REIT

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Dr Dzulkefly Ahmad, the Health Minister plans to set up a REIT (real estate investment trust) to raise funds of up to RM3 billion to upgrade the country’s health services. What is a REIT? Are we privatising / selling off more of the country’s healthcare assets further? Bad or good idea?

A REIT is a company that owns (and operates) income-producing real estate. Dr Dzulkefly intends to unlock the hospitals assets ‘value. Let’s see how this can be done.

The hospitals are currently not income-generating. They are owned and used by the Government.

First, the hospital assets are transferred to a new entity (Newco). The Health Ministry (MOH) then signs a lease agreement with Newco to use the hospitals. Newco becomes income-generating. With that, Newco can be listed.

If MOH sells a minority stake (say 30%) to the public, MOH will still control the hospital assets through Newco. Of course, MOH now needs to pay annual leases to Newco (which it did not have to before). However, 70% of the lease will go back to MOH as Newco’s shareholder.

In conclusion, MOH gets proceeds from selling 30% of assets but pays out 30% annual leases to third parties, while still controlling the assets.

GST refunds

 

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There has been a lot of brouhaha about the shortfall in the trust account for GST refunds.

When companies sell their goods and services, they charge GST which they collect on the Government’s behalf (let’s call A). Companies pay A to the Government.

In order to produce the goods and services, the companies bought raw materials which they paid GST on (let’s call B). B is to be refunded to the companies within 2 weeks after A is paid.

So, B is actually the companies’ money. Only the net (A-B) belongs to the Government.

As B does not belong to the Government, B is set aside in a trust account where it sits until it is paid to the companies. Strangely, many companies did not get the refund, even up to years. Of course, when it comes to tax, there will always be disputes on whether the claim for refund is allowed (just like disputes whether certain expenses are tax deductible when calculating corporate tax). Let’s set that aside.

Now it looks like only some of B was transferred to the trust account. The rest stayed in the Government’s Consolidated Account as its revenue, which was spent. Oops!

It will take the Government time to build up the funds for the GST refund. In the meantime, the companies suffer cash flow constraints and turn Government lender.

Trouble for LaVida coin?

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Trouble for LaVida coin? Bank Negara Malaysia has listed VI Profit Galaxy, the operator behind Datuk Seri Vida’s LaVida coin in its financial consumer alert list.

The list consists of companies or websites which are not authorised or approved to offer financial services under laws and regulations administered by BNM. There are 423 companies on that list currently. Remember Genneva Gold? MBI International? According to BNM, Malaysians seem to favour foreign exchange trading and gold investments when it comes to dodgy investment schemes.

On LaVida coin, the Securities Commission Malaysia has also said that it is reviewing LaVida coin to determine whether any securities laws have been breached.

Want to know more about investments? Register for our “Investment Themes – 2018 and Beyond” on 10 Oct 2018.

MACC Amendment Act

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To get that contract or other beneficial outcome for your company (or client), you offer inducements to the decision-maker. All done quietly and surreptitiously.

You have just committed corruption. The MACC Amendment Act gazetted this year has far-reaching corporate liability provisions. A commercial organisation will now commit an offense if a person associated with that organisation is involved in corruption. That means YOU as a director, YOU as a Partner, YOU as the Management, YOU as an employee will be deemed to have committed the offence, though you were not directly involved in the corrupt act itself.

Punishment? A heavy maximum jail term of 20 years or 10 x the sum of gratification or RM1 million, whichever is higher, or both.

Legal Updates training on 26 September will cover this and other new legal amendments which you need to know.

Today is an important day in Islamic finance

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Today is an important day in Islamic finance. The Federal Court will decide on the constitutionality of a Shariah Advisory Council (SAC) ruling binding the civil court, in the case between Kuwait Finance House vs JRI Resources and its 3 guarantors.

Under the Central Bank of Malaysia Act, the SAC’s ruling on Shariah matters in Islamic finance is binding on all parties, including the civil courts. Remember, Islamic finance is a commercial matter, hence disputes are tried in the civil courts, not the Shariah courts which are for family matters and religion observances.

The case principally arose because in 1 part of the Ijarah (lease) agreement, KFH as the beneficial owner of the assets is responsible for their maintenance, while in another section, the Obligor has to bear the maintenance costs. Such contradictions are unfortunately, common in Islamic finance (e.g. Mudharabah & Musharakah contracts on who in substance bears the business loss).

The SAC ruled that the Ijarah is valid, binding all parties including the High Court. This, JRI argues is usurping the judicial powers of the civil courts. Is it constitutional?

The Federal Court’s decision will be another milestone in Malaysia’s Islamic finance. Watch this space.

Oops, she did it again! Lavida Coin

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Oops, she did it again!

After the viral ayam mee video, Malaysia’s cosmetics queen, Datuk Seri Vida is introducing her own cryptocurrency, Lavida Coin, that runs on the Blockchain technology. It is now on pre-sale, known as ICO (Initial Coin Offering). Apparently, she came up with the idea after profiting from her cryptocurrency investments.

