> Misuse of EPF Funds by ValueCap

State investment company Valuecap Sdn Bhd owes its three shareholders RM5.1 billion, which is due to be repaid in February 2009.

This debt, in the form of interest-bearing unsecured bonds, raises questions over plans for the Employees Provident Fund to lend RM5 billion to Valuecap to invest in the stock market.

In March 2003, Valuecap borrowed RM5.1 billion from shareholders Khazanah, Kumpulan Wang Amanah Pencen and Permodalan Nasional Bhd to invest in the stock market. At the time, world stock markets were bracing for a looming war in Iraq which followed on the September 2001 attacks on the US.

Valuecap’s bonds were due to be repaid in February 2006, but the company was given another three years to this coming February. At the end of 2006, the three shareholders each held RM1.7 billion in these bonds, according to documents obtained by The Malaysian Insider.

Since these debt instruments were not listed and are not tradeable, the three shareholders are probably still holding these bonds today.

Recently, the government proposed that EPF lend Valuecap RM5 billion to invest in the stock market. In view of its impending obligation to repay its shareholders, however, questions arise over whether the loaned funds will be used to redeem the bonds.

As at the end of 2006, Valuecap’s investments were valued at RM4.8 billion. Since then, the stock market has lost 21 per cent of its value. If Valuecap’s investments have tracked the stock market, these could be worth RM3.8 billion currently.

Valuecap may have managed to unwind some of its positions when it launched a RM840 million Islamic investment fund earlier this year. Called myETF Dow Jones Islamic Market Malaysia Titans 25, the fund is managed by a wholly-owned subsidiary, iVCAP Management Sdn Bhd.

At the end of October, the fund's value was 41 per cent lower than at its launch in January this year.

Market observers have speculated that this was Valuecap’s version of Hong Kong’s Tracker Fund, which the Hong Kong government launched in 1999 to unwind US$15 billion (RM52.5 billion) worth of stock positions accumulated during the 1997 Asian financial crisis. The fund concluded the disposals of almost the shares by the end of 2002.

Current market conditions make it difficult, if not impossible, for Valuecap to unwind its positions.

If it is unable to sell its stock market investments, it may repay its shareholders in kind, transferring its share portfolio to them instead of coughing up cash.

If it did so, the EPF loan would provide fresh cash to make new investments. If its shareholders require to be repaid in cash, however, Valuecap may need the cash infusion from EPF.

The company has been servicing the interest on the debt. It has also established a sinking fund to set aside funds to repay the debt. As at December 2006, the sinking fund stood at roughly RM780 million, and it held RM1.7 billion in cash and deposits - The Malaysian Insider.

EPF Funds should not be used because they are the Employees' savings. ValueCap should borrow from local banks or use other Government Funds for the above repayment of capital. This is a serious breach of employees funds and to date the Minister of Finance has not bothered to respond to the public outcry. The Malaysian Insider, please keep track of this misuse of EPF Funds - My Journal.

> Doubts over ValueCap

 Legislators from across the political divide agreed that the lack of information concerning the proposed RM5 billion loan to ValueCap from the Employees Provident Fund raised questions over the move.

However, there was no consensus over the implications of the state investment company still owing RM5.1 billion in interest-bearing unsecured bonds.

The Malaysian Insider had today broken the news that ValueCap Sdn Bhd still owed the sum in bonds which were due to mature in Feb 2006 but was then extended to Feb 2009.

The debt was incurred in March 2003, when ValueCap borrowed the amount from shareholders Khazanah Nasional, Kumpulan Wang Amanah Pencen and Permodalan Nasional Bhd to invest in the stock market.

Chua Tee Yong (BN-Labis) said that he understood the "public sentiment" that "they are taking my money and screwing around" due to the coincidental timing and amounts involved.

DAP parliamentary leader Lim Kit Siang concurred, saying that the revelation that the bonds are due to mature soon raised  "valid questions over a lack of proper accountability and transparency in the running of ValueCap."

"The credibility of the government is at stake as there are already reasons for suspicions over this proposal, the root of which is the crisis of confidence in our government."

DAP publicity chief Tony Pua also released a statement on behalf of the party, asking if Finance Minister Datuk Seri Najib Razak has "misled Malaysians with regards to the purpose of the RM5 billion loan from EPF to ValueCap?"

"The purpose of the RM5 billion load from EPF to ValueCap as instructed by the Finance Minister is a clear case of a mega bail-out of Valuecap whose investment lifespan has already ended nearly 3 years ago.," the statement from the Petaling Jaya Utara MP said.

DAP further called on Najib, who is also Deputy Prime Minister, to immediately cancel the injection into ValueCap, as it "has failed to even protect the principal value of the stocks despite the fact that the market has enjoyed a spectacular bull run till early this year."

It also demanded a full disclosure of ValueCap investment since 2003 to explain its inability to repay the initial loans.

BN MPs however, said that it could not be concluded that EPF funds would be used to bail Valuecap out from its outstanding debt.

"Without further details, I cannot speculate on how the funds will be utilised. But I hope the government releases more information, then question marks can be answered," Chua told The Malaysian Insider.

Datuk Tajuddin Abdul Rahman (BN-Pasir Salak) also insisted that there were many ways for businesses to restructure loans and the extension of the bonds' maturity did not mean that the EPF money would be squandered.

"Valuecap is an investment company run by professionals and the government would have considered the pros and cons of the move. After all, the funds are guaranteed by the government," Tajuddin added.

"EPF is meant to provide funds to earn profits from such investments. Valuecap is just the vehicle. What is wrong with buying undervalued stocks?"

The Umno MP also said that the government was not covering up details but it was standard practice in the business world to keep strategies and plans close to one's chest insteaf of "declaring everything to the whole world."

When contacted, Khazanah Nasional said it would respond to the issue tomorrow - The Malaysian Insider.