The Stock Exchange of Thailand (SET) was recently hit by an accounting and embezzlement scandal at Stark Corporation, which is estimated to have cost at least 14.7 billion baht in damages to shareholders and stock investors.
The debacle affected 4,704 shareholders, while the former chairman and several other top executives are now being prosecuted. The scandal involving the listed manufacturer of cable and wire products represents one of Thailand's largest corporate frauds in recent years.
Now investors have been shocked by the Securities and Exchange Commission's (SEC) accusations against the management of Energy Absolute (EA), the renewable energy company whose aggressive expansion made it one of the blue-chip stocks on the SET.
EA's founder and former chief executive Somphote Ahunai and his deputy Amorn Sapthaweekul resigned after the regulator filed an equipment procurement fraud case with the Department of Special Investigation and Anti-Money Laundering Office. A third person was accused of involvement in the deal, which resulted in the three people allegedly receiving benefits of about 3.5 billion baht.
The investigation comes as the Thai bourse has been battling bearish sentiment, with the index losing about 8% this year to date. Coupled with recent corporate scandals, the EA case again raises questions about the supervision of companies on the SET and how to restore market confidence going forward.
Kris Chantanotoke, chief executive of Siam Commercial Bank (SCB), said his bank has extended a credit line of 13 billion baht to EA, which remains classified as a performing loan.
The bank has also set aside appropriate reserves for this customer, taking into account the company's risk profile.
SCB currently views EA's business potential positively, given growth prospects in the renewable energy sector. However, the bank will continue to closely monitor the customer and its loan portfolio due to increased uncertainties expected in the latter half of the year.
"SCB has tightened its loan approval process in response to the current economic conditions. Additionally, the bank remains focused on maintaining strong governance across all businesses," Mr Kris added.
WIDESPREAD IMPACTS
The EA accusations, to which the executives have denied any wrongdoing, do not affect only shareholders and investors, but also bondholders and creditors as the alleged fraud has made it difficult for the company to mobilise funds to repay debts.
According to the SET, EA's loans from financial institutions and debentures total 62.2 billion baht, representing 89% of its total debt, with short-term debt amounting to roughly 19.5 billion baht. At a press briefing on July 15, EA management insisted they will proceed with plans to sell as much as 5.5 billion baht of green bonds on July 23-25.
The following day, the company informed the SET that Tris Rating had downgraded EA from BBB+ (negative) to BB+ (negative), which EA said "may affect the loan limit from financial institutions and new debentures to be issued as originally planned".
Consequently, EA is in the process of negotiating and considering a selection of strategic partners to boost its financial strength, repay debts, and develop a sustainable business for the long term.
EA stock plunged by about 30% on Tuesday and Wednesday last week after it suspended trading on Monday. Shares of SCB, EA's major creditor, were flat on Wednesday after falling 0.49% and 3.29% on Tuesday and Monday, respectively.
The Association of Investment Management Companies on Wednesday announced that it had placed EA bonds on the restricted list, which limits transactions and prohibits additional investment until there is clarity about a company's future prospects.
"Investors should be cautious on Thai banks in the near-term, as the SEC's accusation against Energy Absolute's management could pressure the company, raising the risk of debenture rollover and the service of its bank loans," said Rakpong Chaisuparakul, senior vice-president of KGI Securities (Thailand).
Asia Plus Securities also warned investors to be cautious as EA executives were accused of fraud, "while it was issuing and offering new debentures and redeeming existing bonds".
"Concern over many issues has negative sentiment on EA as well as the financial market," the brokerage added.
Nattaphon Khamthakruea, director of the securities analysis department at Yuanta Securities, said it remained unclear how much debt each bank has with EA and what the plan was for managing such debts.
"That causes investors to panic a lot, causing them to dump banking stocks heavily last week," he said.
"But this kind of situation happened in the past and banks have learnt to diversify their portfolios. Consequently, this shouldn't be a big problem. We see this case as having an impact on banking stocks only in the short term."
Mr Nattaphon also recommends investors "not to watch only the credit rating but also the company's fundamental factors" in selecting their investment choices.
When compared with Stark, EA is in a different situation because the latter's assets and operations still exist and continue to generate cash flows, said Ariya Tiranaprakij, executive vice-president of the Thai Bond Market Association. "The urgent task for the company is to bring back confidence from investors, creditors and other stakeholders," she said.
LESSON LEARNT
Most investors associate EA's alleged fraud with the Stark case, but Mr Somphote does not agree.
"We are definitely not Stark because we have assets that have reasonable value. Our power plant business generates higher profits per megawatt than competitors," said Mr Somphote, a former securities trader who rode Thailand's electric vehicle transition to become a billionaire, as he announced his resignation from the company he founded 18 years ago.
A major player in the wire and cable manufacturing industry, Stark faced allegations of falsifying financial statements, inflating revenues, and misappropriating company funds.
The scandal came to light in early 2023 after external auditors noticed discrepancies between reported figures and actual financial performance. Subsequent investigations by the SEC confirmed these findings, revealing that the financial statements had been manipulated for several years.
Investigators found that Stark executives orchestrated a scheme to present a misleadingly positive financial outlook to investors and stakeholders. This involved creating fake sales records, overvaluing assets, and hiding liabilities to artificially boost the company's stock price and secure loans and investments.
Analysts said that although the owners' alleged actions were similar, the Stark case was more severe than EA because there was falsification of accounts and creation of false evidence. In the case of EA, the intention was to siphon money out of the company.
