Time for SC to power up?

By Khairie Hisyam

Ranhill Energy and Resources and its president were fined last week for breaching disclosure requirements, but Tiger wonders if the Securities Commission’s action had enough deterrent element in it. Maybe it’s time for the commission to have more punch as far as its regulatory powers go.

Deterrence is a concept Tiger learned early in his life — a solo predator can hardly stay fed or even alive if it does not quickly learn what it should and should not do in the jungle.

So when the Securities Commission (SC) announced fines on Ranhill Energy and Resources (Ranhill) as well as on its president and chief executive officer Hamdan Mohamad last week, Tiger could not help but wonder whether the action will deter future misdemeanours.

To recap, the action was taken after SC found that they failed to immediately disclose the suspension of the licence issued by Petroliam Nasional (Petronas) to Perunding Ranhill Worley Sdn Bhd (PRW), on which Ranhill depends for Petronas contracts.

PRW is not a subsidiary of Ranhill but is seen as the latter’s affiliate because Hamdan, a major shareholder in Ranhill, also holds shares in PRW. Further, Ranhill’s 51%-subsidiary Ranhill WorleyParsons Sdn Bhd has an agreement with PRW whereby the former is exclusively appointed to undertake all projects awarded to PRW in Malaysia.

The notice of suspension was received on July 17 this year — just two weeks before its scheduled Bursa Malaysia debut — and SC imposed fines of RM200,000 on Ranhill and RM300,000 on Hamdan for breaching section 215(3), read with section 354(1), of the Capital Markets and Services Act 2007.

“Ranhill relies on PRW for contracts secured from Petronas. This contract represents a material contribution to Ranhill Group’s revenue,” said SC in a statement last week. “The suspension of the license is therefore deemed as a material change in circumstance as it poses potential adverse implications on Ranhill’s oil and gas business.”

Tiger applauds SC’s action following its finding, but Tiger wonders if monetary fines are enough, really.

First, there is the question whether the quantum of the fine is significant enough to encourage more effort towards compliance in the future.

To bring things into perspective, the Ranhill initial public offering (IPO) was expected to raise RM753 million. In comparison, the RM200,000 fine comprises a mere 0.026% of the expected IPO proceeds.

For Hamdan personally, the IPO would have seen him sell 161,000 shares presumably to Ranhill’s independent non-executive chairman Ahmad Fuzi Abdul Razak. If we take the bottom figure of the IPO share pricing of RM1.70–RM1.85 per share, that translates into at least RM273,700.

Additionally, Hamdan would still have an indirect stake of 37.49% post-IPO or 360.5 million shares, which translates into a valuation of more than RM612 million at RM1.70 per share. Not to mention that Hamdan’s salary band for the year ending Dec 31, 2013 alone is estimated to be RM2,600,001–RM2,650,000.

The point here is the fine amounts imposed by the SC, while certainly unpleasant, are hardly debilitating when viewed within the larger financial context.

That naturally brings up the second issue — punishment for such misdemeanours in the capital market should extend beyond financial impact on parties involved.

If the consequences of non-compliance with disclosure requirements are limited to paying money for transgressions — the amount of which may or may not be substantial to the transgressor in the first place — then unscrupulous parties may not feel sufficient “motivation” to observe the rules more closely.

One grave prospect of going down that path is seeing more unscrupulous parties risking it — taking their chance with a few crucial rules to see if they get away with it.

Tiger concedes that to go beyond monetary damages is something that needs close examination, but certainly doable.

One suggestion is to bar persons and companies found to be non-compliant with disclosure requirements from listing for a certain period of years. Give them something to lose from non-compliance other than money, of which players in this game would usually have plenty of.

This, to Tiger, would incentivise them to get everything right at first attempt as well as increase investor confidence. Trust is a vital element in the capital markets, and investors need to know they can trust those they are investing in without reservations.

No doubt the powers that be in the capital jungle can think of more ways to strengthen the deterrence flavour in the punishments meted out by the SC.

At the end of the day, it is a matter of risk vs reward as far as non-compliance goes. Do the risks of non-compliance fairly reflect the potential rewards of slipping past the regulatory fences?

Tiger feels the answer is no at the moment, though Tiger hopes that will change in the near future.

GRRRRR!