Dispatch (Asia edition)

• Audit committee members want guidance
• Superbank in the making?
• Cheers for latest tax cuts
• Top caps set high standards
• The dragon looks outward
• Fuel woes

Audit committee members want guidance

Audit committee members at firms listed on the Singapore Exchange want greater practical guidance on risk management, fraud and internal control issues, a survey conducted by the Singapore Management University School of Accountancy found.

The survey was commissioned by the industry-led Audit Committee Guidance Committee (ACGC), set up in January by the Monetary Authority of Singapore, the Accounting and Corporate Regulatory Authority and the Singapore Exchange, to develop practical guidance for audit committees of listed companies. This is a key initiative to strengthen corporate governance practices of listed companies in Singapore.

Respondents to the survey indicated that their Audit Committee currently gave the highest emphasis to compliance with law and regulations, financial reporting and external audit, while risk management received the lowest emphasis. They said they would prefer practical guidance in the form of checklists of critical issues and best practice guides, and would also like more training in areas of risk management, as well as accounting standards and taxation.

Other key challenges faced by audit committees and highlighted by the survey were issues of internal governance in family-owned companies; the need to keep abreast with developments and changes in laws and regulations; and the need to upgrade their knowledge in the areas of accounting and finance.

Bobby Chin, Chairman of the ACGC said the feedback received helped confirm the areas of concern where more guidance is needed. 'It also showed that many AC members are keen to upgrade their knowledge. This augurs well for the improvement of corporate governance practices of listed companies in Singapore,' Chin said.

The ACGC is preparing practical guidance for audit committees, due to be released in September.

Superbank in the making?

Malaysia's largest lender, Malayan Banking Bhd or Maybank, was singled out as a potential superbank by London-based Retail Banker International.

A string of back-to-back acquisitions recently has enabled the bank to expand its regional presence, in line with its goal of further diversifying its earnings outside Malaysia. Its acquisitions of a 15% stake in Pakistan's MCB Bank Ltd, 15% in Bank Internasional Indonesia (BII) and up to 100% in Vietnam's An Binh Bank will cost about RM11.5 (USD35.4) billion, to be funded by a mix of internal and external funds. Maybank projected that the three acquisitions will boost overseas revenue contributions from 19% to 31% eventually.

However, many investors and analysts' perception of the bank soured given the 'pricey' acquisitions in weak economic conditions, which could in turn affect the bank's return on equity and dividend payout, even though the bank has said that it will maintain its dividend payout rate of 60-65% over the long term. Maybank is paying an 11.4% premium to the market price for the MCB stake, which will cost RM2.17 (USD0.67) billions, with an option to purchase an additional 5% for RM785.5 (USD241.9) millions. It won the bid to buy up to a 100% stake in Bank Internasional Indonesia for RM8.6 (USD2.65) bil or 4.65 times book value, setting a new benchmark for Indonesian banking M&As since the average price-to-book valuation previously was about 2.5 times.

Although its plate is currently full, Maybank has indicated that it will not stop blazing the regional acquisition trail in future; the bank reportedly has Thailand and South Asia, particularly India, in its sights.

Cheers for latest tax cuts

Any cut in taxes is usually well received, but Hong Kong's recent initiative had corks popping in celebration.

On the back of a record budget surplus this year (more than four times higher than projected) the government announced a raft of one-off and recurring benefits, including the waiver of business registration fees and rates for 2008/2009, and refunds of profits tax, property tax, salaries tax and tax under personal assessment for 2007/2008. But the measure that caused the most excitement was the abolition of duties on all alcoholic drinks except spirits. The decision, announced in February and effective immediately, made Hong Kong the only destination in the world that has no VAT and no wine tax.

Since the announcement, wine business has boomed. Traders who had fine wine stored offshore immediately began to bring it back. In May, over US$8.2 million worth of fine vintages changed hands at the inaugural sale held in Hong Kong by US auction house Acker Merrall and Condit.

Boris de Vroomen, managing director of Moet Hennessy Diageo Hong Kong Limited and chairman of the Wine and Spirits Industry Coalition, said 40% of wines traded in the world's biggest markets, London and New York, are owned by Greater China consumers - predominantly in Hong Kong. 'With the duty obstacle removed and wine flowing back to Hong Kong, the potential revenue shift is enormous.'

The move makes Hong Kong's tax system, hailed as a fiscal role model, even more attractive. The city's taxes are already among the lowest in the world, and the structure is simple and predictable. There's no capital gains tax, withholding tax, sales tax or VAT - and generally no tax on dividends or interest earned. And you don't even have to live there to benefit. Since Hong Kong's tax system is based on source, not residency, companies are taxed only on income that originates inside Hong Kong. From the 2008-09 tax year, it gets better, as the standard tax rate drops from 16 to 15%.

