Qatar to Introduce Corporate Tax From 1 January 2010

See updated post here.

The local GCC press is abuzz with the news that Qatar has passed a law establishing an income tax  effective from 1 January 2010.

That would make it the first GCC state to have a general income tax with the exception of the Bahrain income tax which is only on oil companies.

Some accounts differ on whether the tax will apply only to companies or individuals as well. 

AlQabas (Kuwait) huna is in the no personal tax column.

Maktoob takes an opposing view here.

AlRiyadh (Saudi) huna shares Maktoob's view.

Qatar Tribune with the apparent definitive answer:  companies only.

MP's Protest New Real Estate Tax in Bahrain - Haflat AlShayy (Tea Parties) Can't be Far Behind

Deputies in Bahrain's lower house of parliament are pushing for a repeal of a recent decree by the Prime Minister establishing a real estate tax in Bahrain.

The tax has a sliding scale:

1. 1.5% for properties less than BD70,000
2. 2.0% for properties BD70,001 to BD120,000
3. 3.0% for properties BD120,001 and up.
   

There would be exemptions for those receiving financing from Bank ElEskan (Housing Bank) to buy or build a home.

Not mentioned in the article, Bahrain also has or at least used to a registration fee for changing the legal titleholder of a property.

With all the agida in the Kingdom over taxes, can haflat al shayy be too far over the horizon?

Note to the planners:  AA fancies shayy ahmar.

Another Truckers' Delay on the Saudi-UAE Border - But What is the Real Story Here?

 "There are three whose adversary I shall be on the Day of Resurrection: a man who has given his word by Me and has broken it; a man who has sold a free man and has consumed the price; and a man who has hired a workman, has exacted his due in full from him and has not given him his wage."

Hadith Qudsi #21

SAA

If you'll look closely at this article,  you'll see in the fourth paragraph that driver, Mohammad Jolan Mustafa, gets the princely sum of AED200 (US$54.50)  to make the trip  to Doha regardless of the time spent.

Usually it only takes three days, which would make the per day wage the exorbitant sum of  AED 66.670 (US$18.17).

This time it will take eight days so his per day wages will be merely  AED25.000 US$6.81. 

I will leave it to readers to perform the wage per hour calculation.

On the border story, there was also a delay on the Causeway between Bahrain and Saudi Arabia, which the Gulf Daily News ascribes to a computer glitch in Saudi, speculating that this may have also affected the UAE/Saudi crossing.

UAE Banking Statistics - New CB UAE Monthly Report - Aggregate Banking Statistics

The CB UAE has begun publishing monthly UAE Banking Indicators which give an aggregate "snapshot" of the banking sector.

While there are a variety of data series, separate lines for general and specific provisions enable more in-depth analysis of this critical area.

Here's the inaugural October 2009 report.

November and December's data should reflect the provisioning for AHAB and Saad Groups recently mandated by the CB UAE.  

UAE Revises Corporate Governance Code

On 12 November the UAE Ministry of Economy/UAE Securities and Commodities Authority issued a decree amending certain aspects of the previously issued April 2007 Code which will come into effect on 1 May 2010 after a period of voluntary compliance.  Here is the Arabic press release.  The English translation is here.

The new measures are include the following:

1. Definition of material transactions as 5% of capital or AED 5 million, whichever is less.  Definition applies to the total of transactions.
2. All such transactions with Board Members must be scrutinized to ensure their appropriateness.
3. The Board Remuneration Committee must set compensation policies for the Board and staff, review these annually, and as well review the compensation of senior managers to ensure that it is appropriate/reasonable given the performance of the company.
4. Existence of a robust functioning internal control/risk monitoring group whose full independence of management is to be guaranteed by a mandated direct reporting by the committee to the Board of Directors.  Its areas of responsibility include risk management, review of compliance with internal policies and as well with various external regulations and laws.
5. Steps to ensure the full independence of external auditors.  The decree itself contains warnings against specific practices which might compromise an auditor's independence.

The decree applies to all listed companies in the UAE except for those owned by the Federal Government or one of the individual Emirates.

Investment Dar - Announces Majority Approval of Standstill

On 16 November Investment Dar issued a press release that a majority of its banks and investors had approved the Standstill Agreement.

This means that Suq Al Mal's earlier post was incorrect.  Or at least is as of today,

From the wording in today's press release, it's clear that a majority was not achieved  until today.   Unlike formal political elections, there is always room to count positive votes after the "deadline".  Presumably votes from the more distant precincts trickled in over the weekend.  Or a few "hanging chads" were resolved.

In any case, this is good news for TID who are now set to present their proposed restructuring plan to  their banks and other creditors on 24th and 25th November.

Who knows in the next day or two we might actually see a press release that both mentions who the Co-Ordinating Committee are and hear an endorsement of the plan from them!

Global Investment House - Treasury Share Purchases 4Q08

As companies encounter financial difficulties, their business comes under more intense scrutiny.  This is part of the breakdown in trust that initially occurs when a borrower tells a lender that it cannot meet scheduled repayments or when a formerly high flying company has reversals. 

Suddenly the best customer in the world is a scoundrel - proving once again the old definition of  the commercial banker is well founded.  What is a commercial banker?  He's a guy who gives you an umbrella on a sunny day.  And at the first drop of rain wants it back immediately.

GIH is not immune to this process.  In an earlier post Suq Al Mal looked at the funding relationship between GIH and GMFA, a London Stock Exchange listed fund (of which GIH holds 29.99%) which has come under the review of at least one regulator.  The link to that earlier post is here.  There are several open questions from that post.  The key one is how GIH reportedly repaid deposits  taken from GMFA early (presumably before maturity) after it had declared a principal standstill on bank and bond debt.

Another topic that attracted attention is the dramatic 4Q08 increase in GIH's holdings of its own shares ("Treasury Shares"). Many analysts noted that between 30 September 2008 and 31 December 2008,  these increased from 20.5 million shares worth KD20.1 million to 81.9 million shares worth KD59.0 million.

This is the topic of this post.

One unsubstantiated rumor was that GIH had bailed out a substantial shareholder as it ran into difficulties.

As noted above, that theory is a rumor.

 

In the absence of Kuwait Stock Exchange mandated public disclosure of  details by a company in dealing in its own shares (as occurs on the LSE, for example) there is no conclusive answer.

However, it is possible to use GIH"s financials to investigate this issue a bit further.

The first line of inquiry is to see if Treasury Share purchases are out of the ordinary.  In other words, did these only occur to any extent during 4Q08?  Or does GIH have a consistent pattern of dealing in its own shares?

By looking at the Consolidated Statment of Changes in Equity GIH's quarterly financials, it is clear that at least during 2007 and 2008, GIH regularly traded in its own shares often in sizable amounts.

