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How does Bursa’s PN17 rule serve minority interests?

Tong Kooi Ong & Asia Analytica
Tong Kooi Ong & Asia Analytica • 8 min read
How does Bursa’s PN17 rule serve minority interests?
The Absolute Returns Portfolio finished the week lower, down by 0.5%, paring total returns since inception to 2.8%. Photo Credit: Bloomberg
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There are several key criteria that all companies must meet to remain listed on Bursa Malaysia, such as maintaining a minimum 25% free float of shares, an adequate level of operations and the required financial conditions.

The PN4 regulatory framework was first introduced in 2001 to address financially distressed firms in the aftermath of the Asian financial crisis, whereby the affected companies had to take steps to regularise their financial conditions expeditiously within the stipulated time frame or face possible trading restrictions, suspension and even delisting. PN4 was subsequently replaced by PN17 in 2005 to provide clearer guidelines and more stringent requirements for companies to regularise their financial conditions.

Broadly, the PN17 classification will be triggered when the shareholders’ equity falls below 25% of the issued and paid-up capital and is less than RM40 million; when more than 50% of total assets employed comes under receivers/managers or winding up; when the auditors have expressed an adverse or disclaimer opinion in the latest audited accounts and a material uncertainty as to the company’s ability to continue as a going concern; and when there is a debt default. Paragraph 8.03A was introduced in 2015 to separately address companies with inadequate or insignificant business operations — in cases where they have disposed of, are prohibited from conducting, suspended or ceased major business (as a result of cancellation, loss or non-renewal of a licence, concession, etc) — but are not in financial distress.

Bursa, as the stock exchange operator, is tasked with ensuring compliance of the submission of the regularisation plan and timely update requirements, as well as approving, rejecting or waiving the requirements as it sees fit. Its primary objective is to protect the investing public, and ensure transparency and high standards of conduct and governance, integrity and market confidence. And this is the reason why some recent events caught our attention and concern. For the record, we have no vested interest in any of the stocks mentioned in this article, nor do we have any inside or additional information beyond what has been announced in the public.

Awanbiru Technology (Awantec) became an affected listed company under Paragraph 8.03A 2(a)(aa) back in early 2021, when it lost membership in the Microsoft Partner Network. The distribution of Microsoft products and services was Awantec’s core business, accounting for over 90% of its revenue. Under the listing rules, it needed to come up with a plan to regularise this status, that is, find a new core business to replace the Microsoft loss. In August 2021, it secured Google’s Premier Level Partner status in Malaysia, which allowed the company to be part of the government’s cloud framework agreement in 2022 and participate in the public sector digitalisation transformation. However, rollout was slow and Awantec’s financials deteriorated over the next few quarters. After several extensions, the latest deadline for a submission of a regularisation plan was April 13, 2024.

On April 8, Awantec applied to Bursa for a waiver and upliftment from its affected issuer status — on the grounds that its remaining business is now viable and sustainable, and has growth prospects, supported by its self-regularisation business plan, existing order book and tender book of contracts. The company had reported improved revenue and profits (from losses previously) in the last two consecutive quarters ended September and December 2023. Or, failing which, it requested for another extension to October 2024. On April 18 and 22, Awantec announced that Bursa would suspend its shares from April 26, notwithstanding its appeal against the suspension pending a decision on the waiver-upliftment application. Its shares would be delisted if Awantec’s application for upliftment and/or extension is rejected. Its shares were suspended on April 26. Finally, on May 10, Bursa approved the upliftment from affected issuer status and trading resumed on May 13. (See Chart for key timeline of events.)

Awantec’s share price fell sharply by more than 20% in the week immediately after its suspension was announced. When the upliftment was approved, its share price rose sharply on the first day of resumption of trade, by nearly 55%. Its share price has continued to rise since then.

