Zaitun was granted approval on 31 January 1997 to undertake its flotation exercise. Pursuant to the exercise, Zaitun had submitted a consolidated after-tax profit forecast of RM5.785 million (before pre-acquisition profit) for the year ending 31 December 1997 and, in its listing prospectus dated 5 May 1997, a post-acquisition consolidated after-tax profit forecast of RM4.311 million for the same financial year.

Based on the published audited accounts of Zaitun for the year ended 31 December 1997, as reported in the Company's Annual Report, Zaitun had instead posted a consolidated after-tax loss of RM14.848 million for the year ended 31 December 1997. This represents a very substantial deviation from the forecast.

The SC also notes that among the reasons given for the deviation is the relatively large position taken by the Company for investments in quoted shares, which was made possible via the opening of a margin account, as approved by the board of directors of Zaitun, on 3 September 1997. Between 10 November 1997 and 30 December 1997, the daily cumulative balance of these investments exceeded 25% of the Group's proforma net tangible asset value of RM50.5 million (as at 31 December 1996). Such large share transactions should have been disclosed to and approved by shareholders. In the Company's Annual Report 1997, the Auditor's Report, amongst others, stated that the substantial share transactions had not been approved by members in general meeting as required by Section 132C of the Companies Act 1965.

As a result of the substantial investments in quoted shares, Zaitun, which is involved in the manufacture and marketing of toiletries and consumer products, suffered a realised loss of RM6.94 million and a provision for diminution in value of short-term investments totalling RM1.39 million for the financial year 1997. Further, quoted shares in Malaysia that are intended to be held as long-term investments by the Company, as at 31 December 1997, were stated at cost of RM7.81 million compared with their market value of RM2.75 million.

While the SC takes cognizance of the operational difficulties faced by Zaitun arising from uncontrollable factors such as the Ringgit depreciation and the economic problems facing the region and nation, the SC views the act of trading in quoted shares with such a large position as irresponsible for a company of Zaitun's size, which further exposed the Company's well-being to the vagaries of the stock-market, notably at a time when the level of uncertainty could be perceived as unprecedented.

As Zaitun is a newly-listed company, such an act was clearly to the detriment of the Company and its members, notably the minority shareholders. The board of directors of Zaitun should have exercised prudence and restraint, amid the currency and economic problems facing the nation and the Company, in managing its financial resources, certainly before committing its resources into relatively high-risk investments.

The SC also views with great concern the absence of immediate disclosure by Zaitun in respect of a related-party transaction. As disclosed in the Notes to the Accounts for the financial year 1997, the Company had on 17 November 1997 entered into a sale and purchase agreement with Benua Rezeki Sdn Bhd (the vendor), a company in which certain directors of Zaitun (viz., Dato' Mohd Kamal b. Dato' Mohd Eusuff and Aisha bte. Dato' Mohd Eusuff) have shareholdings, to acquire a piece of land for a purchase consideration of RM36 million. As at 31 December 1997, a deposit of RM18 million being part payment of 50% was paid.

Subsequently, pursuant to a revocation and rescission agreement dated 15 April 1998 (rescission agreement), Zaitun and the vendor had mutually agreed to revoke and rescind the sale and purchase agreement. Under the rescission agreement, the deposit shall be refunded to Zaitun on or before 15 December 1998 by 6 monthly instalments of RM3 million each commencing 15 July 1998. The deposit shall bear interest at a fixed rate of 12% per annum for the period from 15 April 1998 to 15 July 1998 and, thereafter, at 1.25% above the BLR of Standard Chartered Bank Malaysia Berhad on a monthly-rest basis until full settlement. The SC also notes that the vendor, based on a letter to Aseambankers Malaysia Berhad dated 12 August 1998, has since paid only RM345,000 of its first instalment for the month of July against RM3 million under the terms and conditions of the refund.

The SC also notes with grave concern that no announcement was made in respect of the above transaction. This is in breach of the requirements of Chapter 20 on "Special Requirements For Related-Party Transactions", as provided for in the SC Guidelines.

Zaitun's non-disclosure of the above is a serious breach of the principle of corporate disclosure and transparency and reflects non performance of fiduciary responsibilities and poor governance on the part of Zaitun's board of directors, notably that of the independent directors (members of the Audit Committee) who are supposed to be the guardian of transparency, accountability and corporate governance as well as protectors of the interest of minority shareholders.

The SC further holds that, although the proposed acquisition of land was subsequently aborted, the transaction could be construed as loans to directors (in the amount of RM18 million being the 50% deposit) by virtue of the fact that Dato' Mohd Kamal b. Dato' Mohd Eusuff and Aisha bte. Dato' Mohd Eusuff are common directors of both Zaitun and Benua Rezeki Sdn Bhd. The SC considers the 50% deposit paid to the vendor as highly unusual for a property transaction, particularly so when it involves related parties.

In this regard, the board of directors of Zaitun were given due opportunity to explain their case to the SC. The explanations as provided by the board of directors of Zaitun responsible for managing the Company at the relevant time have been found to be unsatisfactory.

The SC views with concern the above shortcomings of the relevant directors of the Company in discharging their fiduciary duties and responsibilities in a diligent and responsible manner expected of them.

Principal shareholders and directors of public companies, as well as advisers, reporting accountants and relevant experts are expected to comply with all the Guidelines and conditions of approval applicable to them. They must also ensure at all times that their duties are conducted in a responsible and professional manner, with due care and diligence. These are important to uphold market integrity and ensure that the interests of investors at large and minority shareholders are well served. The SC will not hesitate to take action against transgressors under the relevant provisions of the Securities Commission Act 1993 and/or the Securities Industry Act 1983 should there be a need to do so. The SC also reserves the right to further investigate any matters in respect of this affair or any other matters which may arise therefrom.