The following list summarizes 2007 activity:

1. 1Q07 Opening Balance: KD20.5mm Purchases: KD5.8mm Sales: KD1.8mm Closing Balance :KD24.4 mm.
2. 2Q07 OB: KD24.4mm P: KD16.8mm S: KD36.3mm CB: KD5.0mm.
3. 3Q07 OB: KD5.0mm P: KD12.1mm S: KD13.6mm CB: KD3.5mm.
4. 4Q07 OB: KD3.5mm P: KD41.4mm S: KD43.3mm CB KD1.5mm.

And here's 2008's activity.

1. 1Q08 OB: KD 1.5mm P: KD 8.6mm S: KD 2.5mm CB: KD7.7mm.
2. 2Q08 OB: KD 7.7mm P: KD30.3mm S: KD25.2mm CB: KD12.7mm.
3. 3Q08 OB: KD12.7mm P: KD 7.4mm S: KD 0.0mm CB: KD20.1mm.
4. 4Q08 OB: KD20.1mm P: KD49.0mm S: KD10.1mm CB: KD59.0mm.

I have not seen an explanation by GIH for this activity.  My guess is that these transactions were undertaken to support GIH's share price.

The next line of inquiry is to see if the price paid during 4Q08 was out of line with the market price.

The first step in that process is estimating the average cost per share GIH paid for the shares purchased during 4Q08.

Looking at the above information in conjunction with that in the Treasury Shares Note in GIH's financials, we can do just that.  At 31 December 2009,, GIH held 81.924 million of its own shares acquired at a cost of KD59.029mm or KD0.721 per share.

We can further decompose that aggregate cost into two components:  shares purchased during 4Q08 and those acquired earlier.

From an analysis of GIH"s financials, it seems Treasury Shares are accounted for on a FIFO basis.  If that assumption is correct, the average cost of the shares acquired during 4Q08 is KD0.683 per share.  Cost allocation to the KD10.1mm of share sales in 4Q08 would be from shares purchased earlier.  Using 3Q08 data, that would mean that after the 4Q08 sale, 10.438mm shares (from those held at the end of 3Q08) with an aggregate cost of KD10.236mm were part of the 4Q08 ending balances.

By simple arithmetic the number of shares GIH acquired in 4Q08 would be 71.486 mm shares (81.924mm - 10.438mm).  These "new" shares would have been responsible for KD59.029mm - KD10.236mm in cost (KD48.793mm)  which is fairly close to the cost of 4Q08 purchases reported in the 4Q08 financials.

Turning to KSE price data for GIH shares, we see the following:

1. From 1 January 2008 until 31 August 2008, GIH's shares traded in a fairly narrow band oscillating around KD1.000 per share.
2. In September the shares began a decline reaching KD0.770 at the end of the month.
3. During October the shares declined further to approximately KD0.485.
   
4. In November the shares traded in the KD0.400's ending the month at KD0.410.
5. In December the shares traded downward reaching KD0.242 on 23 December where they remained for the rest of the year.

Clearly, in order to achieve an average price of KD0.683 on the shares bought during 4Q08, they would have had to be purchased during October.

Let's look at KSE volume data based on the assumption that all share purchases and sales have to clear through the KSE.

There were several large trading days during the month: 

1. 8 October 16.7mm shares for KD9.7mm
2. 9 October 15.5mm shares for KD10.3mm
3. 14 October 14.7mm shares for KD9.8mm
4. 15 October 13.5mm shares for KD9.1mm
   

With the assumptions and analysis above, it is during this period that the shares would have to have been purchased if they cleared through the Exchange.

I'd also note that there were a series of six large identical trades on 4, 7, 8, 9, 10 and 11th December.  All for 55,920,000 shares at a price of KD21,530,950 at a per share price of KD0.385.

These trades seem to have been a calculated attempt to stem the decline in share price.  Besides pride there are a variety of other possible reasons for supporting a share price as anyone familiar with the closely related terms "Kuwaiti investor", "pledge", and "leverage" would know.    

You may be thinking:  why don't these trades - which total KD129.2mm -  appear in GIH's 4Q08 financials. Why aren't both Purchases and Sales for 4Q08 each KD129.2mm higher?  Good question.  I'm presuming because they were rollover transactions or offset by other transactions GIH did not have to include them.  If they were not GIH trades, then there is a very intriguing (notice I did not say interesting) question as to who did and why?

After this intervention stopped, the share price declined to KD0.242 at year end dropping eventually to double digits in 2009 before recovering later this year to just under KD0.100 today.

So this analysis has not provided a definitive answer to the rumor cited above.  One bit of further information, the timing of the purchase dates could go a long way to resolving this issue.

Kuwait Stock Exchange Suspends Trading of 13 Companies (6 Previously Suspended)

Last week the KSE warned 23 companies that failure to provide their 3Q09 financials to the Exchange  by 8:30 AM this morning would result in suspension of their trading.  See earlier Suq Al Mal post on that topic.

This morning at 8:44 AM local time, the KSE announced the suspension of trading of 13 companies.

As noted in my earlier post of the 23 companies so warned, 6 had already been suspended for failure to provide financials for previous periods.

The 13 suspended today include 6 previously suspended, so the incremental number of suspensions (in this announcement) is 7.  The KSE already suspended IFA and Watha'iq last Thursday.

New suspended companies:

1. Industrial Investments Company (Investment Company)
2. Aref Investment Group (Investment Company)
3. Aayan Leasing and Investment Company (Investment Company)
4. Al-Madar Finance and Investment Company (Investment Company)
5. Salbookh Trading Company (Industrial Company)
6. Safwan Trading and Contracting (Services Company)
7. National Ranges Company (Services Company) a/k/a "AlMadayen"
   

Previously suspended still suspended.

1. The Investment Dar (Investment Company)
2. International Leasing and Investment Company (Investment Company)
3. Pearl of Kuwait Real Estate Company (Real Estate)  a/k/a Lu'lu
   
4. Safat Global Holding (Real Estate)
5. Villa Moda Life Style (Services Company)
6. Network Holding Company (Services Company)  a/k/a "Shabka"
   

Company type corresponds to KSE classification.

Central Bank of UAE Weighs in on Al Gosaibi and Saad Restructurings - Establishes Mandatory 50% & 100% Provisions

The Board of Directors the Central Bank of the UAE officially mandated that all local banks and branches of foreign banks operating in the UAE  take certain prescribed provisions against their exposure to the Saad Group and to Ahmad Hamad AlGosaibi and Brothers ("AHAB") Group.  Provisions apply to both funded and unfunded exposure (e.g., letters of credit, etc) - that is to all exposure to the two Groups.

