KUALA LUMPUR (July 30): The Royal Commission of Inquiry (RCI) has recommended that forensic audits be carried out on 14 problematic investments undertaken by Lembaga Tabung Haji (TH), including in FGV Holdings Bhd.

The investments exhibited significant governance weaknesses and contributed to a severe deterioration in value of the pilgrim fund board's assets, the commission said in a report released on Wednesday.

The RCI found there were "too many layers and deliberations" at every stage of the investment decision-making process. Although such a process should have produced sound investment decisions, "this did not happen".

"It is therefore not surprising that there were so many problematic investments at TH," the report said.

The RCI also found that investment decisions were made through poor coordination among the chief investment officer, chief financial officer, head of property and head of treasury.

For example, the Investment Panel relied heavily on recommendations from TH's management instead of independently scrutinising investment proposals, while ministers approved proposals based solely on memoranda prepared by TH’s board and management without independent third-party advice.

The investments identified by the RCI for forensic audits included those in FGV, TH Plantations Bhd (KL:THPLANT), Alam Maritim Resources Bhd (KL:ALAM), TH Marine, Trurich Resources Sdn Bhd and Deru Semangat Sdn Bhd.

The RCI said the largest troubled investment was in FGV, with the fund recording an unrealised loss of RM1.059 billion after accumulating shares following the plantation group’s initial public offering (IPO) in 2012.

Initially, TH subscribed to a 7.5% stake or 273.58 million FGV shares. Including transaction costs, TH’s total investment in the IPO was approximately RM1.25 billion, with an average cost of RM4.58 per unit. It continued to accumulate FGV shares, acquiring 232.01 million shares at RM5.01 per share between July 23, 2012 and October 3, 2012.

However, the market price eventually plummeted to 88.5 sen per share, resulting in a massive unrealised loss of RM1.06 billion. TH eventually transferred 283.71 million FGV shares to Urusharta Jamaah Sdn Bhd, owned by the Minister of Finance (Incorporated) at RM4.62 per share, to avoid realising a loss of approximately RM1.1 billion.

The RCI said TH fully impaired its RM364.31 million investment in Trurich Resources after the joint venture with Felda Global Ventures Kalimantan Sdn Bhd, established to develop about 200,000 hectares of plantation land in Kalimantan, Indonesia, failed to generate the expected returns.

Since then, Trurich Resources had become insolvent with liabilities amounting to RM119.67 million as end-Dec 2017 and RM92.78 million in 2018. Additionally, the company has an outstanding loan with Maybank totalling US$179 million (RM732 million).

According to the commission, TH invested RM334 million in TH Marine group (through RM198 million in equity and RM136 million in financing) to expand into the offshore support vessel business.

By December 2021, the entire RM198 million equity investment and RM80 million of financing had been impaired, bringing total impairment to RM278 million. However, TH said PwC's recovery assessment estimated only RM70.4 million of the investment could potentially be recovered.

The commission found TH's investment in Deru Semangat Sdn Bhd, an oil palm development project in Pahang, deteriorated after land clearing activities breached "No Deforestation, No Peat and No Exploitation" (NDPE) requirements.

The breach caused major buyers, including Wilmar International, to reject the project's output, causing the development to stall.

TH acquired a 55% stake in Deru Semangat from the late Sultan of Pahang for RM231 million and committed to finance the development of the plantation worth RM295.16 million. By January 2021, TH had disbursed a total of RM257 million for both acquisition and development cost.

Of the RM257 million invested, RM32 million remained recoverable, resulting in losses of about RM225 million.

TH eventually took steps to exit the venture and mitigate further losses. It transferred its 55% equity stake in Deru Semangat and existing financing to the Tengku Muda Pahang for a total payment of RM259 million.

The Tengku Muda Pahang agreed to waive TH's obligation to provide the remaining RM258 million in future funding (which included RM71 million in equity and RM187 million in financing).

The RCI cited PwC's forensic review released on April 25, 2019, which identified governance weaknesses surrounding TH Plantations' acquisition of plantation estates between 2012 and 2014. The asset-related companies are Bumi Suria Ventures Sdn Bhd, Maju Warisanmas Sdn Bhd and PT Persada Kencana Prima.

The report said TH Plantations purchased these new estates through financing, especially a RM1.2 billion sukuk, but these investments failed to meet expectations.

Only about 58% of the acquired estates were productive, forcing the company to dispose of assets and cut maintenance spending to service debt. This reduction in spending led to a decline in palm oil yields. TH subsequently recognised an impairment of RM170 million on its investment.

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