Implementation and Enforcement
of Corporate Governance Rules:
The Case of Thailand
(Session 1)
Piman Limpaphayom, Ph.D., CFA
Sasin Graduate Institute of Business Administration of
Chulalongkorn University
The 2006 Asian Roundtable on Corporate Governance
Bangkok, Thailand
14- 15 September 2006
PG Plc: Background
Before the 1997 economic crisis, mini-canisters of
cooking gas were not popular in Thailand.
But the crisis changed the market environment,
because with people having less purchasing power,
lower-income groups preferred smaller and cheaper
sizes. PG discerned that opportunity and made big
profits from it. PG’s products were immensely popular
among large numbers of low-income households and
food sellers.
In 2003, PG was listed on the SET obtaining its listing
status by taking over a listed firm undergoing
rehabilitation.
PG’s Miracle
PG Plc shares made the biggest one-day gain of listed
firms undergoing debt-restructuring, rocketing a
sensational 2,169 percent at one point on the first day of
trade after a suspension of 19 months.
Soon after the bell rang, PG's share price jumped to
Baht21, up from Baht1.30 at its last close on June 8,
2001, and briefly touched a high of Baht29.50.
In March 2005, its stock price trades at more than 10
times the original initial public offering (IPO) price.
Price and Volume: PG Plc.
from 5 Jan 2004 TO 7 Sep 2005
Baht
30.00
VOLUME
PICNI
News (Financial Statement)
Shares
News (Acquition)
1,000,000,000
XR
900,000,000
25.00
Rumor on
acquiring New Gas
800,000,000
20.00
Acquiring
World Gas
700,000,000
600,000,000
15.00
500,000,000
Q3/04 F/S
Profit 544 MB
Q2/04 F/S
Profit 361MB
400,000,000
10.00
300,000,000
2004 F/S
Profit 735.38 MB
200,000,000
5.00
100,000,000
-
-
JAN04 FEB04 MAR04 APR04 MAY04 JUN04 JUL04 AUG04
SEP04
OCT04
NOV04 DEC04 JAN05 FEB05
MAR05 APR05 MAY05 JUN05 JUL05 AUG05 SEP05
PG’s Structure
L. Family took
over in 2002
PG Plc.
MD: Mr. T. L.
System
Engineering
Distributor
of LPG
Lending
MD T’s
Account Lending agreement Gas-filling
Plants
proceeds
Purchase brand &
transfer business
from L’s U Co.
Directors from
U Co.& fund
from MD T
10 Gas-filling Plants
3-year cylinder rental
Sub-contractors
Retail gas outlets Gas purchase at
17 baht/kg (others
Household customers 14 baht/kg)
Questionable Transactions
The payments for the usage of PG’s gas cylinders were
moved from deposits payments for unlimited time use to
a three-year rental fee causing the 178-million baht
rental fee to become an expense item of the plants but
an income of PG in 2004;
PG sold liquefied petroleum gas (LPG) at a higher price
per unit to plants with close relationships than to other
customers. Consequently, PG earned approximately 1.7
billion baht from those gas-filling plants, accounting for
48 percent of the company’s LPG sales.
The value of goodwill derived from the acquisition of
subsidiaries in 2004 was unusually high.
Initial Actions by Thai SEC
Based on the evidence and PG’s explanation, the SEC has
ordered PG to:
1. Appoint an auditor to do a special audit on all
transactions between PG and the 10 gas-filling plants
and others with close ties to ensure that PG’s financial
statements are fairly and transparently presented and
do not affect investors’ decisions. Moreover, PG’s Audit
Committee must review the financial reporting
thoroughly;
2. Reverse the gas cylinders rental income back to the
deposit income account because PG’s gas cylinder
rental fee is, in essence, the company’s deposit.
Company’s Reactions
PG denied control over those gas-filling plants and
argued that the consolidation was unnecessary.
Additionally, PG viewed that the goodwill value
reported earlier was fair and accurate and therefore
needed no adjustments.
The SEC demands PG to submit the special audit
report together with the amended financial statements
for the year 2004 45 days (due on June 27, 2005). In
addition, PG must disseminate its amended financial
statements for the year 2004 with the special audit
report attached.
Revised Income Statement
Previous
2004
Revised
2004
% Change
LPG Sales
5,160
4,788
-7%
Gross Profit
1,268
717
-43%
17.2%
10.5%
-43%
735
235
-68%
Gross Margin
Net Profit
Alleged Corporate Fraud
Accounting fraud
– Injection of earnings: In the course of the
investigation, it was also found that , in 2004, an
executive of PG transferred a large sum of money into
the gas-filling plants’ accounts, some of which was
paid to PG as gas cylinders rental fee;
Siphoning of corporate assets
– Self-dealing transactions
– Intra-group loans
Enforcement Actions
Criminal sanctions
– Establishment of the Special Investigation
Department (DSI).
– SEC officers are appointed as coinvestigator
Administrative sanctions
– Blacklisting of directors
Legal Actions
In October, 2005, public prosecutors filed a lawsuit
in Bangkok South Criminal Court against PG and
related individuals, including former managers of
PG.
The lawsuit was filed in accordance with the
charges previously presented by the Department
of Special Investigation (DSI).
Current Status
MD & Deputy MD alleged on 2 criminal
offenses (SEA 307, 308, 311 and 312).
– Intentionally falsify documents and accounts
– Misappropriation of company assets
Eight directors of gas-filling plants + subcontractor
alleged for aiding and abetting the MD (SEA 315).
All suspects blacklisted: 5-15 years
Other consequences
– MD & DMD resign
– Share prices dropped: PG Plc. and other related
companies.
– Default on debt  capital increase
PRICE AND VOLUME PG Plc.
FROM 5 JAN 2004 TO 7 SEP 2005
Baht
30.00
VOLUME
PICNI
News (Financial Statement)
XR
25.00
Shares
News (Acquition)
Trading
suspended
1,000,000,000
900,000,000
Rumor on
acquiring New Gas
800,000,000
20.00
Acquiring
World Gas
700,000,000
SEC ordered
special audit
15.00
600,000,000
500,000,000
Q3/04 F/S
Profit 544 MB
Q2/04 F/S
Profit 361MB
10.00
2004 F/S
Profit 735.38 MB
400,000,000
SEC ordered
2004 F/S
amendment
Reissue 2004 F/S
5.00
300,000,000
200,000,000
100,000,000
-
-
JAN04 FEB04 MAR04 APR04 MAY04 JUN04 JUL04 AUG04
SEP04
OCT04
NOV04 DEC04 JAN05 FEB05
MAR05 APR05 MAY05 JUN05 JUL05 AUG05 SEP05
Critical Issues
The enforcement (administrative) power of the
Thai SEC.
Reliance on criminal penalty only (affecting the
burden of proof).
The law was not written clearly.
The speed of the legal process.
Small investors’ lack of power.
Reactions from the investment communities.