Commentary: Serious Lapses In Corporate Governance Practices In Incredible Holdings Ltd And Ltd

Date: July 18, 2022

If companies consistently practise poor corporate governance, are repeatedly queried by the Singapore Exchange (SGX) over some of their business deals which had also been flagged by their external auditors and then increase the salaries of their senior management despite reporting widening losses, should regulators intervene? Are shareholders helpless?

In the minds of most corporate governance advocates, the answer is a resounding “yes’’. After all, the job of regulators is to ensure that confidence in the market is preserved and, in this regard, if the integrity of certain business deals can be questioned, then surely some form of regulatory enforcement action is justified.

Consider for example, the recent cases of Catalist’s Incredible Holdings and which on 27 June were served with notices of compliance (NOCs) by the Singapore Exchange’s regulatory arm, SGX RegCo, over a series of transactions involving joint investments and cross-shareholdings.

Both companies share a common executive director, Christian Kwok-Leun  Yau Heilesen, as well as the following board members: Jacob Leung, Stanley Leunga nd Zhou Jia Lin.

In October 2021, Incredible entered into an agreement with Heilesen to acquire 42 per cent of a company, Golden Ultra, for S$14.6 million. Prior to this, had also entered into an agreement with Heilesen to acquire 55 per cent of Golden Ultra for S$14.4 million. The purchase was paid via the issuance of promissory notes by both companies to Heilesen, that also held a 3 per cent interest in Golden Ultra.

It is unclear what is the rationale for this series of transactions and how they will help Incredible and, SGX RegCo said, noting that it has issued both companies numerous queries over the past year. Furthermore, they have substantially similar members in their audit and nominating committees.

SGX RegCo has directed that the audit committees of Incredible and appoint a suitable joint independent reviewer to perform a holistic review of all corporate actions and fund-raising exercises announced by both listed companies in the past year.

The reviewer will assess whether these transactions and corporate actions were entered into on normal commercial terms and are not prejudicial to the interests of the companies and their minority shareholders.

Incredible, whose business includes trading of luxury watches, in its 2021 Annual Report said, “in May 2021, we entered the luxury goods trading business in the European market, acquiring HB 2021 APS for S$1.1 million with a luxury and secured shopfront in Denmark, connecting near the origins and source of luxury Swiss watches and the luxury watch market’’.

The fair value of net identifiable assets of HB2021 was only S$8,600, which meant that goodwill paid was almost the full S$1.1m. Oddly, the company wrote off the entire goodwill amount in the same financial year.

In the same annual report, the independent auditors, when issuing a qualified opinion, said “based on the responses and explanations provided relating to the acquisition of HB2021, we were unable to obtain sufficient appropriate audit evidence on the business rationale for the Group’s acquisition of HB2021’’.

It is difficult to understand that although losses for the year almost doubled to S$6.32m, whilst net assets decreased 24 per cent to S$9.13m, executive director (ED) Heilesen was paid a bonus of S$1m on top of his salary of S$300,000 and housing allowance of S$255,000.

The Remuneration Committee said that it was fair, given the ED’s efforts and contributions to the commercial aspects of the company for the expansion as well as diversification of its business. With due respect, the position of the Remuneration Committee goes against the well-established basic principle that remuneration must be commensurate with performance. There is basis for shareholders to query whether members of the Remuneration Committee and the Board have properly exercised their duties as directors of the group in approving the ED’s remuneration.

There’s more, but the above should be sufficient to raise several red flags in the corporate governance of the companies.

SIAS sent a letter with questions to the company before its last AGM to raise concerns in relation to the independent directors’ oversight of management, the safeguard of shareholders’ interests and the role of the sponsor. Unfortunately, the company chose not to respond to the concerns highlighted by SIAS.

Apart from issuing Notices of Compliance to both companies to appoint an independent reviewer, can  SGX RegCo do more is the question on the minds of the shareholders.

In similar cases such as Incredible and, there is increasing public opinion that SGX Regco should “ratchet up”, perhaps by suspending trading of both stocks until the independent reviews have been completed. Doing this, it is believed, that it will better safeguard the interest of the market as a whole. Before allowing the shares to resume trading, it must be ascertained that a fair and orderly market really exists for both shares counters. The results of independent reviews will provide more clarity on the state of governance of the companies in question, and an indicative basis whether there is a further need for regulatory investigations and possibly enforcement actions.

It would also send a strong message that whilst the regulatory regime is disclosure-based, the regulators will not hesitate to intervene when there is a need to do so.

The answer is not straightforward. Recall that after the local stock market started transitioning in the year 2000 from a merit-based regulatory regime to one that is based on disclosure, authorities here have taken great pains to emphasize that their vision is for regulation to be largely market driven, and that official intervention would only be undertaken in a limited number of extreme instances.

This “regulatory-light’’ approach sounds good in theory – after all, who better to enforce discipline than the market itself? Good, well-run companies would then be rewarded by superior share price performance, whilst poorly-run, opaque firms would see their shares underperform.

This would then mean the corporate sector is incentivised to be transparent and practise good governance and everyone benefits from not having to look over their shoulders all the time or be overly burdened with numerous onerous rules.

In one sense, the aforesaid approach appears to have worked in the cases of Incredible and as their shares trade for only S$0.002 and S$0.012 respectively, so they have been penalised by the market to the detriment of shareholders.

David Gerald
Founder, President & CEO