As Forbes magazine has said, Hong Kong is 'a longtime low-tax champion'. Many have profited from the city's 60-year-old tax system, regarded as a cornerstone of its stunning rise to prosperity. Now, it's the wine industry's turn to benefit.

Top caps set high standard

Australia's largest publicly listed companies have received a thumb's up for their robust corporate governance structures, with top kudos going to the financial services sector. The country's four major banks - National Australia Bank, ANZ, Westpac and the Commonwealth Bank - have been cited as 'outstanding' examples in the BDO Kendalls Large-Cap Corporate Governance Survey, as they comply with every aspect of best practice guidelines.

This year's survey found that while standards have risen overall in the past year, full independence remains a key challenge for some major companies. It also flagged room for improvement, adding that a number of large companies do not meet best practice guidelines in relation to their audit, remuneration or nomination committees. The survey methodology has been developed by BDO Kendalls over a number of years and in some cases sets a higher standard than the Australian Stock Exchange best practice principles for corporate governance.

Areas highlighted included some companies having audit, remuneration or nomination committees that were either not made up of all independent directors, or the chair was not independent. The survey findings are based on the 2007 annual report disclosures of the 20 largest Australian listed companies by market capitalisation. Several companies (15%) were found to be paying a high proportion of non-audit fees to their statutory auditors. And, 40% of the top 20 companies did not have a dedicated Risk Management Committee.

Andrew Pearce, BDO Kendalls' director of risk advisory services, says that despite some of the largest caps needing to improve in certain areas, the broad finding for Australia's biggest listed companies is that their corporate governance structures are robust and in most areas meet best practice guidelines.

'Overall the corporate governance structures for the top 20 companies by market capitalisation are of a very high standard, and in the majority of cases the structures put in place meet all best practice guidelines.'

He added that good corporate governance is essential if companies are to operate to the highest standards. 'Some companies could tighten up their corporate governance structures slightly, particularly in relation to their committees, however most companies have satisfied best practice guidelines and, importantly, exhibit full independence in relation to their committees.'

The dragon looks outward

China is set to continue leading the world in M&A (merger and acquisition) and IPO (initial public offering) activity at rates well above the global average, according to the latest Grant Thornton International Business Report.

It found that mainland China has the highest number of privately held businesses expecting to grow through M&A (67%) or IPO (60%) in the next three years, compared with the global average of 44% and 22% respectively.

The firm believes that current turbulence in world financial markets will do little to curb China's growth as maturing private businesses look to expand internationally. Desmond Yuen, managing partner of Grant Thornton's China practice, says businesses in mainland China are becoming increasingly sophisticated, international and acquisitive in their outlook. 'They are focused on building value rather than looking to realise it at this stage, and are excited about following their own growth strategies through domestic acquisition and IPO. There is no doubt that Chinese M&A activity is being fuelled by finance available from the equity markets.'

Partner Alison Wong, said that while China's privately held businesses 'may not be conducting headline grabbing deals that catch the public's interest', they are increasingly becoming more confident and successful in transacting internationally. This presents opportunities for Hong Kong businesses to expand their own market share through domestic and cross-border acquisition, Ms Wong said. 'Obviously, they see international M&A as a key strategic tool to drive growth and further success in their business.' The report also found that Hong Kong businesses are most bullish about the prospects of leveraging China's continued growth. In Hong Kong, 29% of privately held businesses surveyed said they planned to grow through acquisition in the next three years, with 69% of those businesses anticipating a cross border deal. This result places Hong Kong first among the 34 economies surveyed globally.

In a recent interview, the World Bank's David Dollar, also expressed optimism about China's resilience in the face of world events. 'We are cautiously optimistic that China will continue to grow rather well - our projection is 9.6% for 2008 - and that will help support global growth and make it easier for the US to resume healthy growth,' he said.

Fuel woes

Malaysians got a shock to the system when the government slashed the fuel subsidy in early June, raising the price of petrol by about 41% from RM1.92 (USD0.59) per litre to RM2.70 (USD0.83) per litre. Despite the price increase, the price of gasoline in Malaysia is still the lowest in the region apart from Brunei.

Without the cut, the fuel subsidy would have ballooned to RM33 billion (USD) from last year's RM8.8 (USD) billion. To cushion the impact of this politically unpopular move and dampen public disquiet over the fuel price hike, the government announced a one-off cash rebate of RM625 (USD192.5) for owners of vehicles with an engine capacity of up to 2000cc and a rebate of RM150 (USD46.2) for owners of motorcycles up to 250cc, among other palliatives.

However, the rebate has been widely criticised since it ignores the financial distress of the rural and urban poor who don't own private transport but need extra cash to pay for food and other basic necessities that have gone up in price.

Although there have been calls to ditch the car and take public transport, the state of Malaysian public transport means that many Malaysians will be sticking to their cars despite the new pressure on their budgets. The public transport network is not well-integrated and buses, subways and trains are known for congestion and lack of reliability. To remedy this, the government has said it will make improving the public transportation system nationwide one of the major focuses in the 2009 Budget in order to persuade more people to use public transport. Currently, about 16-20% of people use public transport in Malaysia compared to between 50-70% in developed countries.

