The Stock Exchange of Thailand (SET) has said a loan that Eastern Wire Plc (EWC)'s extended to Siam General Factoring (SGF) has repayment conditions that are unclear, and that the company lacks sufficient internal controls over the approval of loans.

The SET demanded that EWC cooperate with SGF, which the SET said did not provide the same information as EWC on the lending conditions for the Bt500-million promissory note.

The SET ordered EWC to disclose details of the loan before next Wednesday.

"Providing a short-term loan amounting to Bt500 million [30 per cent of shareholder equity as of December 31, 2005] is not considered normal business for EWC. EWC also provided this loan to only one juristic person, which is significant," the SET said in a statement released yesterday, shortly after EWC remitted a clarification on the loan that it made last December.

The SET said EWC had insufficient internal controls for approving loans based on the fact that the transaction was approved by only two directors before being acknowledged by the EWC board of directors. In addition, EWC does not have a specific power structure and clear responsibilities for its board. Hence, authorised directors have no limits on the size of loans they can approve, the SET said.

During a board of directors' meeting on December 15, 2005, the chairman of the audit committee did not agree with the loan and told the management to reduce the risk, but EWC continued with the transaction the following day, the SET added.

Moreover, on December 15, 2005, Ernst & Young resigned as auditor of EWC and its affiliates for 2006. EWC did not inform the SET of the resignation within three business days, as required by SET regulations.

 On December 22, 2005, the board asked the executive to reduce the risk by getting a bank guarantee as collateral. On the same day, the chairman of the audit committee submitted a letter of resignation from his position. In addition, the SET noted, EWC did not proceed with getting a commercial bank to secure the promissory note. Today EWC stated in its clarification that it would do nothing in regards to the note.

The SET also said the loan repayment conditions between the two parties were unclear and might put EWC at a disadvantage.

The regulator said that EWC had accepted an agreement for transferring the right of claims on SGF's receivables in case the borrower cannot pay back the loan in cash, and there was no clear memorandum regarding the conditions for transferring the receivables. That might mean EWC would be unable to weed out low-quality receivables.

"Both participants are still not precise, and misunderstanding may exist regarding the payment conditions and the third-person transfer rights," the SET said.

The SET warned investors to consider EWC's information carefully before making any investment decisions. If the SET finds any issues that might be breach relevant rules and regulations, the SET will further cooperate with the Securities and Exchange Commission, it said.

The two cndifferences in clarifications regarding the Bt500-millon promissory note include loan repayment conditions and the condition of transferring the right of claims on SGF's receivables.