China Aviation Oil’s

Collapse: Singapore Inc’s

Challenges Presented by:
Sunita Singh
Vikalp Chaudhary
Gopal Krishan
Tribhuvan Rajpurohit
Vijendra Gopa
 Introduction
• World’s second largest consumer of jet
aviation fuels
• Fuel Imports accounts for about a third of
China’s total consumption
• CAO established-1993
• Headquarters in Singapore
• Sole importer of jet aviation fuel in China
• Majorly owned by CAOHC- enjoys 100%
monopoly
• CAOHC supplies jet fuels to more than 100
airports across China
• Business estimated- one billion dollars
annually
• 2001- Singapore Exchange
• China became a major buyer of airlines and
aviation fuel- due to increase in air travel
volume
• CAO used oil swaps for hedging
In 2003 to increase its earnings, it began trading
in futures for speculative
reasons………………………
• CAOHC lent $108 million to CAO
• By selling 15% stake in CAO
• Deutsche bank as investment bank
• Offered 145 mil CAO shares @$1.35 each &14% discount rate
• Reorganization plan
• Convert part of $118 mil loan to CAO, into equity & invest additional $50
mill
• Tamasek holding pvt ltd. to invest another $50 mill
• CAO to repay total of $220 ($100 mill immediately & $120 mill over 8 years
 CAO was not the only case on
SIMEX
• Nick Leeson, GM of Baring’s future,
Singapore
• Brought down oldest known merchant bank
single handedly
• Concealing unauthorized trading activities
• Final bet was on Nikkei index
 Singapore Inc Problems
• Singapore Exchange and Monetary Authority of
Singapore failed to enforce corporate
governance
• The exchange eased many rules to attract
foreign companies
• Not allowed to engage in speculative
transactions but CAO did
• Volume transaction exceeded spot trading limits
 contd..
• Misrepresentation of financial statements
• Judging from the accounts there was no
problem with the business operations
• Limited disclosures and lack of transparency
• Partial understanding of concepts like board
independence, independent audits and risk
management in Chinese companies
 Repercussions
• Risk in investing in Chinese companies
• Reduction in volumes of trade on exchange
• Leaving more than 7000 investors’ shares
worthless
• 2004: Singapore exchange had 85 stocks
issued and 40% of those were Chinese IPOs
 Issues
• Should employees work to maximize profits,
to which their compensation is linked, or work
in interest of shareholders and aim for wealth
maximization?
• Are exchanges efficient to do what they are
meant for?
• Is company meeting with the corporate
governance compliances?
 Corporate Governance

• Defining Corporate Governance

• Issues in Corporate Governance

• Obligations to investors
 Instruments of Corporate
governance
• Internal control system
• audits
• Codes, that emphasize the importance of
transparency, accountability, internal controls,
board composition and structure, independent
directors, and performance related executive
pay, tries to encourage both transparency and
accountability
Risk Management Structure
Board of Directors
Delegated Daily Managed Internal Controls
Risk Management and Business Risk

Chief Executive Officer Audit Committee

Received reports of Failed to detect
risk exposure losses

Risk Management Internal Audit

Committee

Department Heads

Traders
 Possible Breach of Duty
• Directors were aware that CAO was
speculating in options
• No effective risk management guidelines in
practice on options trading
• Board of Directors allegedly not aware of
losses incurred
• Audit Committee and internal audit did not
detect losses
 Critical Failures

• Front office ( Traders)

• Middle Office ( Risk controller)
• Back Office ( Finance department)
• Risk Management Committee (“RMC”)
• Internal Audit Division (“IAD”)
• Managing Director (“MD”) and Chief Executive
Officer (“CEO”)
• Audit Committee (“AC”)

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Any questions?