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Red Flag Spotting: Signals to beware when analysing financial statement.

Practice Note 17, also known as PN 17, is triggered as long as a company listed in Main Board hits the following criteria:

·         Shareholder equity falls below 25% of issued and paid up capital and shareholder equity is less than RM40 million

Guidance Note 3, also known as GN 3, is triggered as long as a company listed in Ace market meets the following criteria:

·         Shareholder equity is less than 25% of issued and paid up capital

·         The firm has incurred loss for one full financial year the loss amount is equal to or more than shareholder equity and shareholder equity is less than 50% of issued and paid up capital

·         It has incurred loss in two consecutive full financial year and the amount is more than shareholder equity, the second year loss is more than 50% of first year loss and the shareholder equity is below 50% of issued and paid up capital

Beside the situation that related to shareholder equity, a company will trigger PN 17 or GN 3 as long as the experience the situation as stated below:

·         50% of total assets are under receivership

·         Subsidiary that makes up more than 50% of total asset is winding up

·         Adverse or disclaimer opinion by auditor

·         Auditor express an emphasis of matter on going concern and shareholder equity is less than 50% of issued and paid-up capital

·         The company default in its payment

Adverse Opinion: Financial records are not in accordance to accounting standards or grossly misstated

Disclaimer Opinion: Auditor do not provide any opinion due to absence of financial records or insufficient cooperation from management

Emphasis of matter on going concern: Uncertainty on whether the company will survive

When a company hits the criteria of being a PN17/ GN3 company, they have to announce to the exchange immediately. The below is a timeline of what a company should do when it became a PN17/GN3 company.

If the PN 17 firm plans to change its business direction or policy

1. Announce a regularization plan within the first 3 months
2. Submit the regularization plan to Securities Commission (SC) for approval within 12 months from the First Announcement
3. Update the status of regularization plan on a monthly basis
4. Complete the plan within the time frame prescribe by SC

If the PN 17 firm does not plan to change its business direction or policy

1. Announce a regularization plan within the first 3 months
2. Submit the regularization plan to the exchange for approval within 12 months from the First Announcement
3. Complete the regularization plan within 6 months from the time the plan being approved. Cases that involve court proceedings are being given a time frame of up to 12 months.
4. Update the status of regularization plan on a monthly basis
5. Record a net profit in 2 consecutive quarterly result after the completion of the plan

Action to do by a GN3 Company

1. Appoint a sponsor within the first 3 months
2. Submit the regularization plan to the exchange for approval within 12 months from the First Announcement
3. Complete the regularization plan within 6 – 12 months
4. Update the status of regularization plan on a monthly basis

A failure to do so will face a suspension or delisting of the counter.

Some example of regularization plan

·         Divestment of non-core business

·         Injection of fresh capital via new strategic shareholders

·         Agreement and compromise with creditors

·         Share capital reduction

·         Fund raising via rights issue or private placement