Yesterday, the Governor of the Central Bank issued an official circular setting forth the provision requirements which are to be implemented no later than 31 December 2009:

1. 100% of all exposure to Awal Bank Bahrain (owned by Maan AlSanea)
2. 100% of all exposure to The International Banking Corporation Bahrain (owned by AHAB and partially by Maan AlSanea)
3. 50% of all other exposure to AHAB 
4. 50% of all other exposure to Saad Group companies.

Governor AlSuwaidi emphasized in his circular two further points:

1. The level of provisions is consistent with that deemed appropriate by regional and international supervisors.  The reference to other supervisors' assessment is particularly telling.  This is not simply the CB UAE's view.  Nor apparently is it only a regional view.
   
2. The CB UAE will revert in 2010 if additional provisions are required.

This announcement is noteworthy because Central Banks generally do not get involved in publicly  mandating specific loan loss provisions.  This is only done exceptionally for cases  involving large amounts where the Central Bank has made a determination that the prospects for recovery are low.

As such then, this announcement represents a highly negative assessment of both Groups' prospects.

1. Failure of and no recovery at all on the two banks, Awal and The International Banking Corporation.
   
2. At least a 50% loss on other exposure to the AHAB Group and Saad Group - though there is a hint that additional provisions may be required.

For those who don't read Arabic, a much shorter English language press account.

Global Investment House Kuwait - Seized Deposits

As per GIH's financials, two deposits totaling KD115 million (US$402.6 million) have been attached or otherwise seized by third parties and are now the subject of legal actions. 

KD71.75 million of this amount relates to an investment that GIH had intended to make in National Bank of Umm AlQawain ("NBQ") for KD183.6 million (US$642.5 million) to purchase a 20% stake.  The two parties signed an MOU in July 2008.  GIH placed the equivalent of KD 71.75 million (US$249.9 million)  with NBQ.  (I suspect the amount placed was US $ or AED as the amount fluctuates from one quarterly report to another.  It would not if the amount were denominated in KD). 

Subsequently, GIH obtained commitments for a US$410 million loan to fund the remaining amount of the purchase price.  In November 2008, it decided not to proceed, canceled the loan and asked for its deposit back.  

NBQ refused alleging breach of contract.  See NBQ's 2008 Annual Report Note #13. (You will have to page through this as it is interactive).

Reportedly, a court in the Emirates gave the first round to NBQ.  No doubt there will be several more rounds.  The two parties' legal arguments are summarized in this article.

The second amount, KD43.2 million (US$148 million), is a deposit placed with a Kuwaiti bank by a subsidiary of GIH (AlThouraia) which that bank offset against obligations owed to it by GIH.  

The total KD 115 million represents roughly 0.1% of GIH's total cash of KD89.6 billion.  From that standpoint it's not a highly significant amount.  

From an equity standpoint, if GIH were to lose the court case against the Kuwaiti bank, the result should be no impact on equity as it would merely be a substitution of liabilities - the liability of GIH towards the bank replaced with one towards AlThouraia.  At some point GIH would have to make its subsidiary whole by transferring funds or other value.

With respect to the NBQ case, it's difficult to make a statement.

It is hard to understand the basis for this lawsuit.  In other words hard to fathom how a properly worded MOU could create a contractual obligation.  But then again AA didn't understand the structure of the convertible bond agreed to by Shuaa Capital and Dubai Banking Group.  Since the NBQ/GIH deal is also structured as a convertible, it may be that some cutting edge financial innovation in the Gulf has produced  a breakthrough in convertible deal structuring.  Or then again maybe just a breakdown. 

In any case, it's hard to imagine the UAE court confiscating GIH's deposit in toto.   

However, even if it did, the damage should be containable.

Global Investment House Kuwait - Debt Restrucuting Update - GIH Offers Collateral

Having devoted some attention to The Investment Dar over the past few days, it's time to turn to Global Investment House, where the story appears better.

 
On 25 October GIH announced that its creditors have overwhelming approved the terms of a proposed debt restructuring.  And contrary to TID, where the creditor Co-ordinating Committee is largely invisible and silent, here at GIH that is not the case.  WestLB, the head of the Bank's Steering Committee, (and you'll recall I made a point of the significance of the  change in name of the creditors' committee at TID in a recent post) is front and center selling the deal.

 
There have been, however, two intriguing developments since then - or at least public reports of these events.  

The first was contained in GIH's 3Q09 earnings announcement:  "The size of total bank debt to be restructured is expected to be KD500 million (USD1.75 billion).   The outstanding bonds of KD89.5 million (USD312 million) are expected to be paid as per their scheduled  maturities."

 
There is always a tension in creditor groups between lenders and bond holders with the latter claiming that it is impossible to restructure their obligations and so they must be paid according to their existing maturities.  The images bondholders usually conjure up are scores of unsophisticated investors - widows and perhaps even orphans - who simply  just can't be persuaded to attend bondholder meetings and vote.  

Lenders push to have all obligations restructured as they don't want to see precious cash flow used to pay off another material creditor in full while they are waiting for their rescheduled debt to be paid.

GIH"s bonds represent roughly 15.2% of the outstanding debt obligations .  So this is not a trivial amount.  Maturities are as follows:  December 2009 KD 14.4 million (16.1%), April 2012 KD 40.9 million (45.6%) and November 2013 KD 34.3 million (38.3%). (If you're wondering why numbers differ from those in GIH's press release, I am using the amounts due after GIH Group holdings of the bonds are eliminated.  These appear to be KD 25.5 million.)

Just today GIH issued another press release (though there was a rumor at least one day earlier) that it had granted the bondholders collateral.

GIH states that it has "offered to the bondholders security on the same terms and basis as is being proposed to be offered to the banks and financial institutions currently in discussions with the Company for restructuring of the debt".

 
Since the bondholders are not restructuring their debt, the question is what is the quid pro quo for the collateral.  Is it to forestall their taking legal action?  As part of a bargain to keep them from accelerating repayment of their bonds? 

 
It seems the bank lenders may be acquiescing not only in the bondholders' exemption from the restructuring but are as well their sharing in the collateral. 

Of course without details of the negotiations it's hard to draw a firm conclusion.   However, it seems the bondholders have gotten quite a nice deal indeed.  One wonders if it extends to the GIH Group entities who are bond holders? Perhaps as much as KD 25.5 million as outlined above. 

It would be interesting to know who the holders of the bonds are particularly the 2008 issue which was raised around the time that it should have been apparent to GIH's management that things were getting difficult.   

From GIH's 3Q09 financials, it's clear that the Group itself stepped up for roughly KD 15.7 million of the issue.  That, of course. is based on the assumption that there were no prepayments of that debt.  The 3Q09 financials show no evidence of that.

