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Seeking fair value


PUTTING money in illegal schemes will almost always end up in disastrous results for investors.

But like it or not, some legal investment schemes are not always very fair to investors either.

Take some of the interest schemes that are registered with the Companies Commission of Malaysia (CCM). Some do turn out to be fraudulent, with the companies offering these schemes attempting to swindle investors of their money, while some viable schemes get terminated even before they reach maturity.

While the terminated cases are not necessarily fraudulent, as investors do get back their capital plus some returns in most instances, the unprofessional or unethical way of the companies offering those schemes cut short investors’ hope and expectations of a longer period of sustainable annual returns plus capital gains at the end of the investment period.

At present, there are 205 interest schemes registered with the CCM.

These schemes involve the pooling of financial contributions from the public in exchange for an interest in a particular scheme. For investors, it is an opportunity to diversify their portfolios while for companies, especially the small and medium enterprises, an interest scheme offers them an alternative method of funding their business growth.

Of the registered schemes, 39 have have been terminated – 10 of which were asked to do so by court order – for various reasons. There are 15 others categorised under the “refer interest scheme section” and these include some offered by companies that have been sued for fraud and failure to comply with rules.

Meanwhile, the number of still-active schemes stands at 151.

This number will be down to 150 soon, as it has become clear that the Golden Palm Growers Scheme (GPGS) will soon be terminated.

Early termination

Just seven years into its launch, GPGS is set to be the second local oil palm growers scheme to be terminated after the collapse of Country Heights Growers Scheme (CHGS) in 2013.

Golden Palm Growers Bhd, the management company of GPGS, is expected to meet with investors on Monday to explain the rationale for the proposed early termination of the 23-year scheme that has so far collected an estimated RM212.4mil from investors.

While investors have enjoyed the guaranteed annual returns of 6% plus a discretionary bonus during the first phase of the scheme from 2010 to 2016, they are now left in a lurch, wondering whether they can get back their initial capital.

But if CHGS’ case were a gauge, then perhaps investors can take some comfort.

When CHGS, a scheme founded by Tan Sri Lee Kim Yew in 2007 and managed by Plentiful Gold-Class Bhd, was terminated in 2013, investors were compensated with a goodwill payment of RM25mil on top of the full refund of their initial capital. Prior to the termination of the scheme, investors were estimated to have already gained a total of RM78.5mil in yields during the first five years of investment.

According to a financial adviser, it is only fair to compensate investors with some additional payment on top of their initial capital if an investment scheme were to be terminated earlier than its maturity period.

“There should be some capital gain based on the market value of the business to be fair to investors,” the financial adviser, who requested anonymity, argues.

He questions whether some schemes are just making use of investors.

“Companies get the money from investors to help them build a business, and compensate the investors accordingly during the first few years, but when the business reaches a stage where it can generate better returns, these companies want to terminate the schemes because they no longer want to share profits with the investors,” the financial adviser says.

“While this is not illegal, it does raise the question of ethics and professionalism ... so, it is fair to compensate investors with some capital gain – or goodwill payment, whatever you call it – if the companies want to terminate the investment scheme,” he points out.

In the case of oil palm growers schemes, the financial adviser says the fair value of compensation can be based on the available benchmarks.

“It is not too difficult to value an oil palm plantation business. This is because there are proper benchmarks – such as international crude palm oil prices, the value of trees based on age profile and the market valuation of the plantation land – that can be used to derive the fair value of the business at its prevailing stage,” he explains.

So far, the main recourse for investors who have invested in oil palm growers schemes that have turned sour is the Minority Shareholder Watchdog Group to fight for their rights.

Share-farming schemes

Excluding GPGS, there are still three active oil palm growers schemes registered with the CCM. They were launched between 2011 and 2014.

These are categorised under share-farming schemes, which also comprise livestock-related investment plans that allow investors to participate in the breeding of livestock such as swiftlets and catfish for commercial purposes.

As it stands, three of the four aquaculture-related share-farming schemes registered with CCM have already collapsed. The companies offering the three aquaculture-related share-farming schemes had been charged in court for fraud and mishandling of investment funds around 2012-2013.

It is unclear whether investors managed to recoup the money they had put into these schemes that were launched between 2011 and 2012. These schemes were supposed to come with a maturity period of five years, promising quarterly fixed returns during harvest, throughout the investment tenure.

CCM did not respond to StarBizWeek’s e-mail on the status of the terminated aquaculture-related share-farming schemes.

Meanwhile, the two swiftlet share-farming schemes registered with CCM are still active. They were launched in 2010, promising high annual returns in the form of vouchers and interest payments throughout the investment period of 35 to 36 years.

For instance, one company claims that for an initial investment of RM12,000 for one unit of its swiftlet share-farming scheme, the investor has the potential to earn up to RM270,000 in 35 years, which translates into an average annual return of more than 75%.

The company claims the projection has been verified by “established independent swiftlet ranching consultants”.

A financial adviser, however, argues that while swiftlet farming is a credible business backed by robust demand from Greater China and countries with large Chinese communities, it is still difficult to ascribe a fair value to the business.

“There is no official or proper benchmark for the swiftlet farming business. So, the fair value at best is a matter of opinion and uncertain,” he argues.

To be fair, swiftlet farming is an important industry for Malaysia.

It is one of the 131 entry point projects under the Economic Transformation Programme.

The Government expects swiftlet farming to contribute RM4.5bil to the country’s gross national income by 2020.

Meanwhile, a share-farming scheme involving agarwood plantation has made its debut in Malaysia after being approved by CCM last year.

In general, agarwood plantation is an industry promoted by the Malaysian Timber Industry Board, which has in recent years pointed out that agarwood production in the country can hardly meet the export and domestic demand due to the limited supply availability.

In Singapore, however, agarwood investment schemes have raised eyebrows. At least one such scheme in the city-state has closed down, with no compensation in sight for investors, while another has come under increasing scrutiny by authorities.

Stories such as these go to show that the public has to enter investment schemes with their eyes wide open even when it comes to schemes that are legal. But it also calls for authorities to be more stringent with companies offering interest schemes.

“The key appeal of interest schemes – from share-farming plans to golf and recreational clubs to time-sharing plans and memorial parks – lies in their promise of steady and attractive returns throughout the investment tenure,” a financial planner says.

“And what convinces investors to part with their money is the fact that they are regulated schemes. So, regulators need to ensure better enforcement of rules to ensure that companies offering these schemes play a fair game with investors,” he adds.

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