Note: This article was updated on January 31, 2020 to correct some errors in dates in the original article.
By Mak Yuen Teen
Sembcorp Industries (SCI) has been in the news regarding the fines and claims resulting from its pollution violations in China. Following apparent queries from the Business Times, it released an announcement on January 17 titled, rather uninformatively, “Statement by Sembcorp Industries Ltd”. On January 20, in response to a Business Times commentary, it issued another announcement also titled “Statement by Sembcorp Industries Ltd”. These followed an announcement on September 28, 2018 on the same subject titled…”Statement by Sembcorp Industries Ltd”.
It is interesting that while the company’s other announcements generally carry titles which give a clear indication of the subject matter, in this case, it had chosen a plain vanilla title for its announcements. A shareholder who relies on the title of an announcement in deciding whether to read it could well have missed these announcements.
Having read the statement by SCI on January 20, 2019 responding to Tay Peck Gek’s Business Times commentary “Sembcorp’s disclosure of China unit’s troubles fall short” on the same day; the company’s earlier statement on January 17 providing an update on the legal proceedings relating to pollution violations at its joint venture in China; and its earlier disclosures on this matter, I believe that SCI has indeed fallen short in its disclosure obligations.
There are issues relating to the completeness, accuracy, timeliness and manner of disclosure by SCI.
Let me start with completeness and accuracy.
SCI did not mention the name of the joint venture involved or its stake, including in the two recent statements, results announcements and last two annual reports. According to the Business Times report, the joint venture is Sembcorp Nanjing SUIWU (SNS). An online search found that in 2003, SCI increased its stake from 55 percent to 75 percent in a joint venture company called Nanjing SembCorp SUIWU through its wholly-owned subsidiary Sembcorp Utilities (SU). SCI’s share of the project cost then was to increase from US$5.5 million to US$7.5 million, based on the estimated total investment of US$10 million. Annual reports showed that the stake was further increased to 78.3% in 2006 and then to 95% in 2007. In SCI’s 2016 annual report, SNS was listed as being 95%-owned under SU. However, in SCI’s 2017 and 2018 annual reports – which coincided with the revelations of the problems in SNS – SNS was no longer listed. It is unclear why this is so. Did SNS cease being a key joint venture or subsidiary?
SCI’s January 17 announcement attributed the pollution violations to the “illegal and isolated activities of a few employees of the joint venture company for a period prior to early 2017”. SCI said that the employees involved “were charged in their individual capacities and tried and sentenced by the courts”. It also said that the incident was thoroughly investigated by management.
No information was provided on the period during which the violations occurred, bearing in mind that SCI’s investment in SNS goes back to at least the early 2000s. How did the actions of a “few employees” cause a nearly S$100 million loss to the company? Did these employees include senior management of SNS? What did the court determine in terms of responsibility? Did it find that senior management of SNS were culpable and imposed corporate liability on SNS, hence resulting in such a large fine and settlement? Were any senior management held accountable by SCI?
In its January 17 statement, SCI said that its “share of fines and cash settlement for both the criminal and civil claims amount to a total of S$54 million, which has been fully provided for as at September 30, 2018. No further financial impact is expected.” It also said that “the joint venture company will be committing to new investments worth approximately S$45 million over the next four years to develop projects and initiatives to support environmental protection in the country”.
SCI did not offer much information about these “new investments” or “projects and initiatives”, but it seems that they are part of the penalties imposed or settlement agreement. In certain countries, companies may be required to set aside funds to support various projects and initiatives when they have committed certain offences. This is likely the case here. The S$45 million “new investments” are therefore not really investments as such, as they will likely have zero financial return. In effect, the total loss is S$99 million, now made up of fines, claims and so-called “new investments”. This amount is close to the maximum potential amount of S$100 million for “fines and claims” which the company first alluded to in its September 28, 2018 announcement.
There are also questions about SCI’s sustainability reporting in light of the pollution violations. In its “2018 Performance Data and Commentary” under its Sustainability link on its website, it disclosed its performance on various environmental indicators based on GRI standards. Under “Local environmental protection”, “Environment: Effluents and waste”, it shows “water discharge by destination” for each year from 2016 to 2018. It included the following statement: “We discharge our treated wastewater in compliance with all of the local and national statutory laws and regulations.” Is this statement accurate in light of the company’s wastewater-related pollution violations in China going back to before early 2017?
