Otom (Others’ Time and Others’ Money) causing a ruckus among investors

Updated: Saturday August 24, 2013 MYT 7:53:44 AM

Otoms causing a ruckus among investors

GOVERNANCE MATTERS: BY SHIREEN MUHIUDEEN

THE acronym Otom looks harmless enough, but actually describes a devious charlatan who uses Others’ Time and Others’ Money (hence Otom) for their own gains. Most individuals will invest in a particular company only if they believe in the people who run it. It is all about trust and should that trust be broken, the investment will not be forthcoming. With so many investment opportunities these days, many investors are looking to diversify their portfolios by putting their money in various asset classes, which include properties, equities and, very often, unlisted equities.It is harder to make a valuation of unlisted equities simply because there isn’t a clear market price for these. So the liquidity of such equities becomes a key criterion in valuing these. A very common way of enticing investors into backing an unlisted equity, especially a green field project, is to show them a host of other potential investors who they claim have committed capital to the project.

In such a scenario, investors will often adopt a herd mentality in deciding whether or not they should commit to the project too. So they will likely be lulled by the apparently “committed capital” of some smart investors to join them too.

This is an example of a situation in which the Otom thrives. We have been bemused by the recent spate of Otoms in business here. What Otoms do is start businesses on the strength of other people’s credentials and capital.

This is because the average Otom has no real expertise or experience to speak of, and so takes the ideas and views of others – including lawyers, accountants and asset managers – to come up with a business plan, power point presentations and sometimes even legal documents and cash flows.

They are able to cadge these ideas off the professionals free of charge for quite a while, as no money changes hands until the new business actually takes off.

Things get really serious when the Otom starts using other people’s money. But how do they get hold of such money if they don’t even have a credible business plan, let alone credible investors?

Their modus operandi is as follows: Through lawyers and other professional advisers, the Otom will introduce himself to potential investors.

The Otom might even be brazen enough to use the CVs of his advisers to prop up his own corporate profile. The Otom sometimes does this by dangling the carrot of a few corporate shares in the new venture before these advisers.

Once the Otom have got all his bogus “committed investors”, he will knock on companies’ doors around the city, showing other investors the letters of commitment from these bogus investors. As genuine investors become interested in what he has to offer, he will slowly raise the price of the investment, and cut off the earlier investors (who had come in on a lower price).

As most of these deals are done pretty much in secret, the earlier investors would be frustrated at the new price quoted, as they were the ones who made it possible for the Otom to form the new venture in the first place. What Otoms don’t realise is that investors do speak to other investors, and before long, they would have lost their most important resource in the market – that is, their credibility.

With all these shenanigans increasingly prevalent, we have been advising investors that they should:

·Ask if the deal is worth the risk and if the answer is yes, make sure they get an airtight non-disclosure agreement that is enforceable in a court of law;

·Ask the promoter of the new venture for accounts of the previous businesses that he has run. Insist on seeing these accounts even if the Otom claims that he was previously in a proprietorship and so needn’t file accounts;

·Make sure that the promoter of the new company is willing to sign a statutory declaration that the idea of the new venture is entirely his. Otherwise, you may be dragged into legal suits.

·Make sure that those who say they own the company have really put money into it. The usual statement is that “they are working as hard as they can to make the new venture work, so they need not put in any actual hard cash”. Unfortunately, that is not good enough to ensure consistent commitment.

·Be especially cautious if the Otom starts saying things like “this financial projection was done by Harvard Business School”. Those in the know would be surprised to learn that any university, let alone an institution as famous as Harvard would want to do such a projection for a small start-up. Nor would such a university allow its name to be used indiscriminately.

Otoms are beginning to cause a ruckus among investors, public as well as private. The astute investor, of course, must walk away from Otoms and look to invest with only those credible SMEs who are committed to really building recurring returns.

Datuk Shireen Muhiudeen is managing director of Corston-Smith Asset Management in Malaysia, a fund management company that makes investment decisions based on corporate governance.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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