United Overseas Bank (UOB) has proposed the winding up of its associate, United International Securities (UIS), to avoid more onerous responsibilities that will result from an impending new financial reporting standard (FRS).
But the move, which will also give UIS shareholders a chance to realise their investments, was greeted with cheer by the market, which pushed UIS shares up 27 cents at the close on Friday.
UOB this week announced the proposed winding up of UIS - in which it is deemed to own 49.4 per cent - because of the greater responsibilities that will be placed on the bank as a result of FRS 110. This comes just days after Singapore Exchange sent out a reminder that FRS 110 would be coming into effect soon, for annual periods beginning on or after Jan 1, 2014.
FRS 110 makes control the basis for determining the entities to be included in consolidated financial statements; it is, therefore, expected to change the entities that are consolidated.
In UOB's case, UIS will no longer be considered as an associate of the bank and will - under FRS 110 - have to have its accounts consolidated into the financial statements of UOB.
UOB sent a letter to the shareholders of UIS, explaining that the consolidation of UIS's accounts would lead to: higher capital charges for UOB; greater operational challenges, in particular, those arising from having to perform internal credit evaluation on all investments held by UIS; and higher compliance costs to monitor the investments of UIS and their impact on UOB, and to consolidate the accounts of UIS. "In view of the impact of FRS 110, UOB has decided to exit its investment in UIS. UOB's decision to exit its investment in UIS should not be taken as any reflection of the viability of the company (UIS) as a going concern, or on the management, business or operations of the company," UOB's letter said.
The bank has asked UIS's board of directors to requisition UIS to convene an extraordinary general meeting (EGM) to consider members' voluntary liquidation of UIS. UOB's letter said that the liquidation of UIS "offers an opportunity to all shareholders to realise their investments in UIS at a price closer to the NAV (net asset value) per share".
Based on the unaudited consolidated financial statements of UIS for the nine months ended Sept 30, 2013, the consolidated NAV per share was $1.49, as at the end of that period. The consolidated net assets of UIS stood at $297.7 million.
UIS shares have traded at between $1.08 and $1.21 for the 12 months prior to Sept 30, 2013, UOB's letter said. UIS shareholders obviously agreed with the benefits proposed by UOB; UIS shares closed 27 cents up on Friday on the news, at $1.395. UOB shares were down 3 cents at $20.79.
The bank said that the liquidation of UIS is not expected to have any material impact on the earnings or the net tangible assets of the UOB group for the current financial year.
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