Thailand: don’t let a good scandal go to waste

An accounting fraud at a major Thai listed company has rattled investors but could serve as a timely catalyst for change, writes ACGA Head of Research Jane Moir

Today marks the last day of trading for Stark Corporation, one of Thailand’s top 100 listed companies which until recently was revered in local circles as an impressive growth story in the world of wire and cables.

Over the past few weeks, the company’s auditors have flagged suspicious transactions, conducted a special audit and restated Stark’s financials from a profit of THB2.79 billion in 2021 to a hefty loss of THB5.99 billion for the year. Adding to its woes is an additional loss of THB6.61 billion encountered in 2022.

Scrutiny of the accounts revealed fictitious sales, and a recycling of the proceeds to buy the firm’s own product. In a special audit, more than 200 unusual sales transactions worth THB8 billion in 2022 were flagged by the newly appointed auditors, PWC.

Stark’s viability as a going concern is now seriously in doubt amid a stock plunge of 99% and defaults on its liabilities. Swift action against wrongdoers at the firm has been pledged by the Department of Special Investigation (DSI) and the Securities and Exchange Commission (SEC), while the Stock Exchange of Thailand (SET) has imposed a trading suspension on Stark, putting it in a long delisting process. Even senior figures in government have been vocal in their condemnation: according to Bloomberg reports, the Stark incident has spooked foreign investors who are now divesting from already-bruised stock and bond markets.

Red flags and blue blood

The use of bogus sales and invoices to recycle cash back into a company is a familiar accounting fraud playbook which has played out to public scrutiny on a regular basis in other markets, but less so in Thailand. Stark also came with a well-connected majority shareholder, Vonnarat Tangkaravakoon of the TOA Paint dynasty, and ranked among the top 15 global non-automotive wire and cable manufacturers in terms of production capacity. It had a 30% market share in Thailand (and a good share of government contracts) under the Phelps Dodge brand, which dated back to 1968, although Stark itself only went public in 2019 via a backdoor listing.

Signs of trouble were however apparent in December 2022 when the company suddenly backed out of the acquisition of German firm Leoni Kabel AG’s EV charging cable business, which was funded via an issue of 1,500 million new Stark shares worth THB5.58 billion. The proceeds, the company announced, would instead be used for other unspecified purposes and in the ensuing months no clarity was offered on where the money would be deployed. Investors proceeded to cash out and Stark’s stock dropped by around 33%.

By February 2023 the company was forced to delay the announcement of its financial statements, and this was followed in late March by mass resignations, including Stark’s CEO, CFO and Company Secretary. The chief accountant followed in April by which time seven directors had bailed from the firm. By May, the SEC requested a special audit be conducted. In June, the company finally released its financial statements replete with irregularities.

Silver linings

The true scale of the Stark fraud is yet to be ascertained but early findings by the auditors suggest at the very least this could be Thailand’s Luckin, perhaps even Enron, moment. Still, scandals are very powerful as a mechanism for facilitating change, particularly if there is an acknowledgment in key institutions that it is necessary.

One positive to emerge is that the Thai Investors Association (TIA) is to support shareholders in a class action lawsuit against Stark: according to a 27 June Bangkok Post report, 1,759 retail investors in Stark have registered for class action legal proceedings totalling THB 4.06 billion baht in damages. This would be the first large-scale claim in Thailand since a class action framework was introduced.

The Stock Exchange of Thailand (SET) meanwhile has pledged an overhaul of the listing rules, the board approving a “sweeping revamp of listing regulations’’ focussing on an increase of the free float ratio and the regime for backdoor listings and de-listings (the latter permits a somewhat generous 5 years for companies to fix their equity and turn a requisite profit).

Thailand’s listing rules and CG Code undoubtedly need modernization: while the market has a decent rulebook and code, both have lacked a major upgrade in several years. This includes neglecting to address some CG basics such as bringing in firm rules on blackouts prior to financials being released as well as disclosure on share pledges. It is hoped the regulatory rigour to overhaul the rules does not stop at the chapters on backdoor listings and de-listings.

How the scandal unravels in the enforcement context will also put the spotlight on the regulatory toolkit in Thailand. The use of civil sanctions has gained popularity among regulators frustrated by the lack of progress in the criminal space: prosecutions in a court are few and far between. Fines in the civil and criminal space moreover tend to be for disclosure breaches than market manipulation or fraud. An actual trial would be a welcome change.

And at the policy level, regulatory focus in recent years has appeared to favour crypto scams rather than traditional market misconduct, reflecting the prolific growth of the digital currency in Thailand as an investment of choice. It is hoped the Stark episode sees the pendulum swing back to more traditional forms of corporate misconduct.

Finally, as the tawdry tale of the wire and cable manufacturer unravels over the months and years, it would be refreshing to see regulators and policymakers make good their promises to leave no stone unturned. The resolution of the Noble Group accounting fraud in Singapore ultimately fell well short of what investors expected in terms of regulatory outcome, and the attractiveness of the market has suffered for it.