And finally don't overlook the central message here - the price of the restructuring is collateral.  Not an uncommon requirement of creditors in a restructuring.  There will also be  covenants in the restructuring agreement designed to protect the lenders' interests by limiting what the borrower can do.  Depending on how onerous these are, GIH could find itself with limited room to conduct / expand its business.

Riyadh Chamber of Commerce - Golden Jubilee

Congratulations to the Riyadh Chamber of Commerce and Industry on its Golden Jubilee.

The Investment Dar - Creditors Fail to Approve Standstill Agreement - Time for Plan B

Subsequent to this post, TID announced majority approval of its Standstill Agreement.  See updated news here.

The Investment Dar has announced that it will be calling meetings with creditors and investors in Kuwait and Dubai on 24 and 25 November respectively to present its restructuring proposal.  Creditors will then be given some time to accept or reject the plan.

As you'll recall, 12 November was the deadline for creditors to vote on the proposed Standstill Agreement.  Since the press release is silent on that topic, it's pretty clear it failed.  Something predicted here at Suq Al Mal.

The Company and its advisor are now going to Plan B.  Under this scenario they will try to make the Standstill moot by persuading creditors to accept the restructuring plan. 

The upcoming meetings will be critical for TID's restructuring. TID is in a difficult situation and success is likely to be difficult to achieve. The one thing in its favor is the size of its debt  - KD 1 billion (US$3.5 billion).   There is a term describing the behavior of conventional lenders faced with huge loan losses: "Extend and Pretend".  Given the "Islamic" nature of TID and a good number of its creditors, a more apt phrase may be "Delay (the loss) and Pray".

The difficulty is that TID and its advisors are not going into the meetings with any perceptible positive momentum.  The Standstill failed to garner enough support.  There is no success to build on.

In fact TID has achieved a standstill of another sort - no progress - an definitely unwelcome standstill.

Also they are burdened with some fairly negative baggage:

1. Creditor skepticism
2. An apparent lack of a leadership among the creditors to sell the restructuring
   

The earlier requests for a CRO and a Central Bank of Kuwait appointed  monitor point to a high  degree of skepticism among creditors.  The no vote on the Standstill Agreement  shows  no change in this attitude. 

In an earlier post I commented that the change of name of the creditors' committee from a "Steering Committee" to a "Co-Ordinating Committee" seemed to reflect a lack of willingness of key creditors to take a leadership role in advancing the restructuring.  Bolstering this negative view is the lack of any public statement attributed to the Committee in the press.   In fact, the names of the banks  and other creditors comprising the Committee have not been publicly disclosed.   They are not only invisible but it seems silent as well.  A situation much different from that in the Global Investment House restructuring. And one that represents a real negative given TID's situation.  TID needs a champion among the creditors.  It appears to have none.

As I said before, getting creditors to agree to a debt restructuring is like herding cats - even with leadership and a firm hand from key creditor banks.   It takes a lot of work and a lot of knocking together of heads.

It's not just the matter of bridging gaps among the creditors and forcing compromises to arrive at the term sheet.  It's also a matter of controlling the process so it doesn't get derailed or needlessly prolonged by creditors who don't know what they are doing or are trying to use their recalcitrance to engineer their exit.

The first group are composed of creditors  that complicate the process with pointless, trivial, silly or impossible conditions. And sometimes all four at once.  They waste time in closing the restructuring as their points have to be debated and resolved.  With strong leadership these distractions can be kept  to a manageable level.  There is also an equal chance that a creditor will come up with a "brilliant" idea that actually does harm.   In one debt restructuring a bit further East, a smart creditor insisted that it be allowed to re-engineer the cash flow capture mechanism (a device to ensure that excess cash flow is used to prepay the loan) to make sure it was proper.  The result of its brilliant financial engineering was that  the borrower had to pay 50% less under the new and improved cash flow sweep than the original mechanism.  You can guess how reluctant the borrower was to agree to this!   Sadly none of the creditors seemed to notice!!

Also there are always one or two small creditors that refuse to go along,  planning that bigger creditors desperate to avoid a loss of their much larger stakes will buy them out so the restructuring can close.

In this environment, the smart strategy is not co-ordination.  It is leadership and, if required, coercion. 

After the upcoming meetings, creditors will be given time for a response.   I suspect the next critical milestone -that approval date - is likely to be in January.  I'd guess at least late January to accommodate the upcoming holidays.

If Plan B doesn't work, the borrower may be forced to puts its fate under Decree Law 2 of 2009 a/k/a the Financial Stability Law ("FSL").   That suggests that a post on the FSL - issued by the Amir during the Majlis AlUmma's well deserved "vacation" - might be in order.

Kuwait Stock Exchange Warns 25 Companies of Potential De-Listing - Sign of Continued Financial Stress in Kuwait

The press reports that 12 November the KSE warned 25 companies that unless they provided  their 3Q09 financial statements by this coming Monday it would suspend trading in their shares.    Earlier this year in May, the KSE gave just such a warning and suspended firms - many of whom are from the distressed "investment firm" sector.  Suspension is lifted when the financials are provided.

The key takeaway from this announcement is that serious distress in the financial sector continues.

Current data on the KSE website differs from the press accounts  Perhaps, an earlier KSE statement was amended.  The latest KSE statement (Arabic only) is here.  (Note:  This news page will be updated on  the next trading day (Sunday) and so after then this link won't be valid).

In the latest statement the KSE's warning is to only 23 firms. 

First, you're probably asking yourself about the discrepancy.  The press reports say 25.  Suq Al Mal  says 23.  I presume the difference are the two firms the KSE suspended this morning:  IFA (investment firm) and Watha'iq (insurance company).  The KSE also suspended the trading of Commercial International Bank Egypt.  As noted above, all three stocks are suspended until the provision of their 3Q09 financial reports.

Second, 6 of the 23 firms are already suspended.  These are probably the stragglers from the 26 the KSE suspended last May. So the potential incremental trading suspensions  are 17 not 23.

Third, let's look at the data a bit closer to see what conclusions we might draw from it  Industry categories are per KSE definitions. The first number followed by a "W" is the number warned.  The second number followed by an "S" are those already suspended:

1. Banks:                       2W 0S
2. Investment Firms:   11W 2S
3. Real Estate:              2W 2S
4. Industrial Firms:       3W 2S
5. Service Firms:          4W 0S
6. Parallel Market:        1W 0S

As noted above the presence on the list of two banks and 11 investment firms (there are 46 investment firms listed on the KSE) indicates the serious distress in the Kuwaiti financial sector  continues  The investment firms have been particularly hard hit losing something on the order of KD 9 billion (US$31.5 billion).  And are currently locked in difficult negotiations with the local banks over debt restructurings as well as the provision of new finance.  Here's a recent article from AlQabas about an upcoming meeting called by the Association of Investment Companies with the Association of Kuwaiti Banks to discuss those two topics.  It's titled "Crisis in Financing (to be discussed) in Meeting between Association of Banks and Investment Companies".

