The mega-banking merger reveals how the pension fund is helpless when it involves companies where it is the single-largest shareholder.
IT is a perplexing situation when a shareholder is not able to vote on the direction of the company in which it has a substantial presence.
Yet, this is the quandary that the Employees Provident Fund (EPF) has found itself in.
The recent barring of the EPF from voting on the proposed mega-bank merger between RHB Capital Bhd (RHB Cap), CIMB Group Holdings Bhd and Malaysia Building Society Bhd (MBSB) has unravelled a tricky position for the fund that manages the retirement savings of 14 million Malaysians.
Based on Bursa Malaysia’s reasoning for denying the EPF the privilege to vote in the recent case, it could well mean that the fund’s non-entitlement to vote could actually extend beyond the case of the proposed merger of RHB Cap, CIMB and MBSB.
Note that the stock market regulator has disallowed the EPF to express its vote on the proposed merger on the grounds that it is a related-party transaction, and the fund is the single-largest shareholder in at least one of the companies involved.
The EPF is the single-largest shareholder in RHB Cap, in which it has a 41% stake, and MBSB, with a 65% stake. The fund is also a substantial shareholder in CIMB, with a 14.6% interest.
Besides the three banks, the EPF is also a substantial shareholder in several other major banks in Malaysia – Malayan Banking Bhd (12.35%), Public Bank Bhd (15.14%), AMMB Holdings Bhd (14.37%) and Alliance Financial Group Bhd (15.14%).
In such an instance, if any of these banks were to make an offer for RHB Cap in the event the proposed merger of RHB-CIMB-MBSB lapses, the EPF would still be barred from voting on an outcome. The deal would still be decided by Abu Dhabi’s Aabar Investments PJS and OSK Holdings Bhd, which respectively have 21.22% and 9.9% stakes in RHB Cap, along with other minority shareholders.
“Any of the smaller banks can make an offer for RHB and the EPF cannot decide on it because the rules restrict it from voting. It will be entirely up to Aabar and OSK Holdings to decide. This is the hard reality that the fund faces and something that has been deliberated at the investment committee,” say sources.
In the property and construction sector, the EPF would be caught in a similar situation if IJM Corp Bhd or WCT Holdings Bhd, in which the fund has 11.9% and 10.42% interests, respectively, were to make a bid for Malaysian Resources Corp Bhd (MRCB), in which the EPF is the single-largest shareholder with a 36.47% stake. Without its voting right in such instances, IJM or WCT could take over MRCB and the EPF can do nothing about it.
This puts the EPF in a bind, as it now appears that the fund does not actually have much control over its own investments because of the prevailing regulations of Bursa Malaysia.
Investment review
In a tough spot, there is talk that the EPF will be assessing its options.
Sources tell StarBizWeek that the fund might be looking at reviewing its shareholdings in listed companies to avoid being caught in a powerless situation again in the event of future corporate exercises taking place in these companies.
The planned move by the EPF’s investment panel, sources say, stems from the fund’s recent experience in the proposed merger and acquisition exercise involving RHB Cap, CIMB and MBSB, whereby the EPF’s voting rights had been denied by Bursa Malaysia on conflict-of-interest grounds.
The EPF’s huge exposure in the local banking industry dates back to the late-1990s, as it heeded Bank Negara’s call for institutional investors to invest heavily in local banks.
This came about after the 1997/98 Asian financial crisis, when many banks found themselves insufficiently capitalised and heavily burdened with non-performing loans. The situation was made worse by the fact that their individual owners were saddled with all sorts of financial constraints that came about after the ringgit’s value plummeted.
Bank Negara then deemed that institutionalised shareholding could ensure that local banks became well-capitalised, ruling subsequently that banks should no longer be controlled by individuals.
Before the crisis in 1998, most banks were controlled by individuals. RHB, for instance, was controlled by Tan Sri Abdul Rashid Hussain, while AMMB was controlled by Tan Sri Azman Hashim and CIMB (the-then Bank of Commerce) was controlled by the Renong Group.
Over the years, government-linked funds such as the EPF gradually emerged as significant shareholders in local banks, as Bank Negara advocated the policy of having more institutionalised shareholding.
This is also in line with global trends that have seen the institutionalisation of shareholding taking precedence in critical sectors such as banking.
“Now that policy is biting back at the EPF,” says a banker.
