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 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 Baht 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 Q2/04 F/S Profit 361MB Acquiring World Gas Rumor on acquiring New Gas Q3/04 F/S Profit 544 MB 2004 F/S Profit MB JAN04 FEB04 MAR04 APR04 MAY04 JUN04 JUL04 AUG04 SEP04 OCT04 NOV04 DEC04 JAN05 FEB05 MAR05 APR05 MAY05 JUN05 JUL05 AUG05 SEP05 Baht Shares XR

Purchase brand & transfer business from L’s U Co. PG’s Structure PG Plc. MD: Mr. T. L. L. Family took over in Gas-filling PlantsGas-filling Plants System Engineering Distributor of LPG Retail gas outlets Household customers Directors from U Co.& fund from MD T 3-year cylinder rental Gas purchase at 17 baht/kg (others 14 baht/kg) Sub-contractors Lending agreement MD T’s Account Lending proceeds

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 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 Sales5,1604,788-7% Gross Profit1, % Gross Margin17.2%10.5%-43% 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 co- investigator 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 Q2/04 F/S Profit 361MB Acquiring World Gas Rumor on acquiring New Gas Trading suspended Q3/04 F/S Profit 544 MB 2004 F/S Profit MB Reissue 2004 F/S JAN04 FEB04 MAR04 APR04 MAY04 JUN04 JUL04 AUG04 SEP04 OCT04 NOV04 DEC04 JAN05 FEB05 MAR05 APR05 MAY05 JUN05 JUL05 AUG05 SEP05 Baht Shares SEC ordered 2004 F/S amendment XR SEC ordered special audit

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.