Apart from affecting the overall quality of life, higher fuel prices will be a drag on the economy. In particular, higher fuel and food prices will reduce disposable income and crimp consumer spending among lower and middle-income groups. Since domestic demand is a key growth driver, economic growth is projected to slow to about 5% for 2008.

In brief

Hong Kong now e-ready
Hong Kong has jumped in ranking to be the second most 'e-ready' economy, just behind the United States, according to the latest Economist Intelligence Unit (EIU) report. 'e-readiness' is defined as a nation's ability to use information and communications technology (ICT) for economic and social development. The EIU has been assessing the world's largest economies since 2000, compiling an annual e-readiness ranking. It says Hong Kong's advancement from fourth to second spot this year is largely due to the city's improvements in connectivity and the security of its internet connections.

Hedge fund group expands
Global hedge funds group Financial Risk Management (FRM) is significantly expanding its Asian operations with new offices in Hong Kong and South Korea. The Hong Kong office will strengthen the firm's research coverage of Asian hedge funds and better serve its growing investor base in the region. The Seoul office, due to open later this year, will target FRM's Korean institutional clients who are currently served through its Tokyo office, opened in 2000.

ICT counts on green future
Australian ICT (information and communications technology) firms have told KPMG of their dwindling optimism for the industry's future. The third ICT Industry Pulse Survey shows sentiment regarding key company performance indicators, such as sales and profitability growth, has dropped by around 10% from a year ago. Capital expenditure is also expected to decline over the next 12 months, due to the current state of capital markets. The good news is a belief that 'green ICT' will become increasingly important, as organisations pay a premium for products and services which have a positive environmental impact.

M&A values soar
The value of mergers and acquisitions across Asia is soaring as the region's leading companies build scale and secure resources in fast-growing markets closer to home. The Financial Times reported that deals in the pipeline point to a record year for intra-Asian M&A activity, eclipsing 2007. It adds that regional consolidation has been led by outbound Chinese investment into the financial services and resource sectors.

Review of China's securities industry
The China Securities Regulatory Commission has flagged a possible further opening of its securities industry. Reuters reported an announcement of the commission's official web site saying it would assess government policy with the aim of opening up China's securities operations and capital markets 'in a practical and realistic manner'.

MAS warns banks of internal sabotage
The Monetary Authority of Singapore has warned banks that internal sabotage - ie spying by employees, contractors and vendors - ranks among the most serious risks they face. According to updated guidelines for Internet banking and technology risk management, the central bank has recommended that no one should have concurrent access to production systems and backup systems, particularly data files and computer facilities. External personnel should be subject to close supervision, monitoring and access restrictions, it said. Some of the control and security practices it recommended are two-factor authentication (2FA) for privileged users and restricting the number of privileged users.

Singapore law firms boost tax practices
Amid the pessimism surrounding the current global economic slowdown, Singaporean law firms are reporting a rise in demand for tax advice as well as greater focus on corporate governance, a local newspaper reported. The Business Times said Singapore law firms have been expanding their tax practices through recent hiring, with lawyers noticing a rising trend of using litigation for resolving tax disputes. Rajah & Tann has added Yeoh Lian Chuan, a former partner at Allen & Gledhill, as well as leading tax academic Stephen Phua to its team, while KhattarWong recently welcomed Alan Ow, former senior deputy commissioner at the Inland Revenue Authority of Singapore (IRAS), as its tax consultant. Ow is CEO of the Tax Academy of Singapore.

Sime Sacks Finance Officers
In a move lauded for corporate accountability and transparency, the world's largest plantation group Sime Darby Bhd terminated the services of its group chief financial officer Razidan Ghazalli and vice-president Muhammad Mohan Kittu Abdullah in June over RM120 (USD36.9) million in trading losses. Sime's Board of Directors moved to terminate the duo following an in-depth inquiry into the losses at Golden Jomalina Food Industries, a subsidiary of Golden Hope Plantations. The losses were discovered in August 2007, several months before Golden Hope, Guthrie Plantations and Sime Darby were merged into a single entity.

RE Boosting FDIs
Global energy scarcity is spurring foreign investor interest in Malaysian renewable energy projects. According to the Malaysian Industrial Development Authority (MIDA), increased FDIs have been channeled to renewable energy projects, particularly biomass and solar, in addition to oil and gas and aerospace projects. Concluded investment deals in the solar energy sector in May 2008 stood at approximately RM7 (USD2.15) billion. Despite challenging global economic conditions, MIDA reported no reduction in FDIs. For the first four months this year, MIDA had approved RM23.9 (USD7.35) bil of investments, of which nearly 60% or RM16.6 (USD5.11) bil consisted of FDIs.