Two Saudi stock market experts recently said that the final verdict issued by the Capital Market Authority (CMA) against Al-Mojil Company would have a positive impact on all those associated with the stock market besides alleviating the grievances caused to the affected shareholders. Alarm bells are also sounding for several companies that are allegedly manipulating their financial statements or whose losses have exceeded more than 50 percent of their capital, they said. In an interview with Okaz daily, the experts noted that the boards of directors of these companies are seriously working to save their entities from incurring further losses. They underlined the need for these companies to concentrate on maintaining fair conduct in their dealings before floating their shares to the public. Hussain Al-Raqib, a financial analyst, said that the case of Al-Mojil has set a precedent for getting compensation for the damages incurred by shareholders due to the violations of CMA rules during the initial public offering (IPO) stage. He stressed the need for framing regulations to give compensation equal to the number of shares and the size of the damage caused. Al-Raqib noted that 95,000 shareholders have been affected by the malpractices of Al-Mojil. He said the CMA's decision would also have a positive impact on reassuring other investors in the stock market. It gives a strong signal to the boards of directors that they will be held accountable for any fault in their performance or for circulating misleading data. At the same time, monitoring agencies, which were negligent in listing the company, which levied unjust and exorbitant premiums, shall also be held accountable. Despite incurring huge losses amounting to more than 300 percent of capital due to mismanagement, the company managed to remain among the listed firms in the stock market. He noted that Article 150 of the Law for New Companies is applicable to all those companies that are running at a loss of more than 50 percent of their capital and these companies might have to be liquidated if their boards of directors fail to take quick corrections to improve their performance. The penalties ordered by CMA against Al-Mojil Company included payment of SR1.6 billion plus a fine of SR300,000, in addition to a five-year jail term. According to Al-Raqib, these punitive measures showed the magnitude of wealth amassed by the company through illegal and fraudulent means. Meanwhile, Hani Baothman, former member of the Securities Committee at Jeddah Chamber of Commerce and Industry, underlined the importance of focusing on fair dealings by companies before floating their shares to the public. He noted that some companies earn huge profits by using illegal methods and that the verdict against Al-Mojil revealed the magnitude of manipulation that happens after the IPO stage. Some firms rely on issuing a share premium that far outweighs reality without considering the real value of the stock in the market. I would know like to ask some relevant questions. How could the authorities allow all of this to happen? Was there a proper inquiry with regard to the capital of Al-Mojil before giving it permission to go ahead with an IPO? Who gave permission for fixing its share premium and on what basis this happened? It is essential for Al-Mojil to undergo normal procedures to be granted a license. It is mandatory that any firm that wants to convert from a limited company into a joint stock company be subjected to investigations to verify the authenticity of the information provided, as well as the company's financial health and the trustworthiness of its founders. There should not be any doubt with regard to their honesty and credibility. In the case of Al-Mojil company, who was responsible for fixing its actual value and who estimated its share premium? Was there any attempt to interrogate the officials who gave their consent to convert Al-Mojil into a joint stock company? Will these officials share the responsibility for the damage caused to 95,000 affected shareholders? These shareholders hope that there will be a quick resolution to the problem with the receipt of compensation that is owed to them by the company. They also hope that all those who had a role in the manipulation and corruption that culminated in the losses that they incurred will be penalized without exception. The picture is clear with regard to the damage caused to the shareholders of Al-Mojil Company who are going to be compensated for their losses. However, what about other companies whose track record is not much different from that of Al-Mojil? There are many members of the public who want to own shares of companies that announce their successful performance in their respective fields. These companies present their performance statements to the authorities and are granted a license to sell a portion of their shares. These companies offer shares to the public after making statements about their assets and fixing a share premium that in many cases is based on exaggerated figures. By doing this, such companies manage to earn a large amount of money that might be equivalent to the value of their total shares after simply floating a portion of their shares. Most often, there is an overwhelming response from the public resulting in shares being oversubscribed multiple times. However, some of these companies have achieved limited success while others have incurred losses that have threatened their existence and have exposed them to bankruptcy. Perhaps, no one has asked about the reasons that have led to their failure. In fact the Law for Corporate Governance is not very effective and as a result, some companies are engaging in fraudulent practices under the nose of the Capital Market Authority. — Dr. Ali Al-Ghamdi is a former Saudi diplomat who specializes in Southeast Asian affairs. He can be reached at [email protected]