Here is the issue. Yes, Bursa acted within its powers in the situation — it has discretion over whether to extend the submission deadline, and approve or reject any regularisation plan. But did it also safeguard the interests of the investing public in this case? More critically, the process itself lacked transparency and appeared inconsistent. For example, ACME Holdings was in a similar, if not exactly the same, position.

ACME triggered Paragraph 8.03A (2)(b) of the Main Market Listing Requirements when its revenue fell below 5% of its share capital in June 2022 and hence, had insignificant operations. The company submitted an application for waiver and upliftment (self-regularisation) of affected issuer status just before the deadline for submission of the regularisation plan, which was Dec 29, 2023. It also applied for a six-month extension should the waiver be rejected. In this case, Bursa did not announce any suspension of its shares pending a decision on ACME’s application for self-regularisation. The application was ultimately accepted, and its affected issuer status was lifted on April 1, 2024.

The question we have is why were Awantec’s shares suspended pending a waiver-upliftment decision while that of ACME was not. Obviously, we don’t know what transpired in all the communications between Bursa and the two companies. Like we said, the situations are similar but not exactly the same. We, and the public, may not be privy to certain nuances. But the fact is some Awantec investors lost a lot of money while others made a lot in the few weeks of volatile share prices — that perhaps could have been avoided, for instance if the suspension announcement had been delayed for three more weeks, to after a decision on the waiver-upliftment application had been made. Remember, Bursa’s primary objective is to safeguard the interests of the investing public. Perhaps the process could also be made clearer, so that both the affected companies and the public are not caught off guard.

We would go one step further and ask whether Paragraph 8.03A itself, as a rule, serves its purpose of protecting the shareholders of these companies. How does it protect the small shareholders? When a company loses its core business, for whatever reason, Bursa places it under Paragraph 8.03A — with the same stringent requirements for regularisation as a financially distressed company under PN17. Ultimately, a company that cannot find another core business gets delisted. So small shareholders either must sell at huge losses or end up with an unlisted company with hardly any business. How does this rule help them?

In the past, these companies simply became public shell companies and at some stage, someone would undertake a reverse takeover and voila, they and their shareholders were made whole again. Much like what a special purpose acquisition company does in the US — a shell company waiting for an asset injection. Is this not better?

Plus, after a regularisation plan has been submitted, how does Bursa come to a decision whether to reject or approve it, and therefore either delist or uplift the affected issuer status? Is it equipped to ascertain if a new business is viable, sustainable and has growth prospects? The fact is, one never knows for certain.

And how does Bursa determine whether or not to extend the time allowed for a plan submission? Is there a limit on the number of extensions a company can request for? There are quite a few affected issuers that have yet to submit any plans at all, some for years since triggering the classification (see Table).

If the balance sheet of a PN17 company has negative shareholders’ equity and is made whole by capitalising the monetisation of future cash flows of say, a subsidiary, does that qualify? Is it sufficient for upliftment? Is there a change in the fundamental business? Over to you, Bursa.

The Malaysian Portfolio gained 4.1% for the week ended June 12, outperforming the FBM KLCI, which remained largely unchanged. The top gainers were  KSL Holdings (+14.4%), Insas Bhd – Warrants C (+13.7%) and Insas (+7.6%), while the losers were IOI Properties Group (-1.2%) and Malayan Banking (-0.2%). Last week’s gains lifted the total portfolio returns to 221.2% since inception. This portfolio is outperforming the benchmark index, which was down 12.1%, by a long, long way.

The Absolute Returns Portfolio finished the week lower, down by 0.5%, paring total returns since inception to 2.8%. It was dragged down by top losers such as Swire Properties (-6.1%), SHK Properties (-3.8%) and Airbus (-2.7%), but the losses were partially offset by gains from top performers such as  Microsoft (+4%), Itochu (+2.2%) and Vanguard S&P 500 ETF (+1.2%). 

See also: Ringgit can strengthen near term but are we addressing the secular decline?

Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/ or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.

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