Fourth, the financial statements of all banks and investment firms licensed by the Central Bank of Kuwait ("CBK") are subject to its approval prior to release.  This gives the CBK considerable leverage over these firms.  It can demand changes in the financials.  And it can use the approval process to press for a firm's acquiescence to other of its requests.

Fifth, let's look at the three names on the list which were mentioned in the press accounts:  Commercial Bank of Kuwait, Burgan Bank and Aref (Investment Firm).

One possible interpretation of the delay is that discussions are ongoing between the CBK and these two banks over the level of their provisions (the most likely sticking point between banks and the CBK) and/or as a way of encouraging them to commit to raise new capital.

The inclusion of Aref is a bit of a surprise.  In late September Kuwait Finance House (KFH)  - a 52% or so shareholder in Aref - announced that it was providing facilities so that Aref could reschedule some KD 132 in liabilities.  So Aref should be well placed to finalize its 3Q09 report.  Not clear why they have not. 

Hawkamah Corporate Governance Conference - Important Documents Released

Hawkamah held its Fourth Annual Conference "Building Middle East Markets and Corporate Governance Imperatives" the 9th and 10th at the DIFC, Dubai.   Event was in partnership with the OECD.

As usual, a worthwhile event.

Two solid documents issued:

1. Policy Brief on Improving Corporate Governance of Banks in the Middle East and North Africa Region
   
2. Study on Insolvency Systems in the Middle East and North Africa   

The Study covers 11 jurisdictions:

DIFC, Egypt, Jordan, Kuwait, Lebanon, Oman, Palestine, Qatar, Saudi Arabia, UAE and Yemen.

There are some global comparables on recovery rates (Page 5) based on another study the World Bank "Doing Business 2009".

As you might expect, the MENA region has lower claim recovery rates than other major countries.  Japan at 92.5% , the OECD at 68.6% versus MENA at 29.99%.  Bahrain came in with a respectable 63.2%

Anyway:  A hat tip to Hawkamah.  More evidence of  regional institutions helping develop the GCC/MENA market.

UAE Court Freezes Saad Assets (Maan Al Sanea)

12 November was not a good day for Maan Al Sanea.

Not in the UAE where a court place a protective order on the assets of Saad Group and Saad Trading Contracting and Financial Services in an amount of US$151 million at the request of an unnamed Abu Dhabi Bank.  Article here.   More coverage here and here.

Nor in the USA where the court-appointed liquidator for Saad Investments Company Ltd (Caymans)  ("SICL") made a Chapter 15 filing in Delaware to protect the assets of Saad Investments Finance  (owned by SICL) against third party attachments as per this  report.    

Some details on exposure disclosed so far to Gulf Banks.

Some links to previous SAM posts here and here.

The Investment Dar Kuwait - Standstill Agreement - 12 November Key Date - Creditor Response Uncertain

 

Today is a key date for TID and its advisor, Credit Suisse.

12 November is the deadline already extended once from 15 October for a response from creditors to a proposed standstill agreement.  A standstill would involve creditors voluntarily halting legal action against TID in return from some reciprocal actions and commitments from TID. 

Signs are not encouraging.  Failure to get creditors to agree to the Standstill would complicate matters but would not necessarily be "fatal".  The problem is the situation is complicated enough already.

While it's long past the end of the day in Kuwait, the lack of an announcement is not necessarily confirmation that creditors have not agreed.  TID is likely to have creditors in other jurisdictions and votes may still be coming in.  And if history is any guide, there will be ambiguous answers or contingencies placed on "yes" votes.  So some "hanging chads" to be resolved.

However, since votes like this don't take place on a single day, it's probably safe to assume that there wasn't a landslide of yes votes.   Otherwise, TID would have announced victory already. 

If asked to, I'd guess that the standstill is not likely to be accepted.  And if it's accepted, it will be by less than the number necessary to ensure protection from legal actions by dissident banks.

As you'll recall that in an earlier post, I noted the reported reluctance by certain participants in wakala transactions with TID to sign the standstill, preferring instead to rely on the "trust nature" of their transactions to secure repayment outside any debt restructuring.  And some speculation on the rumored resignation of an Adeem and Investment Dar Bank Bahrain director and connections with the TID restructuring.

TID's restructuring has been complicated by the fact that unlike Global Investment House ("GIH"), it has not issued any financial statements since its 30 September 2008 interim report.   Bankers don't like uncertainty.

As well unlike GIH, the Central Bank of Kuwait has appointed a temporary monitor at TID apparently at the request of creditors to oversee the completion of financials and the restructuring process  Perhaps a sign of the level of uncertainty of the creditor group.

A bit of background regarding the negotiations with creditors regarding some KD 1 billion (US$3.5 billion) in outstanding debt via announcements:

1. December 2008:  discussions with Commercial Bank of Kuwait to lead refinancing.  These do not succeed.
   
2. 25 January 2009:  announcement of engagement of Credit Suisse as a financial advisor.
3. 12 February 2009:  announcement that Credit Suisse will assist in developing a financial restructuring plan.
4. 1 April 2009:  KSE suspends trading in TID.
   
5. 12 May 2009:  TID defaults on US$100 million Sukuk
   
6. 28 May 2009:  announcement of formation of Creditors "Steering Committee" and upcoming meeting with creditors
7. 10 June 2009:  progress announcement.  (AA:  Note creditors have hired Morgan Stanley as their advisor).
   
8. 7 September 2009:  CBK appoints monitor at TID. (AA: The language used reflects the apparent concern of creditors.  There is of course always a break down in relations between banks and debtors when they advise they have difficulty paying or might have difficulty.  In effect the creditors have asked the CBK to look over the shoulder of TID's existing management.  A theme we'll see repeated with the Chief Restructuring Officer).
   
9. 26 September 2009:  announcement that "Creditors Co-Ordinating Committee" and TID had agreed a standstill agreement which was being submitted to all creditors for ratification with a deadline of 15 October. (AA:  Note the change from a "Steering Committee" to a "Co-Ordinating Committee".  That sounds like the members of the committee decided they  want to de-emphasize responsibility.  So they've taken their hands off the steering wheel and are now co-ordinating not leading).
   
