The Stock Exchange of Thailand (SET) Index has been heading south in recent days due to poor market sentiment, partly caused by the accounting scandal at Stark Corporation Public Company Limited, which used to be among 100 largest listed companies in the country.
The scandal has taken a toll on confidence in the local financial markets amid the fragile economic recovery in the COVID-19 aftermath.
Many market observers are worried about the state of corporate governance and the role of regulators.
Illusion of rapid growth
A close look at the Stark fiasco reveals failings at multiple levels.
Stark’s core business was wire and cable manufacturing. It did not directly launch an initial public offering when it listed on the SET in 2019, but it registered as a public company on the local bourse through the backdoor, by buying Siam Inter Multimedia Pcl, a listed media company that had suffered losses.
Stark’s financial statement showed it had later made a profit of close to 3 billion baht with revenue exceeding 10 billion baht. The company’s narrative of its success story went like this: its electrical wire manufacturing generated about 90 per cent of its revenue; it cashed in on the growing number of EV-charging stations which have to use electrical wires; and it also expanded its investment in Vietnam.
Something unusual happened when in May 2022, it announced it was raising capital by issuing 1,500 million new shares at 3.72 baht each, totalling 5.58 billion baht as private placement allocated to institutional investors.
At that time, the company had claimed it was raising the funds to acquire a stake in LEONI Kabel GmbH, which is listed on the German stock market. But on December 13, 2022, it informed the SET that it had abandoned the acquisition plan, explaining that Russia’s invasion of Ukraine had made the business unfeasible, but the company would retain the funds raised from the share issue for other business purposes.
In February this year, Stark informed the SET that it could not meet the deadline of submitting its financial statement for fiscal year ending December 31, 2022 as it was still gathering information about the company’s performance and its auditing was incomplete. The company pledged to complete its financial statement by March 31 this year. The SET suspended trading of the company’s shares from March 1 to 31.
On March 31, the company again informed the SET that it could not submit its financial statement and sought an extension until April 21, saying that it had replaced Deloitte, its former auditor, with PriceWaterHouseCoopers and it was reviewing its inventory cost.
The move was followed by the resignation of the executives, directors and auditing committee in April this year. The company on April 19 informed the SET about the change of executives and board of directors and the appointment of new executives and a new board of directors.
Irregularities found
On June 14, the company informed the SET that the new management had found irregularities in the financial statements for fiscal years 2021 and 2022 and asked for an extension until July 17 to facilitate special auditing of its financial statement.
The new management team identified many irregularities. For example, Stark’s previous report of a net profit of 2.8 billion baht in fiscal 2021 was false. The new management adjusted it to a loss of 5.99 billion baht. Sales figures were revised to 17.49 billion baht from the 25.22 billion baht reported earlier.
In fiscal 2022, Stark’s consolidated account showed total revenue of 25.73 billion baht, but despite the almost 35 per cent increase in sales, it suffered a loss of 6.65 billion baht, bringing cumulative losses for the past two years to 12.6 billion baht.
Its shares plunged to the floor after the SET allowed it to resume share trading from June 1 to 30. The SET has threatened to delist the company.
Denting market confidence
On June 26, the Securities and Exchange Commission (SEC), the SET and nine other concerned parties involved in regulating the capital markets held a press conference to inform the public about the latest developments in the investigation with the aim of shoring up public confidence in the local capital markets.
Thawatchai Pittayasophon, SEC’s deputy secretary-general and acting secretary-general, assured investors and the public that the SEC was working closely with police, the Department of Special Investigation, the Economic Crime Suppression Division and the Anti-Money Laundering Office. However, so far no one has been accused of committing any crime. The concerned parties are also trying to find ways to address the interest of stock investors and bondholders who had suffered from the scandal, he said.
Shareholders worst affected
Siriporn Jangtrakul, secretary-general of the Thai Investors Association, revealed that 1,759 stock investors had informed the association of being victims of the irregularities, with the erosion in their total share value estimated at about 4 billion baht. The association is ready to support investors who want to launch a class-action lawsuit against Stark.
Meanwhile, Somjin Sornpaisarn, president of the Thai Bond Market Association, said that the company was likely to default on its corporate bonds worth 9.2 billion baht this year. A total of 4,528 bonders will be adversely affected.
Pakorn Peetathawatchai, president of the SET pledged to improve regulations to make sure investors had adequate and timely information before making investment decisions, and also ensure strict disclosure practices by listed firms. The SET will also tighten rules for companies that seek to list and closely monitor their behaviour afterwards, to prevent such incidents from happening again.
Regulators to blame
The scandal has turned the focus primarily on the SEC and the SET.
Veerathai Santiprabhob, a former central bank governor, has raised the issue of integrity of the SEC. Posting on his Facebook page, he called for more transparency in the procedure to appoint the new head of the SEC, which is currently pending.
He warned that lack of confidence in the regulatory framework could severely damage the development of financial markets. Bond-issuers would not be able to seek roll over — holding back the principal amount, but paying the interest — of bonds on maturity, like it had happened three years ago and this could derail the financial system, he warned.
Lessons for investors
Ariya Tiranaprakit, the executive vice president of the Thai Bond Market Association, advised investors to not only look at the company’s current balance sheet, but at its history. If a company has been operating for a long period of time, people somehow assume it to be a guarantee that such irregularities would not be committed, she said.
Investors need to take into account the high credit rating of bonds. The other way is to diversify investments. They should not put too much money in one company, she advised.
By Thai PBS World’s Business Desk
