EPF should not vote in MBSB deal BY M. SHANMUGAM

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EPF should not vote in MBSB deal BY M. SHANMUGAM

Post by Cals on Sun 17 Aug 2014, 22:41

Published: Saturday August 16, 2014 MYT 12:00:00 AM 
Updated: Saturday August 16, 2014 MYT 10:28:13 AM

[size=40]EPF should not vote in MBSB deal

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THE Employees Provident Fund (EPF) is always viewed as a strong cornerstone investor in any public-listed company because of its long-term view and fund size of RM600bil, which is growing every month.
This is the prestige and influence that the pension fund commands. For instance, in any large public listings, if the EPF is not a cornerstone investor, its absence would be taken as a sign of weakness in the new listing.
One example is the listing of Astro Malaysia Holdings Bhd, where the offer did not take off well. The EPF stayed out of the offer of being a cornerstone investor.
However, there is a liability to being a dominant name on the stock exchange.

This is something the EPF is learning to deal with, as it is confronted with the question of whether it can be allowed to vote in the proposed merger of CIMB Group Holdings Bhd, RHB Capital Bhd and Malaysia Building Society Bhd (MBSB).
The EPF is the single largest shareholder in RHB Cap and MBSB, with equity stakes of 40.76% and 64.73%, respectively. It has a 14.46% stake in CIMB Group.
Although a major shareholder in RHB Cap and MBSB, the EPF does not get involved with the day-to-day operations of the company. It has a nominee director in RHB Cap and MBSB to take care of all the fund’s interest.
It has not had any representative in CIMB Group for several years now.
The pension fund, which has 13 million members, contends that it should be allowed to vote in corporate deals, and that disallowing it would put it at a disadvantage to determine the fate of its investments in the companies concerned.
Going specifically into the CIMB-RHB Cap-MBSB proposed merger, the EPF’s view is that the pension fund should be allowed to vote in the proposal when it comes up at the respective shareholders’ meetings. This is on the grounds that it did not initiate the proposal and that its representatives do not have any executive positions on the board of the banks or its subsidiaries.
However, the rules also state that for a fund such as the EPF to be allowed to vote in corporate deals, it cannot be the single largest shareholder in the listed entity concerned. This is clearly stated in the listing requirements.
In this case, the EPF is the single largest shareholder in RHB Cap and MBSB. If the merger does take place, then it would be the single largest shareholder in the merged entity.
Hence, based on the rules, the EPF cannot vote in the proposals of the merger involving both these financial institutions unless there are exemptions from Bursa Malaysia.
But are such rules fair to the fund, considering that it is restricted in its investment policies? According to the rules, the EPF is compelled to place at least 21% of its money in the local equity market as part of its strategic asset allocation.
So, at any one time, the EPF has about RM150bil invested in the local stock market. Its universe of stocks is about 200 out of the 1,000 listed on the exchange.
Apart from RHB Cap and MBSB, the EPF is also the single largest shareholder in Malaysian Resources Corp Bhd.
In all three companies, the EPF ended up being the single largest shareholder due to legacy issues, where politics had played a part in “forcing” the pension fund to increase its presence in these listed companies.
But the EPF cannot rely on history and why it ended up holding large stakes in RHB Cap and MBSB to get a waiver from Bursa.
This is because the rules are set and cannot be bent.
There can be some justification if there are compelling reasons that the minorities would not be severely impacted if the EPF was allowed to vote. Put in a nutshell, the minorities have a fighting chance to oppose the deal even if the EPF votes for it.
Looking at RHB Cap and MBSB on a case-by-case basis, there is a fighting chance for the EPF to be allowed to vote in the former.
The other two major shareholders in RHB Cap are Aabar Investments PJSC with 21.43% and OSK Holdings Bhd with 9.9%.
Generally, a merger proposal would need 75% of shareholder support, depending on the structure. Based on this, both Aabar and OSK can scuttle the deal even if the EPF is allowed to vote.
If the deal needs a simple majority of 50% plus one share, then the voting rights of the EPF would need some justification.
But the scenario is different in the case of MBSB. The EPF has a 64.73% stake in MBSB and the minorities hold the rest of the shares.
Based on MBSB’s annual report, Permodalan Nasional Bhd and three other individuals own more than 3%, with the rest less than 1%.
Clearly, in the case of MBSB, if the EPF is allowed to vote, it can swing through the deal. Minorities would not have a chance.
Therefore, in the case of MBSB, there is no justification in allowing the EPF to vote. It would go against the grain of protecting the rights of minorities.

“It cannot be said too often that in speculation and investment, success comes only to those who work for it”

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