Frankly Speaking

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F1 benefits and costsThe government’s decision to build a Formula One (F1) racing team shows once again the Malaysian penchant for making a big impact on the world stage. The benefits of joining the high octane Grand Prix championships are undoubtedly enticing. They include promoting the Malaysian brand to a massive global fan base for the sport. TV audiences alone amount to 600 million viewers per season, consisting of up to 18 races.

As the government’s involvement in the enterprise is through Proton, important technological spin-offs for the automobile industry can be expected, as Prime Minister Datuk Seri Najib Razak said when announcing the public-private partnership. AirAsia and Naza Motors, two prominent business groups in the venture, will also gain from global marketing exposure through their involvement in the project, as will the Sepang International Circuit, the motorsports association and others.

Big dreams like F1 fame do not come cheap, however. A top team like Ferrari spent about US$415 million (RM1.45 billion) in 2008, by some estimates. On average, a team spends some US$4.38 million per point won in a race, based on a scale of 10 points for first place and one point for the 8th position. Team Honda, which quit the championship citing escalating costs, spent 12 times as much per point as Ferrari, while at the other end of the scale, Super Aguri closed down after failing to score any points.

While the benefits of investing in an F1 team may be “100 times” its cost — in the view of former prime minister Tun Dr Mahathir Mohamad, who made Malaysia the second Asian country after Japan to host the event — it makes good sense for the full costs of the venture to be known, for a more accurate accounting of the public funds that will be put to this use.

Transparency makes sense even when the economic outlook is rosy, but is especially important when a global financial crisis has threatened to bring whole economies to their knees.Surprise placementShareholders’ jaws must have dropped last week when they got to know that Sanichi Technology Bhd had proposed a private placement of 50 million new shares, equivalent to 44% of the company’s issued and paid-up capital.

Private placements have been common, particularly in recent months, with the rebound in share prices and improved risk appetite among investors. But one of that size is rather rare.

The proposal is among the largest in Malaysian corporate history in terms of proportion to existing paid-up capital. The private placement is expected to raise RM5 million, assuming an indicative price of 10 sen apiece.

Why would the plastic injection mould maker want to issue that many new shares to raise fresh capital? The fund-raising exercise is for working capital as well as debt repayment. Sanichi’s gearing ratio stood at 0.92 times as at June 30.

To achieve its target gearing and interest servicing position, the board is of the opinion that any fund-raising exercise at this juncture should be in the form of equity rather than debts.

It is good for Sanichi to monitor its borrowings closely and to opt for fund-raising through the equity route and not debt. But why didn’t the board propose a rights issue, which is also a form of equity, when the company needs to place out so many shares.

Like it or not, the sizeable private placement has to some extent denied the right of the company’s shareholders to participate in the fund-raising scheme. The company’s share price closed at 10.5 sen on the ACE market last Friday. Interestingly, the counter did not succumb to heavy selling after the announcement, considering the dilution effect.

When all is said and done, considering the placement requires shareholders’ approval, minorities will still have the last say.Good sneak previewThe Securities Commission Malaysia’s (SC) recent move to publish the unregistered prospectuses of potential new listings on its website is commendable.

This allows the public to examine the information contained within and give feedback to the regulator before the prospectuses are approved for dissemination for the purpose of soliciting investors.

The SC started publishing unregistered prospectuses recently. It began with the posting, on Sept 11, of the prospectus of China Haikui Ltd, a seafood processor and exporter in China, which has applied to list on Bursa Malaysia’s Main Market.

Last Friday, the SC published the unregistered prospectus of Maxis Bhd, which is seeking to relist on Bursa. The mobile operator was privatised in July 2007.

Through Maxis’ unregistered prospectus, the public came to know that the company’s planned listing involves only its local operations. While its initial public offer (IPO) price was omitted from the prospectus, information on the number of shares, and more importantly, Maxis’ finances over the last few years, was revealed.

Regardless of whether it is a small listing such as China Haikui or one as big as Maxis, publishing the unregistered prospectuses of potential IPOs will help prevent inaccurate information from reaching investors.

There have been cases of IPOs turning sour, a notable case being that of furniture maker Tat Sang Holdings Bhd. The company sank deep into financial trouble shortly after its listing in 2000 and was delisted in 2003, after its major shareholder was found guilty of furnishing false financial information and was sent to jail.

It has become ever more important to create a platform for the vetting of IPO prospectuses, after the SC shifted from a merit-based to a disclosure-based regime. That puts stricter responsibility on IPO promoters to ensure the accuracy of the information they provide.

But at the end of the day, while the penalty is severe for fraudsters, prevention is always better than cure. Penalising the culprits later does not help the victims obtain an equitable financial remedy.

This article appeared in The Edge Malaysia, Issue 773, Sep 21-27, 2009.