10. 4 October 2009:  announcement of appointment of Chief Restructuring Officer, fulfilling a TID commitment under the proposed Standstill Agreement.  (AA: The creditors request for the appointment of a CRO is another indication of creditors' concerns.  It is not a vote of confidence in favor of existing management.)
    
11. 12 October 2009:  announcement of the extension of the deadline until 12 November.  "The intention is that the revised timeline will give a greater opportunity for TID’s banks and investors to actively participate in the standstill process. As such; the new date by when TID’s banks and investors can accede to the Standstill Agreement is 12 November."  (AA:  In other words not enough creditors signed up by 12 October and it was clear they wouldn't by 15 October. So the deadline was extended.  But their language sounds more eloquent than mine).

Failure to achieve the standstill need not be fatal.  But TID and CS will have to move quickly to create some forward momentum that will keep creditors engaged in discussions rather than court rooms.  A task as difficult as the proverbial herding of cats.

I'll be following this and update as more news becomes available.

UAE Bankers' Bonuses to Drop 40%?

The words bankers most dread - lower bonuses.

It's worse than hearing about a bad loan.

Much worse.

Kuwait Chamber of Commerce and Industry - Golden Jubiliee

Congratulations to the KCCI on its 50th Anniversary.

Something apparently all can agree on: here and here.

Maybe some of the pioneers mentioned in the articles could nip over to the Majlis AlUmma and give a few pointers.

Qatar Airways Wins Best Business Class Award - 16th World Travel Awards

Congratulations to Qataria for winning the award for the second consecutive year for best business class.

One comment:  If the Kawkab Al-Sharq songs you're offering as part of your in-flight entertainment are no longer than 8 minutes, you've missed the best ones.

Global MENA Financial Assets Ltd (GMFA) /Global Investment House Kuwait - Review of GMFA's 31 March 2009 Financials

Following up on my earlier post, today we'll take a more in depth look at GMFA's Audited Financials for the Fiscal Year Ending 31 March 2009  (the "Report"). 

As in my last post, I will again let the Company speak for itself.  These verbatim quotes will be enclosed in quotation marks.  Any observations or tafsir I have will be in parentheses in italics and preceded by AA.

First, let's turn to one of the topics that has caught the attention of more than one observer:  funds placement transactions between GIH and GMFA.  As noted GIH owns 29.99% of the shares of GMFA and has representation on GMFA's Board of Directors.

From the Report, we learn the following:

1. Note 3 (e) Page 58:  "The total maximum lending to Global under the Murabaha contracts peaked at US$140 million and subsequently reduced to $47,765,800 at 31 March 2009 excluding wakala contracts."  (AA:  Using US$500 million as a rough estimate of GMFA's total assets, that would mean placements with GIH by GMFA were 28% of assets.  If we remove the US$250 million represented by the investment portfolio, GMFA's liquid assets were approximately US$250 million.  Thus, the placements with GIH appear to have been roughly 56% of GMFA's liquid assets using our admittedly crude analytical technique).
2. Directors' Report "Corporate Governance" Section Page 39: "Three murabaha transactions amounting to US$88 million were repaid early by Global on 15, 17 and 22 December 2008 respectively and monies were placed with the Company’s bankers, HSBC Bank plc."  (AA:  The full significance of the term "early" is not explained.  Does this mean prior to maturity?)
   
3. GIH Financials Scope Limitation Section in GIH's auditors report on GIH's interim financial statements for the first nine months of 2009:  "Furthermore on 15 December 2008 the Parent Company defaulted on the repayment of a USD 200 million  (KD 55 million) syndicated facility and subsequently suspended any principal repayments towards the banks and financial institutions falling due after the default date."
4. GMFA's Report, Footnote 11, Subsequent Events Pages 64-65: "On 4 June 2009, Global and its subsidiaries repaid US$9.6 million by way of partial repayment of the total principal amount owing under murabahas reducing the Group’s exposure to US$38.1 million.
   Towards the latter part of 2008, the Group started assessing the feasibility of acquiring two assets from Global. In June 2009, the Company, through one of its Subsidiaries, acquired a minority holding in Twenty Third Project Management Company W.L.L. and consequently an indirect interest of five per cent. in Dar Al Tamleek Co. (also known as Saudi Housing Finance Company), a mortgage finance company incorporated and based in the Kingdom of Saudi Arabia offering Shari’ah compliant mortgage financing products, from Global. The consideration for the acquisition, US$4.1 million (KD1,200,210) was set off against a corresponding amount owing under the murabaha contracts reducing the Company’s exposure to US$34.0 million.          
   The Company remains in negotiations with Global regarding the possible acquisition of a further asset, which is intended to further reduce the amount owed by Global and its subsidiaries to the Group to nil. The Company will inform shareholders, on behalf of the Group, in respect of any material developments with respect to the possible acquisition of this asset, but there can be no certainty that an agreement can be reached to acquire this asset, in which case, the Group’s exposure to Global and its subsidiaries will remain outstanding at US$34.0 million. At the balance sheet date, the Directors of the Company resolved to impair the Global murabaha by 25 per cent. or US$8.5 million, based on the principal amount outstanding US$34.0 million."

Second, some other interesting items from GMFA's Report.

1. Management Fee Expense and Payments: As per the Report Footnote 3 (a) Page 57: "The management fees expensed for the period amounted to US$6,878,143. The management fees outstanding at 31 March 2009 were US$2,175,596."  (AA:  This means that GMFA has paid the difference in cash to the Investment Manager, Global Capital Management Ltd, a subsidiary of GIH, = US$4.702,547).
2.  Management Fee Calculation:  As per the Report also Footnote 3 (a) Page 57: "The Investment Manager is entitled to a management fee, payable quarterly in arrears, at an annual rate of 2 per cent. of the Net Asset Value of the Company.  The Investment Manager is a related party of the Company and is a wholly owned subsidiary of Global."  (AA:  The Net Asset Value is equal to assets minus liabilities.  Therefore, NAV includes GMFA's cash and deposit holdings plus the Islamic finance transactions. As at 31 March 2009, the Report shows that these assets totaled some US$226.3 million or roughly 51.1% of GMFA's total assets of US$442.3 million.  As well, as per Note 4 on Page 59, US$21.3 million of GMFA's US$214.5 million  in carrying value for its Investment Portfolio was comprised of a GIH payment obligation - the Put Option Derivative cancellation fee.  At current short term US Dollar interest rates the Investment Manager has a challenging task in finding earning opportunities in the deposit market in excess of its Management Fee).
3. Intercompany Loan Repayment:   Again as per the Report Footnote 3 (a) page 57: "The initial portfolio was transferred to the Company through an intra-group loan facility extended by Global, which was repaid in December 2008".  (AA:  I didn't see the loan amount in the Report.  However, it does appear in) GMFA's 30 September 2008 Interim Report on page 40 in Footnote 8: "Since inception of the Company, an intra-group loan facility has been provided between Global Investment House, the Company and its Subsidiaries. All intra-group loans between the Company and its Subsidiaries have been eliminated upon consolidation. The loan of US$8,949,303 outstanding at 30 September 2008, is payable to Global Investment House. The loan is non-interest bearing and repayable on demand."
4. Legal and Accounting Fees:   As per the Directors' Report Page 38:  "During the period the Company incurred fees of US$432,984 comprising legal and accounting fees in relation to the work undertaken by the Murabaha Committee".  (AA:  It is unclear to me whether this is (a)  for the period from late December when the Board became aware of the transactions through 31 March 2009 or (b) from the date of the formation of the Murabaha Directors Committee on 2 March 2009).
   