On the question of timeliness and manner of disclosure, SCI seems to take the position that making provisions and brief note disclosures in its financial statements satisfy its continuous disclosure obligations. Let’s consider how the company actually disclosed.
The first “disclosure” made by the company was in its 4Q and full year results announcement for 2017 on February 23, 2018, where it disclosed a $25.8 million “provision for fines and claims” under general and administrative expenses in its notes to the consolidated income statement. An accompanying footnote states: “The provision was for fines and claims at an overseas water business arising from an alleged environmental offence for discharge of off-specification wastewater. The amount was estimated based on available information at the date of release of the Group’s FY17 results.”
Would shareholders have noticed the disclosures on page 4 of its 34-page results announcement? This was not mentioned in the press release and only further disclosed as small footnotes on slides 11 and 50 (in Appendix) of its 67-slide results presentation. The provision for fines and claims was then mentioned in several places in the FY2017 annual report released on March 29, 2018.
When did SCI come to know of the incident and the potential fines and claims? If it was before the results announcement, why did it not disclose as soon as it became aware?
SCI only made a separate announcement of this incident on September 28, 2018, when it mentioned that it had made a provision of S$25.4 million in its FY2017 financial statements and disclosed for the first time that its maximum exposure could be as much as S$100 million.
In its 3Q 2018 results for the period ending September 30, 2018 and released on November 2, 2018, it disclosed on page 4 of its 38-page results announcement an additional provision for fines of S$25 million. A footnote on the same page states: “In 3Q18, additional provisions for fines was made relating to an alleged discharge of off-specification wastewater at an overseas water business. Together with the S$25.4 million provision made in 4Q17, the total provision made amounts to S$50.4 million as at September 30, 2018. The amount was estimated based on available information at the date of release of the Group’s 3Q18 results.” Disclosures in the results presentation slides and the annual report for that quarter and year were similar to what was done in 2017.
Up till March 29, 2019, when its 2018 annual report was released, it had only provided for fines and claims amounting to S$50.4 million. While it did say that the actual amount of fines and claims depends on the outcome of proceedings which are still ongoing, there was no further mention of the potential exposure of up to S$100 million.
It was only in its January 17, 2020 statement that SCI mentioned that its share of the fines and claims amounted to S$54 million, “which has been fully provided for as at September 30, 2019” – and the amount of “new investments” of S$45 million that it has to incur as part of the settlement. Based on its 1Q2019, HY2019 and 3Q2019 results announcements, there does not appear to be any additional provision for fines and claims from the total amount of S$50.4 million that had been provided up to December 31, 2018.
In its January 20, 2020 statement, it said that it “is of the view that there has been no material development since its previous disclosures and an update would be made to the market when the proceedings are definitively concluded.” However, prior to its January 17, 2020 statement, the provisions for fines and claims only amounted to S$50.4 million and there was no disclosure about the S$45 million “new investments” required.
How can shareholders be expected to infer that the final exposure would be about S$99 million when the company had disclosed provisions for only S$50.4 million (based on its financial statements up till September 30, 2019) and said nothing further about the potential total exposure of S$100 million alluded to in 2018? When did SCI become aware of the S$45 million “new investments” under the settlement?
Its January 20, 2020 statement on the one hand said that there are no further claims pending as suggested by the Business Times article, but also said that all legal proceedings will only be deemed to be definitively concluded in February 2020 when the agreement is finalised, following a period of public consultation. However, the company had in December 2019 reached a civil settlement. The company seems to be justifying the delay in its disclosure on the total exposure of S$99 million because the agreement had not being finalized, but yet is certain there are no additional claims. Regardless, shouldn’t it have made an announcement and disclosed the terms of the civil settlement in December 2019, even if this is pending finalisation in February 2020?
Investors should not have to stitch together announcements and disclosures like a quilt to figure the full picture and the company made this even more challenging by using announcement titles that gave no indication about their contents.
Throughout the course of this entire episode going back to 2017, SCI has also been making regular share repurchases on the market. Could the company be seen to be sending the wrong signal about the value of its shares when it was in possession of adverse news which had not been adequately disclosed? Were the company’s interests served through these share repurchases given the information that was not made public?
