Implementation%20and%20Enforcement%20of%20Corporate%20Governance%20Rules:%20The%20Case%20of%20Thailand%20(Session%201)

1
Implementation and Enforcement of Corporate
Governance Rules The Case of Thailand(Session 1)

• Piman Limpaphayom, Ph.D., CFA
• Sasin Graduate Institute of Business
  Administration of
• Chulalongkorn University
• The 2006 Asian Roundtable on Corporate Governance
• Bangkok, Thailand
• 14- 15 September 2006

2
PG Plc Background

• Before the 1997 economic crisis, mini-canisters
  of cooking gas were not popular in Thailand.
• But the crisis changed the market environment,
  because with people having less purchasing power,
  lower-income groups preferred smaller and cheaper
  sizes. PG discerned that opportunity and made
  big profits from it. PGs products were
  immensely popular among large numbers of
  low-income households and food sellers.
• In 2003, PG was listed on the SET obtaining its
  listing status by taking over a listed firm
  undergoing rehabilitation.

3
PGs Miracle

• PG Plc shares made the biggest one-day gain of
  listed firms undergoing debt-restructuring,
  rocketing a sensational 2,169 percent at one
  point on the first day of trade after a
  suspension of 19 months.
• Soon after the bell rang, PG's share price jumped
  to Baht21, up from Baht1.30 at its last close on
  June 8, 2001, and briefly touched a high of
  Baht29.50.
• In March 2005, its stock price trades at more
  than 10 times the original initial public
  offering (IPO) price.

4
Price and Volume PG Plc. from 5 Jan 2004 TO 7
Sep 2005
Shares
Baht
XR
Rumor on acquiring New Gas
Acquiring World Gas
Q3/04 F/S Profit 544 MB
Q2/04 F/S Profit 361MB
2004 F/S Profit 735.38 MB
JAN04 FEB04 MAR04 APR04 MAY04 JUN04 JUL04
AUG04 SEP04 OCT04 NOV04 DEC04 JAN05
FEB05 MAR05 APR05 MAY05 JUN05 JUL05
AUG05 SEP05
5
PGs Structure
Purchase brand transfer business from Ls U Co.
PG Plc.MD Mr. T. L.
Directors fromU Co. fund from MD T
10 Gas-filling Plants
Gas-filling Plants
3-year cylinder rental
Gas purchase at17 baht/kg (others14 baht/kg)
6
Questionable Transactions

• The payments for the usage of PGs gas cylinders
  were moved from deposits payments for unlimited
  time use to a three-year rental fee causing the
  178-million baht rental fee to become an expense
  item of the plants but an income of PG in 2004
• PG sold liquefied petroleum gas (LPG) at a higher
  price per unit to plants with close relationships
  than to other customers. Consequently, PG earned
  approximately 1.7 billion baht from those
  gas-filling plants, accounting for 48 percent of
  the companys LPG sales.
• The value of goodwill derived from the
  acquisition of subsidiaries in 2004 was unusually
  high.

7
Initial Actions by Thai SEC

• Based on the evidence and PGs explanation, the
  SEC has ordered PG to
• Appoint an auditor to do a special audit on all
  transactions between PG and the 10 gas-filling
  plants and others with close ties to ensure that
  PGs financial statements are fairly and
  transparently presented and do not affect
  investors decisions. Moreover, PGs Audit
  Committee must review the financial reporting
  thoroughly
• Reverse the gas cylinders rental income back to
  the deposit income account because PGs gas
  cylinder rental fee is, in essence, the companys
  deposit.

8
Companys Reactions

• PG denied control over those gas-filling plants
  and argued that the consolidation was
  unnecessary.
• Additionally, PG viewed that the goodwill value
  reported earlier was fair and accurate and
  therefore needed no adjustments.
• The SEC demands PG to submit the special audit
  report together with the amended financial
  statements for the year 2004 45 days (due on June
  27, 2005). In addition, PG must disseminate its
  amended financial statements for the year 2004
  with the special audit report attached.

9
Revised Income Statement
Previous 2004 Revised 2004 Change
LPG Sales 5,160 4,788 -7
Gross Profit 1,268 717 -43
Gross Margin 17.2 10.5 -43
Net Profit 735 235 -68
10
Alleged Corporate Fraud

• Accounting fraud
• Injection of earnings In the course of the
  investigation, it was also found that , in 2004,
  an executive of PG transferred a large sum of
  money into the gas-filling plants accounts, some
  of which was paid to PG as gas cylinders rental
  fee
• Siphoning of corporate assets
• Self-dealing transactions
• Intra-group loans

11
Enforcement Actions

• Criminal sanctions
• Establishment of the Special Investigation
  Department (DSI).
• SEC officers are appointed as co-investigator
• Administrative sanctions
• Blacklisting of directors

12
Legal Actions

• In October, 2005, public prosecutors filed a
  lawsuit in Bangkok South Criminal Court against
  PG and related individuals, including former
  managers of PG.
• The lawsuit was filed in accordance with the
  charges previously presented by the Department of
  Special Investigation (DSI).

13
Current Status

• MD Deputy MD alleged on 2 criminal offenses
  (SEA 307, 308, 311 and 312).
• Intentionally falsify documents and accounts
• Misappropriation of company assets
• Eight directors of gas-filling plants
  subcontractor alleged for aiding and abetting the
  MD (SEA 315).
• All suspects blacklisted 5-15 years
• Other consequences
• MD DMD resign
• Share prices dropped PG Plc. and other related
  companies.
• Default on debt ? capital increase

14
PRICE AND VOLUME PG Plc. FROM 5 JAN 2004 TO 7
SEP 2005
Shares
Baht
Trading suspended
XR
Rumor on acquiring New Gas
Acquiring World Gas
SEC ordered special audit
Q3/04 F/S Profit 544 MB
Q2/04 F/S Profit 361MB
SEC ordered 2004 F/S amendment
2004 F/S Profit 735.38 MB
Reissue 2004 F/S
JAN04 FEB04 MAR04 APR04 MAY04 JUN04 JUL04
AUG04 SEP04 OCT04 NOV04 DEC04 JAN05
FEB05 MAR05 APR05 MAY05 JUN05 JUL05
AUG05 SEP05
15
Critical Issues

• The enforcement (administrative) power of the
  Thai SEC.
• Reliance on criminal penalty only (affecting the
  burden of proof).
• The law was not written clearly.
• The speed of the legal process.
• Small investors lack of power.
• Reactions from the investment communities.