Reducing interests?
A market observer notes that as long as the EPF remains the single-largest shareholder in certain companies and at the same time a substantial shareholder in at least 30 companies listed on the local bourse, the fund will face the risk of running into the same dilemma of having its voting rights denied in the event of future corporate exercises.
Hence, sources say among the options being considered by the EPF for the future is to pare down its stakes in certain companies so that the fund would no longer be the single largest or substantial shareholder in companies listed on the local bourse. The EPF is considered a substantial shareholder when it has at least a 10% stake in a company.
This is one of the changes of the EPF under current chief executive officer Datuk Shahril Ridza Ridzuan.
An analyst with a government-linked fund notes that the EPF will likely take on the role of passive investor in companies, instead of being in a position of influence over a company’s operations.
The analyst points out that by readjusting its portfolio, the EPF can, in part, resolve the issue of a conflict of interest in the event of major corporate exercises involving the companies in which it has interests.
“This will allow the EPF to vote on any major exercise, but at the same time, not be involved in the company’s management,” the analyst says.
“Having the right to vote in a corporate exercise is important because it will determine the EPF’s investments,” he adds.
According to analysts, if the RHB-CIMB-MBSB deal does not go through, then the EPF could consider selling down its stakes in other banks to less than 10%, while maintaining its stake in RHB Cap. This is because it is more difficult to sell a big block of shares in RHB Cap. With less than a 10% stake, the EPF will no longer be considered a substantial shareholder.
But, on the other hand, if the merger of CIMB-RHB-MBSB does go through, then the EPF’s dilemma will be naturally solved and the fund will not need to reassess its holdings in RHB Cap and MBSB.
A successful merger of the three financial institutions is expected to reduce the EPF’s stake to 25% in the merged entity.
Fair play?
Last week, the EPF submitted an appeal to Bursa Malaysia for its right to vote on the proposed merger between RHB Cap, CIMB and MBSB.
Bursa Malaysia’s earlier decision last month to bar the EPF from voting on the proposed deal involving the three banks may raise concerns among certain quarters, but most fund managers, and even the Minority Shareholder Watchdog Group, believe Bursa Malaysia made the right move.
“There are existing rules in the market to promote fairness and orderliness in trading; we have no choice but to play by the rules,” a fund manager with an international insurance company stresses.
“And that means, for us as fund managers and investors, we need to plan our strategy accordingly to ensure our rights with regards to our investments not being jeopardised,” she explains.
Bursa Malaysia on Oct 22 ruled that the EPF will not be allowed to vote in the proposed merger of RHB Cap, CIMB and MBSB, despite the fund arguing that the interest of its 14 million members would be at stake.
Bursa Malaysia said that by virtue of the EPF being a common major shareholder in all three affected companies, as well as the single-largest shareholder of both RHB Cap and MBSB, there existed a potential conflict-of-interest situation, whereby the EPF may be able to influence the proposed merger for its own benefit.
The market regulator also said the EPF’s position was not the same as the other shareholders of RHB Cap, as it had controlling stakes in RHB Cap and MBSB, hence putting it in a position of significant influence in these companies.
“We need to look at things from the bigger perspective ... Let the market decide on what is best for the company,” a fund manager with a local asset management company says.
“It does not benefit Bursa Malaysia as a whole if the EPF is allowed to vote, particularly in cases where there could be a potential conflict of interest,” he argues.
The fund manager notes that the Malaysian stock market at present is already a “controlled” market by most international investors. Allowing the EPF, which has a substantial presence in almost all major companies listed on the local bourse, to vote in cases where there could be a potential conflict of interest would not work in favour of market perception, he points out.
“The EPF does not represent shareholders per se, it represents workers in Malaysia ... our view is that the pension fund should not be involved in driving the business direction. It is merely an investor, so let the managers decide on the direction of the company,” the fund manager says.
Fund managers believe stock market regulations cannot keep changing to work in favour of important institutions or to please certain groups. After all, the clause in the listing requirements that put the EPF in a bind was only put forward about eight years ago, following the merger of plantation companies under Permodalan Nasional Bhd (see boxed story).
The mega-bank merger involving RHB Cap, CIMB and MBSB is a stark reminder of how the rules can come back to haunt the institutions.
For the EPF, this is a lesson learnt and a great reason why it should reduce its stake in large corporations – so that it does not get into a bind again.
