the directive and make known the findings of the special audit, said SIAS's Mr Lee.

'What we need is a clear, objective third party coming in to look at all the issues and explain to the public what transpired in the transactions that were red-flagged by SGX,' he added.

_________________

Question.....

Miscommunication (as per Mr Yeap?) OR Conflict of Opinions?

[Qiaofeng]

Hi d.o.g,
I thot maybe we can continue the below discussion here.
And I hope I can have some learning points from U here...

Freezing and seizing cannot be done for a few reasons:

1. Even if the promoters put their shares with a custodian in Singapore, they can just take cash out of the company. The shares would then be worthless.

2. Requiring the cash to be held in Singapore would create tremendous inconvenience for the business operations. Only if the customers and suppliers are all international could this even be feasible i.e. only transfer enough onshore to pay local wages, utility bills etc. For pure domestic operators who buy and sell locally in China, keeping the cash in Singapore makes no sense at all.

3. Extradition treaties, if they exist at all, normally cover only severe crimes e.g. drug trafficking, weapon smuggling, genocide etc. Stealing a few million dollars doesn't count. Marcos stole billions and didn't get extradited. Why would some small fry S-chip owner who stole "only" $50m get any attention? Even the boss of Oriental Century, after confessing to The Edge in an exclusive interview, is living as a free man in China. That should tell you everything about extradition.

Let's assume an entirely fictitious case....

Say there is a company CSCF ( China Sea Chemical Fibre).... a (blue) sky scenario----- out of the blues....
It has raised funds say thru a rights issue (or say CBs) and NOT yet disbursed.
The stated objective is to purchase land, build factory and purchase equipment.
Say there seems to be some IPTs which are dubious and that the cash and cash equivalents (C&CE) as stated in the B/Ss seem not to tally accounting wise.
So SGX smells a rat, becos a certain Mr C.a.t. pointed out the inconsistencies.
Now assume that SGX issues a directive to have a 3rd Party auditor to give another opinion since there seems to be a conflict of interests and opinions on the issues involved.
Now assume that the professionals ( accountants, auditors and lawyers) who advise CSCF and the IDs are compliant, sensible and are not putting up a fight/sideshow----- they comply with the directive and advises the majority SSH that they ought to have the SA do the audit.
Say further that the SA do find wrongdoing.....


Based on the above entirely fictitious scenarios....

1) Would it NOT be more comforting to shareholders in SG that there is some framework whereby SGX can "freeze" the monies collected and direct the disbursements say thru the IDs who are acting in the interests of minority shareholders?
Or maybe the IDs and the SA can investigate the C&CE, verify their existence and "freeze" it before allowing for the funds to be used in the stated IPTs?

2) I take Ur point that "Requiring the cash to be held in Singapore would create tremendous inconvenience for the business operations. ..." especially wrt working cap.
But, if the monies raised is for specific purpose or project and (hence can be treated seperately) if the SA had already flagged for caution----- "freezing" and controlled disbursements may be a more safer framework/option.

3) Extradition - the status quo is that the perpetrators of fraud gets away scot free.
But this cannot be said to be an acceptable norm of biz mode or the "rule of law" type of exchange that SGX aspires to be. Surely, it is not sustainable!
Is there no incentive for SGX to lobby for changes to protect investors (aka customers) who uses the exchange platform from whom SGX derives revenues and incomes ?

[d.o.g.]

1) Would it NOT be more comforting to shareholders in SG that there is some framework whereby SGX can "freeze" the monies collected and direct the disbursements say thru the IDs who are acting in the interests of minority shareholders?
Or maybe the IDs and the SA can investigate the C&CE, verify their existence and "freeze" it before allowing for the funds to be used in the stated IPTs?

2) I take Ur point that "Requiring the cash to be held in Singapore would create tremendous inconvenience for the business operations. ..." especially wrt working cap.
But, if the monies raised is for specific purpose or project and (hence can be treated seperately) if the SA had already flagged for caution----- "freezing" and controlled disbursements may be a more safer framework/option.

Sad to say, very few independent directors want to be so hands-on that they are in charge of releasing cash. These directors are "non-executive" directors for a reason - usually they are just there to collect their fees. It is a quid pro quo - they sit on their friend's board and say that everything is fine, and in return they get some pocket money and their picture in the annual report.

That said, disbursement can be controlled by passing the money through an escrow account held by a law firm in Singapore. That way the law firm is liable if they release the money improperly. Of course, this will raise costs tremendously since the law firm must do its checks before releasing the money.

Basically, this type of escrow requirement will mean that NOBODY will list on SGX.

3) Extradition - the status quo is that the perpetrators of fraud gets away scot free.
But this cannot be said to be an acceptable norm of biz mode or the "rule of law" type of exchange that SGX aspires to be. Surely, it is not sustainable!
Is there no incentive for SGX to lobby for changes to protect investors (aka customers) who uses the exchange platform from whom SGX derives revenues and incomes ?

Financial fraudsters getting away scot free is the norm everywhere in the world. Even in the case of Enron nobody went to jail. Welcome to the world of finance. Invest at your own peril.

The SGX is paid directly by listed companies (listing fees) and the stockbrokers (clearing fees). To increase revenue, it can:

1. Increase the number of listings.

We see this with the introduction of ADRs as well as the proliferation of S-chips.

2. Encourage trading.

We see this in the $300m invested to accomodate high-frequency trading, plus the introduction of covered warrants and extended settlement contracts. All these are clearly to encourage trading.

Notice that "protecting investors" does not produce any visible short-term benefit to revenues. In fact it reduces the number of listings (and thus listing fees) since the dubious companies are prevented from listing. Therefore SGX has no incentive to protect investors, but it has millions of incentives to increase the number of listings and to promote churning.

Anyone who imagines that SGX will adequately protect investors, when doing so will hurt their profits, is being naive. Think about SMRT/SBS/Comfort - if they truly put customer service first, their profits will be hurt. Any monopoly will seek first to maximize profits. Service is delivered only to meet regulatory requirements.

As usual, YMMV.