Charge – form of security by banks

Charge is a common form of security taken by banks for granting a loan to the borrowers. When you charge your assets to the bank, you are called “Chargor” and the bank is “Chargee”. There is no transfer of ownership / title required to create a charge. The ownership remains with the Chargor. In the event the borrower is not able to pay back the loan, the bank has a right to foreclose the property.

In most cases, the borrower and the chargor are the same, this is called First Party Charge. Third Party Charge is when the borrower and chargor are different. For example, Party A and Party B enter into a joint venture to develop a housing project. Party A has the land and Party B has the expertise. Party B needs to borrow from the Bank to fund the development costs. In this case, Party A may offer the land as security for Party B’s loan.

There can be more than one charge on the same assets, i.e. First Charge, Second Charge. For example, your property value is RM1 million but your loan outstanding is only RM200,000, you may borrow more by creating a second charge over the same piece of asset. The rights of the subsequent Chargee shall rank after the first Chargee.

PKFZ and the infamous letter of support

Remember PKFZ and the infamous letter of support?

The courts recently found Port Klang Authority’s GM guilty in the PKFZ fiasco.

PKFZ was supposed to be Malaysia’s Jebel Ali Free Zone but it ended up a failure, a massive RM12 billion failure for the taxpayer. This was THE Malaysian financial scandal until it was eclipsed by 1MDB.

At the bottom of the fiasco was the Letter of Support issued by the Minister of Transport to support the bonds issued to develop PKFZ. The Letter was obviously issued to support the bonds because it was not likely to generate the cash flows to meet the financing obligations.

But did the Letter tantamount to a guarantee by the Government for the bonds? The Government decided to honour the Letter though it was signed by the Minister of Transport (bypassing MOF as required under the Financial Procedure Act), and even addressed to MARC, the rating agency (instead of the trustee for the bondholders)!

Finally, why was a similar Letter of Support issued by LKIM not honoured by the Government for the Malaysian International Tuna Port? The court judgments on that case make for very interesting reading.

Utusan – VSS

As expected, Utusan has announced a VSS exercise for its staff. While the employees grapple with the question of whether they should take up the VSS offer, the key question is will Utusan survive in the medium term. This is a question which all employees affected by VSS need to ask themselves.

Some companies undertake VSS exercises to cut costs, to be leaner in order to protect their profit margins. Some do it because they have no choice. During the 1997 economic crisis, many companies had to offer VSS to the staff. It was a matter of survival. A lot of companies did not pull through. Their turnaround plans did not work out. The key things to be considered are:

1. Does the company have a viable and changed business plan to improve its business and cash flows?
2. What is the company’s operating leverage like? High overheads vs variable costs.
3. Are the banks willing to take a hair cut on the loans?
4. Are the shareholders able and willing to pump in money?

When a turnaround fails, it is the remaining staff, suppliers and minority shareholders who will lose the most. Secured lenders will still have the collateral to offset their loss.

Felda’s land

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There was a lot of controversy regarding Felda’s land in Jalan Semarak where the land titles were transferred to a private company, Symphony Promenade (SP), who then came out with a press statement to deny any wrongdoing and explain that the transfer was necessary to secure funding for the development. In our opinion, their explanation is not strictly correct.

It was to be a joint venture between Felda and SP to develop Kuala Lumpur Vertical City. This type of JV is common where 1 party provides the land and the other develops it. The JV sources for financing for the development.

To secure financing, the land is charged to the banks. BUT, typically and crucially, the land title remains with the landowner. There is NO need to transfer the title. This is called a third party charge, done all the time. Once the title is transferred, the landowner has no control or right over the land except what has been agreed in the JV agreement which is to share in the profits of the development. If the development fails, the landowner gets nothing and loses his land. The developer mainly loses his working capital.

Our opinion is based on publicly available information only and may change if the info is incorrect.


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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.