Cover Story: Revisiting interest schemes

TheEdge Thu, Oct 27, 2022 02:10pm - 1 year View Original


AGRICULTURE-related interest schemes have been getting bad publicity as media reports of possible scams perpetrated on investors in such schemes emerged. It has not helped that a number of such schemes have failed.

An investor in a plantation of rare trees used in the making of incense and perfumes tells The Edge that he had invested more than RM100,000 in the project by buying a couple of hundred of these trees in a Southeast Asian country in 2012. He had attended a talk by the promoters in a hotel in Kuala Lumpur after being approached on social media.

According to the police report he had made, he was promised guaranteed returns of more than 100% by the seventh year. In the years after he made the investment, however, the investor did not receive any news about the trees. By the seventh year, when his trees would have matured, the investor reached out to the marketing agent and was told that most of his trees had to be replanted because of bad weather.

He never saw any of the promised returns.

Investors in an oil palm plantation scheme in Kelantan may be considered a little luckier.

Investors in the Golden Palm Growers Scheme (GPGS) managed to get a court order to have the scheme wound up in 2019. Lim Peng Keo of Deloitte Corporate Solutions Sdn Bhd was appointed as liquidator.

When contacted, Khoo Siew Kiat, restructuring services leader of Deloitte Malaysia, says the scheme’s asset comprising 4,565ha of plantation land in Gua Musang, Kelantan, is still available for sale and the liquidator is still looking for a buyer.

“The investors shall wait until the assets of the scheme are disposed of before the liquidator makes any distribution of net sale proceeds to the investors. Once the assets are sold, the liquidator will inform each investor of the claim process. This includes the submission of a formal claim by the investor to the liquidator,” says Khoo, when asked about the recovery process for investors in the scheme.

The GPGS was launched in 2010 as a 23-year scheme ending in 2033.

Golden Palm Growers Bhd (GPGB), the scheme’s management company, had promised scheme investors a guaranteed net yield of at least 6% yearly and discretionary bonus during the first six years of the scheme. From the seventh year, investors were supposed to be entitled to a prorated share of profits each year, with a minimum return based on average crude palm oil prices.

In the first phase of the scheme, investors put in a total of RM218.55 million in GPGS and received a 6% guaranteed net yield for the first six years, totalling RM78.48 million, for their investment.

In 2017, however, at the onset of the second phase — when investors were supposed to receive a proportionate return from the plantation’s net profit and a minimum return based on average CPO prices — GPGB proposed an early termination of the scheme by selling the plantation.

This was agreed to by most of the investors. The company was given a year to look for a buyer for the Kelantan plantation.

An extension of time to sell the assets in 2019 was opposed by investors who now claimed that the first phase of the scheme was a Ponzi scheme. They then filed an application to intervene in GPGB’s application to wind up the scheme.

The investors contended that if the scheme was closed based on GPGB’s application — that it was a valid and not an illegal scheme — the investors would get nothing in return.

Eventually, the High Court ordered GPGB and GPGS to pay monies due and owing, plus guaranteed yields, to the investors, and ordered for the scheme to be wound up.

It is not clear why the scheme failed and whether there is any truth to the investors’ claims.

Deloitte says it is unable to comment on these questions as the liquidator’s role was to wind up the scheme and it did not undertake any investigative work.

According to a press report in 2017, GPGB’s notice to investors said it faced a host of challenges — floods in Kelantan that were followed by drought, labour shortage, attacks by animals, lack of skilled labour and poor infrastructure — that delayed its path to profitability.

Some will recall another oil palm plantation scheme that failed — the Country Heights Growers Scheme. The country’s first oil palm plantation investment scheme, which debuted in 2007, did manage, however, to repay investors a total of RM319 million compared with RM215.5 million in total funds raised.

The Companies Commission of Malaysia (SSM), which oversees interest schemes, did not respond to enquiries from The Edge.

An industry player familiar with plantation schemes says it is typical for agricultural ventures to incur high capital costs in the early years. Then, there is the waiting period for the trees to mature and yield income.

“Also, some investment schemes allow for redemption and promise high returns in the early years to attract investors. There are also high commission rates to sales agents, which add to the outflow. [The success of the investment scheme] really depends on its business model,” he says.

Indeed, not all interest schemes fail; some have done well.

Choo Chin Thye, managing partner at law firm CT Choo & Co, points to the ICT Zone Ventures Scheme, which raised working capital via two interest schemes in 2011 and 2020 and went on to list on Bursa Malaysia on the LEAP Market.

ICT Zone Asia Bhd, listed in 2020, is an ICT solutions provider.

Choo is also a director in City Coin Technology Bhd, which manages the Laundrybar Investment Scheme launched in 2020 to raise funds from the public to fund the company’s chain of self-service laundrettes.

The scheme is governed under the Interest Scheme Act 2016, which was enforced on Jan 31, 2017.

Previously, interest schemes were governed by Part IV of Division 5 of the Companies Act 1965. The law then acted primarily to protect investors “who have invested beyond shares or debentures of a company by regulating the public offering of interests — other than shares or debentures”, according to the Interest Scheme Blueprint 2020-2024, published by SSM.

“However, more often than not, promoters responded to the law by designing increasingly more sophisticated schemes in [an] attempt to circumvent the law. Hence, it is important for the law to develop accordingly to provide greater protection to the general public,” the document adds.

Hence the need for the Interest Scheme Act. “Our general view is that the Interest Scheme Act 2016, which is now a standalone act, is more specific and has more comprehensive provisions in governing interest schemes,” says Khoo of Deloitte.

Choo says the act offers investors several layers of protection. “First, the onboarding of new interest schemes undergoes a rigorous set of qualitative and quantitative criteria set by SSM. Second, all interest schemes require a trust company to monitor aspects of the interest scheme and the enterprise activities as set out in the trust deed.”

All investment monies are deposited into a trust account to be released based on the trust deed and the trustee is obliged to report any issues to SSM.

Choo adds: “Third, interest schemes are required to issue a prospectus every six months for the tenure of the scheme [that] contains the latest audited financial affairs in an accountants report and an operational audit by an independent consultant. The prospectus sets out risk factors for the underlying enterprise of an interest scheme.”

Fourth, all assets acquired by the interest scheme must be ring-fenced and any encumbrances must receive the consent of the trustee in consultation with SSM, which is the regulator of the interest scheme industry.

In addition, there are sub-categories of reporting and disclosures specified in the regulations that serve as further safeguards, he says.

The act also improved on the definition of “interest” to specifically exclude any capital market product as defined in Section 2 of the Capital Markets and Services Act 2007. It also excludes any interest in partnerships, as well as products by licensees and issuers regulated under the Financial Services Act 2013 and the Islamic Financial Services Act 2013, as well as development financial institutions prescribed under the Development Financial Institutions Act 2002.

According to the SSM’s blueprint, the old law previously divided interest schemes into four categories: (a) profit, assets or realisation of a business; (b) common enterprise with expectation of profits, rent or interest; (c) time-sharing scheme; and (d) investment contract.

Now, Section 2 of the Interest Schemes Act 2016, defines “interest” as any interest or right to participate, whether in Malaysia or elsewhere, in any (a) investment scheme; (b) time-sharing scheme; or (c) recreational membership scheme, whether or not the interest or right is evidenced by a formal document or relates to a physical asset.

Choo, who is also founder of the Federation of Interest Schemes Operators Malaysia Bhd, says the company is working closely with SSM to increase the relevance of interest schemes as an alternative form of financing for Malaysian companies, especially small and medium enterprises.

 

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