THE RISE AND FALL OF RAJA FINANCE
Collapse of the country’s second-largest financial institution led to a liquidity crunch, writes Busrin Treerapongpichit
Throughout the 1970s, an infamously turbulent time for Thai society, the Raja Finance crisis sent shockwaves through the banking sector and beyond. The roots of one of the worst incidents in Thai banking history began in 1977 when Raja Finance grew rapidly through investments in several of its wholly owned subsidiaries. A huge sum of money that Raja had borrowed from commercial banks was lent out to those subsidiaries without transparency. In the end, the subsidiaries failed to repay their debts to the parent firm, leaving a slew of bad loans on Raja’s balance sheet.
The bad loans imposed a severe burden on Raja’s creditors and led to a liquidity crunch in the banking system, dragging the economy into its first economic crisis of the post-war era in 1984.
Raja Finance, then the country’s second-largest financial institution, had attracted lending from commercial banks keen to share in its success.
In 1977, Raja listed on the Stock Exchange of Thailand (SET) with an initial public offering of 275 baht per share.
The share price quickly spiked to a peak of 2,470 baht on Nov 21, 1978, shortly after Raja had provided credit for securities purchases as high as 80% of its capital, even though the Bank of Thailand had set a 60% limit.
Only a few days later, the share price fell sharply. The subsidiaries found the bad loans too big to handle, with creditors calling for immediate debt payments from Raja, which defaulted because of the liquidity squeeze. The incident severely damaged its creditors, while the entire banking system was affected by the larger number of non-performing loans. The liquidity crunch spread to the business sector and eventually sparked the economic crisis.
Raja shares fell precipitously, dropping to as low as 380 baht in early 1979. On May 2, the SET ordered a delisting of Raja. More than 50 finance and securities companies had agreed to inject 270 million baht into the company in exchange for Raja shares, but the plan was scrapped.
Raja became the first financial company to
be taken over by the Bank of Thailand and the Finance Ministry through a special committee set up on May 11, 1979. That effort was led by two assistant governors of the central bank, Sompong Thanasophon and Prateep Vacharangkul. Other committee members came from the Finance Ministry, Krungthai Bank and the SET.
The panel was set up with the aim of investigating all of Raja’s debts, accounts and transactions. The goal was to get the firm on its feet before putting it back in the hands of its original managers.
That plan, however, was quickly nixed, as the company went bankrupt after it was discovered that its liabilities were some 300 million baht higher than its assets. To add to its woes, the company was also straddled with an annual interest payment burden of almost 100 million baht.
The Finance Ministry was forced to revoke its financial operating licence in August 1979.
The Raja case resonated throughout society. After the company was taken over by authorities, several protests were staged by groups of people claiming to be affected shareholders.
In a Bangkok Post report on Aug 7, 1979, Gen Kriangsak Chamanan, the prime minister at the time, called Raja a “unique problem” and said the company had been plagued by internal mismanagement unrelated to the stability of other financial and securities firms.
It is believed Gen Kriangsak’s speech was delivered with the intention of restoring public confidence at a time when serious doubts were being raised about the stability of the financial sector.
The investigation would also reveal one of the greatest cases of fraud in the sector’s history. Shares that had gone missing were later discovered to have been clandestinely transferred by the company’s management.
Seree Subcharoen was also found to have cheated the public by depositing money with the company through the issuance of bills of exchange during his tenure as chairman of Raja.
Executives at Raja faced criminal charges both for chronic mismanagement that affected the public negatively and tax evasion for the fraudulent transactions between the parent firm and its subsidiaries. Seree was ultimately arrested in the fraud case.
In 1981, the Civil Court dismissed the request to liquidate Raja Finance, saying that creditors had failed to demonstrate solid evidence that its liabilities were greater than its assets. The move allowed the company’s managers to stay on board for a time. But two years later, the Appeal Court reversed the previous ruling, forcing the liquidation of Raja at the request of its creditors.
After more than a decade of legal wrangling, the case concluded in April 1994 with the Supreme Court upholding the Appeal Court’s ruling. Seree’s legal troubles were far from over, however, as he still faced charges of deceiving the public and share manipulation.