ICO is somewhat similar to IPO but with far less regulation and offer quicker and cheaper solution for fund raising. Lavida Coin’s White Paper (an informational document which sets out the key features of the product) is quite scanty on information. The ICO aims to crowdfund 3 projects which cover development of an entertainment platform, a mobile wallet and Muslim community hub (a new Mosque will be built). So the attraction to investors is making money for this life plus doing good for the next.

Many ICOs ride on the Blockchain hype rather than offer a good ‘startup’ plan, so exercise due diligence prior to investing. Unlike her evergreen cosmetics business which have made millions for her and other entrepreneurs like Aliff Syukri, crytocurrencies remain highly speculative.

Want to know more about ICO, Cryptocurrencies and Blockchain? Register for our ‘How Fintech is Disrupting and Complementing the Financial Industry on 30 Oct.

 

I have become my company’s creditor

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According to the National Union of Journalists, Utusan’s staff may not get their wages in the future. If you are owed your salary by your employer, what can you do? What are your rights?

If a company is wound up (tutup kedai), you need to wait in line to be paid.  You have become your employer’s creditor.

First, the secured creditors, normally banks.  They are not part of the queue.  They will take the assets charged to them (normally landed assets) and sell them on their own. If the amount received is less than what is owed, they will join the unsecured lenders in the queue for the balance.

For the rest, the liquidator will sell the company’s assets and distribute the money in the following order of priority:

  1. Winding up costs, including the liquidator’s remuneration;
  2. Employees’ wages and salaries (including commission) capped at RM15,000
  3. Workers’ compensation
  4. Vacation leave
  5. EPF
  6. Federal tax
  7. Unsecured creditors e.g. suppliers, and unsecured lenders
  8. Shareholders

Are you in this situation? Learn about legal rights and other updates and debt recovery at Symphony’s 26th September training.

Investment – Hantu Kak Limah?

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Hantu Kak Limah made history as the highest grossing film in Malaysia, taking in RM20.5 million in ticket sales alone over 11 days. While the production cost is not known, it can be safely assumed that the ROI or return on investment for Hantu Kak Limah will be in 3 digits at the very least.

So why don’t more people fund films since they are so lucrative? Or why is the film industry a non-starter for banks?

The answer lies in the risk reward profile of the film industry. Success and failure is unpredictable. An investor can make a lot and he can also lose all (example, Kevin Spacey’s latest film grossed USD126 on its opening night in the US). Hence, the funding of films tend to be from own pockets and not many people have that kind of pockets. Fortune favours the brave, or fool-hardy.

The only exception where third party financiers may come in is when the films (or songs) are long time favourites with a track record of royalties. If they are expected to be perennial favourites, a case can be made to securitise the future royalties. These would include Sir Run Run Shaw’s films, P Ramlee’s films or anthology of Elvis Presley, Michael Jackson, Beetles songs.

Investment Themes – 2018 and Beyond (10 October 2018)

Investing in listed shares and bonds

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Difference between investing in listed shares and bonds.

Bonds are IOU financial instruments issued by companies and the Government. They are similar in nature to bank loans. A bondholder receives a periodic coupon (normally every 6 months) and the par value on maturity. These are fixed obligations, meaning you can sue the issuer if they are not paid.

Like bank loans, bonds can be secured against the issuer’s assets. You can foreclose on the asset and recover your money from its sale.

You can be an active bond investor by trading the bonds and make capital gain (or loss). Bond prices change based on the issuer’s credit standing and the prevailing interest rates. But if you are a passive investor, you will just get your fixed coupon and par value.

For shares, an investor makes money from dividends and capital gain from share price increases (or loss). Dividends are at the discretion of the company. You cannot sue if you don’t get any dividends. There is also no security. If the company goes under, an ordinary shareholder is the last to get any remaining cash after all statutory bodies and creditors have been paid. Hence, shares are riskier than bonds.

Next, how does a retail investor buy bonds?

Capital expenditure & Operating expenses

What kind of financing does a company need? There are 2 types of expenditure that a company incurs to start and run its business:

1. Capital expenditure to fund capital goods such as plant and machinery used to produce goods and services; and
2. Operating expenses to fund daily operations e.g. salaries, utilities and rent.

For capital expenditure (capex), the company uses term financing which has a fixed repayment period, usually less than 7 years. This term loan or term financing (in Islamic) typically has a grace period where it does not have to repay any part of the loan. Financiers recognise that the company needs time to be established and generate cash. However, there is no grace period for interest payment.

Operating expenses are funded by working capital financing which are in the form of revolving credit (RC), overdraft facility (OD) or trade lines such as letter of credit (LC), bankers’ acceptance (BA) and trust receipts (TR). These are short term in nature (1 year and subject to renewal). RC and OD allow you to use, pay back and reuse within the tenure of the facility.