The Securities and Exchange Commission yesterday ordered Eastern Wire and Siam General Factoring to clarify lending between the two companies. The watchdog wants the information by the end of the month.

The commission found that Siam General Factoring (SGF) had re-lent money it borrowed from Eastern Wire (EWC) to the same debtors to which EWC used to lend.

In addition, the two companies' previous clarification about their lending did not make it clear whether the risk was being carried by EWC or by SGF, it said.

According to the SEC, on December 15 and 16 last year, EWC lent SGF Bt500 million, getting promissory notes with the condition that SGF repay EWC in cash or transfer the right to claim other debts owed by SGF to EWC.

Two directors of EWC approved the deal, and its board of directors acknowledged the transaction on December 15. However, its audit committee disagreed with the transaction, saying it was risky, and urged EWC to find a way to reduce the risk. Despite this, EWC proceeded with a further transaction on December 16.

On December 22, EWC's board allowed the company to seek a commercial bank to guarantee the SGF promissory notes, but the two firms agreed such a guarantee was impossible.

EWC's auditor said the lending conditions were too risky in terms of debt repayment, as the company would not be able to control the debtors who were receiving the investment from SGF.

After SGF received the loan from EWC, it re-lent the money in full to debtors, some of whom had received EWC loans in early 2005.

According to the SEC, SGF's lending was different from general lending. Most debtors of SGF borrowed less than Bt100 million, via a factoring scheme. Also, SGF lent them large amounts relative to their financial status, backed only by personal guarantees.

The SEC said the lending-risk information provided to date had not made it clear whether EWC would carry the risk. The EWC would have to shoulder the risk if it could not select SGF's debtors and, in addition, SGF would be responsible as it had re-lent the money to a group of high-risk debtors. Moreover, EWC lent to SGF at too high a proportion of its total assets - or 29 per cent - although its normal business is not a financial institution, the SEC said.