Malaysia's Securities Watchdog Head Quits

After months of controversy, Malaysia’s Securities Commission has announced that the embattled chairwoman, Zarinah Anwar, will step down at the end of the month in the wake of a blatant conflict of interest involving her husband’s trading in shares.

There is some indication that the government has belatedly recognized the troubled condition of the Securities Commission, which has been the subject of considerable criticism in addition to the conflict of interest case involving Zarinah and her husband.

(Zarinah’s departure is the second major incident involving at top woman government official. Shahrizat Abdul Jalil, the women’s minister, announced she would leave her post on April 8. Read related story here.)

A study by a task force appointed by the International Institute of Finance said it viewed the regulatory environment “as the weakest factor in the overall corporate governance framework of Malaysia.” The commission, the study found, “is not perceived by many of those who spoke with the Task Force to be operationally independent from the Ministry of Finance, although under the present government the SC claims to have full operational freedom. This public perception weakens the regulator.”

Replacing Zarinah as chairman is Ranjit Ajit Singh, previously managing director of the SC and responsible for the oversight of the Malaysian capital market. He has gained international recognition as the chairman of the International Organization of Securities Commissions emerging market group on the regulation of secondary markets and co-chaired of the task force on bond markets. He is a member of numerous international task forces as well as the expert group that prepared the principles being used for international securities regulation.

Nik Ramlah Mahmood, formerly Managing Director & Executive Director of the Securities Commission’s Enforcement Division, was named Ranjit’s deputy. She has also gained international recognition for her corporate governance work.

Zarinah, appointed to head the Securities Commission in 2006, was a conflict of interest on the way to happen. It was not a question if conflicts would arise, but when, given the number of companies her husband, Azizan Abdul Rahman, had an interest in, some of them dodgy at best.

She came under fire last August when it was revealed that Azizan, the chairman of the Eastern & Oriental hotel and property company, bought nearly half a million E&O shares not long before the Sime Darby Bhd. conglomerate bought 30 percent of the E&O shares, driving the price up sharply.

Although under Malaysian securities law Sime Darby, still recovering from heavy losses from its oil and gas activities, should have been obligated to make a general offer for the remaining E&O shares, the SC concluded that it didn’t need to do so, although it didn’t give any arguments. A Securities Commission task force ruled that a new "concert party" had been created between Sime Darby and E&O's managing director and thus that a general offer obligation had been triggered.

The perceived conflict of interest appeared to clash directly with the commission’s own principles and standards, which state that: "An integral part of ethics and integrity is the avoidance of conflict of interest. In this regard, all SC staff and their immediate family members have the obligation to avoid putting themselves in situations of conflict where their personal interest is conflicted with the interest of the SC.

"The SC must demonstrate the highest level of honesty and integrity in all our dealings with stakeholders and ensure exemplary conduct of our staff. The Statement of Principles and Standards applies to all business transactions entered into by the SC. All staff as well as those who do business with us, need to fully understand the requirements of the Statement and ensure its application in all dealings and engagements with the SC."

Zarinah herself signed the statement.

The E&O transaction also triggered questions over the fact that Sime Darby, as a government-linked company, was given a pass by the Securities Commission at the expense of minority shareholders. That added to the perception that the commission too often goes easy on state controlled companies.

There are other concerns involving Azizan Abdul Rahman, who has been actively involved as an officer or director in at least nine other companies as well as serving as chairman of the investment panel of Lembaga Tabung Haji, the Malaysian government-maintained haji pilgrim fund.

Among the more controversial of those companies is Isyoda Corporation Bhd., a construction that was taken private after being threatened by delisting at 60 percent of book value. Isodya was initially the prime subcontractor for the construction of the controversial Shah Alam hospital, which ultimately had to be retendered and whose construction was delayed for months as costs ballooned out of sight.

On winning the contract in 2007, the hospital turnkey contract holder Sunshine Fleet, owned by Selangor princess Arafiah Sultan Abd Aziz Shah, first subcontracted the project to Isyoda, which was unable to complete the project after it was delisted from the Kuala Lumpur Stock Exchange and was in the process of being declared bankrupt. There are rumors in Kuala Lumpur that Isyoda hastily delisted to avoid the possibility of a probe into kickbacks or corruption.

The project was later subcontracted to GMH Healthcare, which claimed that when it took over last year from Isyoda, it was required to put up RM10 million to repay the ailing construction company for the bond the latter placed with the Public Works Department (PWD) on Sunshine Fleet's behalf. That stalled the hospital project even longer.

Questions have also been asked about Ramunia Holdings Bhd., a 51-percent subsidiary of the troubled oil and gas contacting company Oilcorp Bhd, which has frequently been accused of insider trading. According to a filing with the stock exchange by Ramunia, Oilcorp’s subsidiary Oilfab Sdn Bhd had accepted a letter of offer from Ramunia to buy fabrication yard assets for RM83.8 million on Jan 25.

According to Ramunia, RM80 million of the purchase price would be satisfied via the issuance of 156.86 million new Ramunia shares to Oilfab at an issue price of M.51 sen each while RM3.8 million would be paid for in cash. What is interesting about the deal is that Oilcorp was also delisted from Bursa on the same day. This certainly raised questions on the timing. Could the deal have saved Oilcorp from delisting had it sold the asset earlier?

Ranjit and Nik Ramlah have their work cut out for them. As the International Institute of Finance pointed out in its study, “Both the Companies and Securities Commissions are perceived as weak by many investors and other market participants. However, recognizing the need to improve the country’s regulatory environment, the government has announced plans to create one regulator by merging the Companies and Securities Commissions. This announcement was well received by the markets. Nevertheless, the success of this plan depends largely on the approach taken in executing the merger, which has yet to be decided.