"Both cases impacted banks and bondholders, but the EA case is larger, especially in terms of the number of minority shareholders which exceeds 42,600. However, EA still has business value and stable income from the energy business. It is possible that a new business partner may be found to help the company under the current situation," said an analyst who spoke on condition of anonymity.
Sanan Angubolkul, chairman of the Thai Chamber of Commerce, said the case of the embattled renewable energy company was a specific event which investors should not be alarmed by, or view the whole market in the same way.
There is an important lesson learnt that investing in a company is not just about looking at the operating results of a company, but should also include its corporate governance.
Good corporate governance creates accountability as it gives investors and stakeholders a clear idea of a company's direction and business integrity.
It has the power to prevent corporate scandals, fraud, and corporate liability issues, including significant disasters like EA's fall.
Thai authorities are now considering new and stricter measures to supervise listed companies and to prevent fraud and corruption by executives, said Lavaron Sangsnit, permanent secretary at the finance ministry who is also a member of the SEC board.
Actions taken by the SEC, along with the Department of Special Investigation and the Anti-Money Laundering Office, are likely to help restore confidence in the country's capital market, he pointed out.
The SEC needs to clean up problems "that have been under the rug" for some time, Mr Lavaron noted.
Waratchya Srimachand, deputy secretary-general of the SEC, admitted that the EA case has affected investors' confidence.
Asset management firms should communicate with investors and disclose adequate information to bondholders to curb their panic.
"The SEC has been closely monitoring the situation and there is still nothing to worry much about so far," she added.
RESTORING TRUST
EA is struggling to regain trust from investors, hoping that strengths in its businesses that promote clean energy and ongoing efforts to deal with the alleged fraud should bring the company back to the ESG ratings list.
Standing for environmental, social and governance, ESG is a set of standards adopted by companies committed to taking better care of the environment and people, as well as promoting good corporate governance.
"One of the best solutions to this problem is to restore public trust in the company," said Vasu Klomkliang, who succeeded Amorn Sapthaweekul as EA's new chief financial officer.
Mr Amorn, one of the three embattled executives, resigned from the post, paving the way for a committee set up by EA to look into the allegations.
Besides the fraud investigation, EA plans to officially appoint its new chief executive this month, said Mr Vasu.
Board chairman Somchainuk Engtrakul took over the position of chief executive after Mr Somphote stepped down from the post.
"Though Mr Somphote and Mr Amorn resigned, I believe EA's businesses will move forward smoothly," said Mr Vasu.
"I will be part of a team to help EA. I have gained experience in operating the company from Mr Somphote and Mr Amorn."
EA also needs to keep on running businesses in line with its goal of growing them in a sustainable manner, said Mr Vasu.
The company aims to achieve carbon neutrality, a balance between carbon dioxide emissions and absorption, in 2045 and attain a net-zero target, a balance between greenhouse gas emissions and absorption, in 2060.
Mr Vasu believes businesses run by EA and its subsidiaries will not be severely affected by the fraud problem because the company is driven by capable and experienced staff who are eager to continue to expand.
"EA has worked with teams of professional staff for many years, so I am confident the situation will return to normal soon," he said.
With EA's current revenue standing at 1 billion baht a month, Mr Vasu does not see any difficulty in repaying existing debts and servicing new bond payments of 5.5 billion baht.
The company is currently in the process of issuing 5.5 billion baht's worth of debentures.
EA earlier said it expected revenue to grow by 5-10% this year. In 2023, it earned 31.5 billion baht, according to the company's 2023 sustainable development report.
Last year, renewable energy made up 40% of EA's total revenue, with 37% from electric vehicles and batteries, 16% from biodiesel, and the remainder from other businesses, including investment in other companies, the firm said.
EA announced in March this year that it planned to partner with a Chinese company to push ahead with a new renewable energy development project.
EA will lose some revenue due to the expiry of the adder tariff given to its six renewable power generation facilities in the next several years, but Mr Vasu said new purchase orders of electric buses and trucks assembled by the company should offset this decline.
MORE ESG-FOCUSED BUSINESS
According to UBS Securities (Thailand), banks are expected to set aside over 10 billion baht in total loan loss provisions for embattled EA if the company faces a cross-default.
The combined loan exposure to EA is around 32.1 billion baht, consisting of 23.2 billion baht in long-term loans and 8.84 billion baht in short-term loans, it estimated.
The SET said on July 15 it had dropped EA from the current SET ESG ratings list, saying the company no longer met the criteria. The bourse is also planning to upgrade ESG evaluation guidelines for listed companies.
Krisda Phatcharoen, head of wholesale banking at HSBC Thailand, said the overall banking industry should pay more attention to business sustainability, as well as ESG in banking business operations in accordance with international standards.
Given the global tendency, good governance and transparency would give businesses better access to financial services, he said.
As a global financial institution and the first foreign commercial bank in Thailand with a presence of 135 years here, HSBC Thailand has also paid more attention to financial sustainability and ESG, aligning with international standards.
HSBC sets strong risk assessment and compliance processes for corporate loan approval. The bank has a specific team working on sustainability and ESG-related financial services. In addition, the bank also uses a third party when assessing corporate clients for ESG criteria.
"We set the ESG score for corporate customers, in terms of both the organisation and individuals. The score would reflect the loan accessibility and interest rate for those clients," he said.
Mr Krisda said the bank's accounting unit supervises the clients' balance sheet and assesses their accounting. This team is important for the bank because customers' auditors mainly work for their clients and not the bank.
HSBC recently held a training programme about financial fraud for large Thai corporate customers and high-net-worth clients in order to explain several fraudulent cases to build their awareness and protect themselves from the risks appropriately.
Phusadee Arunmas and Somruedi Banchongduang