 Link to earlier post.

Falcon Market Poised to Soar

By now many of you are probably "long" sand based on my earlier post.

Now is your chance to get in on ground floor in the falcon market.

The Saudi Gazette reports that Sa'eed Al-Huweiti recently sold a bird he found in the Qais Mountains for SAR 299,000 (US$79,733).

As Sa'eed said, "The price for falcons seems to still be on the rise"

Tell your broker you heard it from Suq al Mal.

(Picture copyright Saudi Gazette)

ADCB to Disclose Executive Salaries?

There's a report in The National (Abu Dhabi) that Abu Dhabi Commerical Bank ("ADCB") is in the early stages of considering to:

1. disclose the remuneration of key executives in its financials
   
2. submit executive remuneration policies to a shareholder vote
   

It should be noted that neither step has been finally approved.

If ADCB implements the compensation disclosure, it will be the first regional bank to do so. 

With respect to compensation policies, there already are some limited requirements for shareholder approval- at least in Bahrain - of stock option plans.  It sounds as though ADCB's plan is broader.

By way of comparison, in the USA, shareholders vote on generic descriptions of plans rather than on individual compensation for members of senior management.  And usually the approval is at a very high level of principles.

The topic of disclosure of senior management salaries was raised  in 2004 or 2005  by the Central Bank of Bahrain as part of extensive enhancements it proposed to make to its corporate governance regulations.   Most of which were finally accepted in the revised regulation.  Only one point was fiercely resisted by local banks - disclosure of individual key officers' salaries.

I once asked the CE of a bank there why there had been this opposition. 

His response was:  This isn't New York.   In New York, a senior officer of Citibank would be unknown to 99% of the people of the city.  And  fewer would know what that officer made even if they knew who he was.  Here it would be completely different, not only would everyone know who I am but also what I make.  That could be a big problem for me.  Not just security.  But having people ask for money.

Global MENA Financial Assets Ltd (GMFA) /Global Investment House Kuwait

GMFA is a closed-end investment company incorporated in Guernsey on 2 June 2008.  It is listed on  the London Stock Exchange.   LSE link here.

GMFA was formed with the intent of investing in financial assets in the MENA region (including Turkey)

Global Investment House Kuwait ("GIH")  holds 29.99% of GMFA.   GIH is in the midst of major debt restructuring - which hopefully will be the subject of another post in the not too distant future.

Other major shareholders, aggregating 42% of the total, are detailed on page 41 in the Annual Report mentioned below.

Global Capital Management Limited (“GCM”), a subsidiary of GIH, is the Investment Manager for GMFA.

I've just seen GMFA's audited Annual Report and Consolidated Financial Statements for the period 2 June 2008 (inception) through 31 March 2009 (the "Report").

These are their first audited financials and so are of interest, especially given the current GIH debt negotiations and the links between the two companies outlined above.

Rather than interpreting the Report, I'm just going to quote verbatim from it to let the Company speak for itself.  I think you'll find this informative even though you'll have to spend a bit of time reading.  Plunge in.  I think you'll find it well worth your time. 

In a few places I have added some comments in italics preceded by "AA" to identify them as mine and distinguish them from the text of the Report.  These are references to other portions of the Report or to information on the LSE website.  Because the LSE website uses pop-up boxes, I can't provide links.

I would strongly encourage you to read the entire Report to hear all that the Company and its Directors have to say.

From the Chairman's Statement

(1) Islamic Money Market Instruments (Pages 5-6)

"As at 31 March 2009, the Company held cash, deposited with HSBC, Citibank and Standard Chartered Bank of US$145.1 million and Islamic money market instruments in the form of agency agreements (wakalas) and murabahas with various entities: Global and its subsidiaries, two Kuwaiti companies and one Jordanian company, with an aggregate face value, gross of impairments, of US$107.2 million (plus profit).

In the unaudited non-statutory interim accounts as at 30 September 2008, cash deposits of US$273.8 million were shown. Due to a misunderstanding between the Company’s service providers, money market instruments amounting to US$140.0 million, which had been acquired in August 2008 with Global and its subsidiaries, were recorded as cash at Bank of New York and shown in the accounts as such, whereas the wakalas with two Kuwaiti companies of US$74.9 million were shown as foreign currency cash. Although this was a wrong description, it did not affect the net asset value of the Company.

The Board was not aware that the Company and its subsidiaries (the “Group”) had entered into Islamic money market instruments until late December 2008. Following this discovery, the Board engaged its Auditors to review the Group’s accounting entries so that the Board could be satisfied that the Group’s accounting records accurately reflected the Group’s assets. In addition, the Independent Directors gave instructions to the Investment Manager to seek the immediate repayment of monies invested in murabaha arrangements, to terminate all the murabaha arrangements, and not to enter into any further murabaha arrangements or to agree revised terms without the Independent Directors’ approval.

At this time, the Board also learned that the Company, through its wholly-owned subsidiary, FAB, had entered into a further three Islamic money market instruments with Global, a substantial shareholder of the Company and the parent company of the Investment Manager, and its subsidiaries, for an aggregate principal amount of $47.8 million (plus profit). Subsequently, this amount was reduced to US$34 million. The Board also learnt that the Company, through its wholly-owned subsidiary, FAB, had entered into two Islamic money market instruments with two Kuwaiti companies (other than Global) in August 2008, which were later renewed in November and December 2008, on which Global acted as Islamic financing agent, for a total principal amount of US$74.9 million (plus profit) and an Islamic money market instrument was entered into with a Jordanian company in December 2008 for a total principal amount of JD3.0 million (US$4.2 million) (plus profit).

