Pulling a financial smokescreen over fidf investment in bank thai

The articles tried to indicate that by carrying out this capital injection, FIDF would incur a loss as high as Bt2,215 million and suggested setting up a team to investigate the conduct of the Bank of Thailand in this matter. I am bewildered by the context of these articles since I do not think that this transaction could easily lead to such a high loss within so short a period of time.

It also appears that during the same period there is news of another appointment of the recruitment committee, under the newly-amended Bank of Thailand Act, whose responsibility is to recruit the chairman and members of the board,as well as the governor of the Bank of Thailand. This has been criticised by some columnists in regard to the doubtful qualification of some members of the committee.

I sense that these two pieces of news, released more or less at the same time - even though the former came outfive months ago - might have a certain common agenda. I therefore sniffed around and luckily ran into one source of information that happened to hear a conversation among a group of a few elderly men. The gist of the conversation went something like this: this governor is quite tough-minded and will not easily follow orders. If we remove her and put … as a replacement, many issues would easily be implemented.

Hearing this, it is crystal clear why news of Bank Thailand's capital increase was released at the time that the recruitment committee under the amended BOT Act was appointed. It seems to me that the committee was appointed not only to select the chairman and members of the board of the BOT, as required immediately by the Act, but also to select the new governor which is not required now.

I do not see what this governor may have done that might have caused the finance minister any dissatisfaction. The implementation of monetary policy and fiscal policy seem to be in conformity. There was only one issue where the governor did not go along with the finance minister's wishes and that was the appointment to the bank's board of an adviser to the finance minister. The governor obstructed this because the person in question was subject to legal action as well as being under investigation over cases involving alleged financial misconduct.

However, to get rid of the current governor is not so simple under the newly amended BOT Act. Clause 28/19 (4) and (5) empower the Cabinet to vote out the governor if he or she was guilty of gross misconduct or fraud or at the recommendation of the BOT's board if the governor was deemed incompetent or was guilty of gross misconduct. This means that before putting a proposal to the Cabinet to vote out the governor, there must be convincing evidence that the governor had committed gross misconduct. This is why the story of a possible huge loss due to the capital injection for Bank Thai by the FIDF was fabricated.

In looking into this allegation, I have studied the facts and figures that Bank Thai reported to the Stock Exchange of Thailand (SET) and found that the capital increase was intended for existing shareholders only and not for outsiders at the price of Bt1.36 for shares allocated proportionately to all shareholders, and at Bt1.38 for additional shares left unsubscribed by some shareholders.

The shareholders' meeting resolution to this effect was on November 29, 2007, the day the stock's book value was Bt2.17 per share. It can be seen that the price offered to existing shareholders was not higher than the book value and thus not intended to cause a loss to shareholders. After that, it took more than a month to seek approval from the SET and Securities Exchange Commission and the actual capital injection was done in January 2008. The FIDF invested Bt2,841 million at the above mentioned price in January 2008 when the book value as shown in the financial statements was still Bt2.17 per share. This is the evidence that on the date of the cash injection for the capital increase, the price of shares purchased was lower than the book value. There is no evidence of misconduct to cause a loss in this transaction.

The book value thus was finally reduced to Bt0.30 per share and was made known to shareholders only after February 29, 2008 - after the auditors completed their work and proposed additional loss provisioning on the investment in sub-prime debt instruments, as the situation in the market for sub-prime debt instruments had changed rapidly.

The question that follows is whether this reduction of the book value to Bt0.30 per share would cause a loss to FIDF as high as Bt2,215 million as predicted by the unknown informant. The answer depends on the actual price of Bank Thai shares traded on the SET. At the time that this article was written, Bank Thai's share price posted by the SET was Bt1.26 per share. If the FIDF sold all its newly-acquired Bank Thai shares, the total loss would be around Bt200 million, and not Bt2,215 million as predicted.

However, the reason for this capital increase was for Bank Thai to have an adequate capital base to continue its operations with the intention of eventually selling all the shares held by FIDF to competent private financial institutions. In doing so, Bank Thai would become totally privately owned, which could help improve its financial position as well as prevent any political interference.

It appears that a number of private financial institutions have shown interest and due diligence has been performed by outside financial advisers. Amidst all these developments, the market price of the stock is still Bt1.26 per share,indicating that these private financial institutions and the market did not perceive that the financial position of Bank Thai was too weak as implied by a lower book value. It is also possible that the final price of the share sold by the FIDF may be higher than the price it paid in January and may make a profit instead of a loss as was prematurely forecast.

Lastly, according to my experience as ex-chairman of the FIDF, I would like to explain to the reader that any decision on such an important matter is not normally made solely by the governor in her capacity as FIDF chair. It is normally a collective decision by the FIDF board, which includes two or three senior officials from the Finance Ministry, representatives from the Office of the Council of State and Attorney-General's Office. I believe that with all these personalities present, any decision should be made with prudence.

If the Finance Ministry would go to the extent of setting up a committee to investigate the conduct of the FIDF board on this issue, please bear in mind that the Administrative Court is always dependable to provide justice to the accused. And if, in the end, the FIDF does sell the newly-acquired shares at a profit, where would you hide your face?

nMore to come on related issues next Monday.