Due to the conflicts of interest existing between the Company, its Investment Manager and two of its directors (by virtue of their position within Global), a committee comprising the  independent directors of the Company was established at the beginning of March 2009 to deal with all matters and business relating to and arising out of the entry into of all of the Islamic money market instruments (the “Murabaha Committee”). The Murabaha Committee, comprising myself and John Hawkins (joined by Terrence Allen and Kishore Dash when they became directors of the Company in April 2009 and July 2009, respectively), has been working with the Investment Manager and the Company’s legal advisers, Ashurst LLP, on the recovery of the amounts invested in the Islamic money market instruments."

(2) Corporate Governance (Page  8) 

"You will see from the Corporate Governance Report that a number of issues have arisen during the year.  The directors believe that the issues have been satisfactorily addressed and that the appropriate internal controls and systems are now in place. There is an issue as to whether or not murabahas were permitted investments but the Board has clarified the position by restricting the holding of cash to deposits with banks of high credit standing and with strict exposure limits.  The Board hopes that it will succeed in negotiating a satisfactory recovery of the monies invested in these murabahas. The Board recognises the importance of the continued co-operation of the Investment Manager in attempting to recover the outstanding monies owed under these arrangements."
(AA:  The Directors' Report on Corporate Governance is on pages 39-40.  The Directors' Report also contains discussions of other matters relevant to corporate governance, various board committees, internal controls, special committees formed by the Independent Directors, etc).
  

From the Directors' Report

(1) The Put Option (Page 38-39)  

 "At Admission, the Company acquired six unlisted companies from Global comprising part of the initial investment portfolio at a cost of US$152 million. Global granted the Company a put option on these unlisted assets at an aggregate strike price of their acquisition cost, such option to be exercised by serving notice on Global during the period beginning on the first anniversary of Admission and the close of business on the thirtieth day thereafter.

The Directors have considered carefully whether or not to exercise the put option, balancing the attractiveness of the investment portfolio against the deteriorating economic outlook caused by the dramatic events in global capital markets, the current financial position of Global and the Company’s existing outstanding murabaha with Global.

                                                                                         
As announced on 17 July 2009, following discussions with Global, the Directors agreed, subject to all necessary regulatory requirements, to terminate the put option agreement for a payment of US$21.259 million from Global. The Board believes there is significant value which can be derived in time from these six investments and indeed the value of two of the investments transferred has increased over the period from Admission to the first anniversary of Admission. Thus whilst the investment portfolio has, as a whole, continued to perform well, the valuation of four of the six investments concerned has been impacted by the fall in markets. The payment to the Company of US$21.259 million represents the difference between the value of these four investments as at 30 June 2009 and their acquisition cost.

 
The Directors propose to distribute this cash, which is expected to be received on or before 15 September 2009, by way of a special dividend to shareholders in due course."                                        

(AA:  As per information at the LSE website link provided above, at the shareholders' EGM on 29 October 2009, roughly 82% of shares present voted for the Board's proposal to cancel the put option against the US$21.259 payment.  Shareholders representing roughly 30% of GMFA's total shares were present for the vote.  In effect then the motion was carried by approximately 25% of GMFA's shareholders.  I'd also note that it is common that many shareholders do not show up for an AGM or EGM, even when very important matters are on the agenda). 
          
(2) The Investment Manager (Page 40-41)

"Having considered all the issues, the Directors consider that in the circumstances the continued appointment of the Investment Manager on the terms agreed continues to be in the best interest of the shareholders and the Company. In reaching this conclusion, the Directors have considered a number of factors, including the views of Global and a number of the Company’s other shareholders (see the section below entitled “Relations with Shareholders”), as well as the options available to the Company.

The determining factors were the Investment Manager’s relationship with the unlisted investments, the regional investor base and the support for the Investment Manager expressed by a number of shareholders."

                                                                                                   

DFSA to Tighten Corporate Governance Standards

Abu Dhabi's The National reports on DFSA plans to tighten corporate governance.

Key elements of the proposed reforms are:

1. Mandatory separation of role of Chairman from CEO
2. Abolition of share payment for non executive directors
3. Mandatory number of non-executive directors on audit, remuneration, and nomination committees

The full article is here.

Some comments:

1. I hope the reference to non executive directors is really to independent directors.   A non-executive director could be a major shareholder or the representative of a major shareholder.  An independent director as that term is understood elsewhere, e.g., the UK or Bahrain is someone with sufficient expertise and a degree of independence both from management and the major shareholders so that he or she will truly look out for the interests of all stakeholders of the firm.
2. The comment about the various board committees seems to imply that current regulations allow executive directors to sit on those committees.  An executive director is one involved in the management of the firm.  It is hard to think of a situation where any executive directors should be a member of the audit committee of the board of directors. The audit committee is supposed to be checking very carefully that the management of the firm is applying  appropriate accounting principles and standards as the basis for its financials on a consistent basis and that any estimates involved in the preparation of the financials are well founded and documented.  That the controls in the company are adequate to prevent honest errors or fraud.  And that both the internal audit function and external auditors are independent of management, have assigned competent staff to do the audit and are discharging those responsibilities fully and professionally.  Similarly, it would not be a good idea to have an executive director on the remuneration committee where he might set the salaries of other directors and thus give them an incentive to support his actions as a member of management.  Or on the nomination committee where he might pick a friend to be a director.  There is a fundamental conflict of interest for an executive director to sit on any of these committees.
   
3. While this is a good step, it is very important to understand that regulations are not a panacea. Like the traffic signal at the corner or the posted speed limit, corporate governance reuglations are only effective if people obey them.  So they are a necessary first step.   But, if they are ignored, no matter how elaborate and well constructed they are, they will not work.   Enron Corporation had an extensive code of ethics  - some 65 pages.  That document proved ineffective.  Not for want of not being there.  Rather because the people who were supposed to implement it, didn't.  More on Enron here.  Both Enron Corporation and Hollinger  International had an impressive list of independent directors.  And elaborate procedures to vet related party transactions. Reading the Breeden Report on Hollinger will illustrate better than I can the critical importance of people in making whatever process a firm has work.  Sometimes group dynamics - the desire to avoid confrontation, the fear of appearing ill-informed - cause even the most honest to make bad decisions.  Corporate governance like religion is in the heart not on a piece of paper.  Paper provides a guide, but it's no substitute for the heart.
4. People from the region should not be overawed by experts from the West preaching their particular mathhab of corporate governance.  Enron, BCCI, Madoff, LTCM and many more all occurred in these self-proclaimed exemplars of world class standards and regulation.  Though I suppose the counterargument is that the doctrine is sound but was not followed, or, perhaps more precisely not enforced by the regulators.
5. Finally, if any banker out there thinks that corporate governance code or set of regulations is going to protect him from someone determined to cheat him, I'd refer him or her to my traffic light example above.  Traffic laws have not proven to be a "grail" holy or otherwise in preventing violations or deaths.