Media advisory from Professor Meziane Lasfer, Professor of Finance at Cass Business School.
Published (Updated )
Professor Meziane Lasfer comments on the news that UAE-based NMC Health, the largest healthcare provider in the Middle East, will come under administration.
“The main reason behind the failure of UAE’s NMC Health is fraud. Not too long ago, Jefferies and Muddy Waters warned about the misreporting of the firm's misleading information. The situation is more complicated as the firm is listed in London and it is operating in the UAE. The case brings to mind that of the 1MDB saga, Patisserie Valerie, and the famous Enron. These firms are good companies from their business risk perspective, but the company seems to have taken the money raised from debt and also from operations, through creative accounting methods, such as creating other companies and diverting the funds through false invoices and other transactions. In finance terms, this is called tunnelling – a practice that sees major shareholders directing company assets to themselves for their personal gain.
What’s next for NMC?
"My expectation is that a new owner will buy the asset at a very low price and the operating activity will carry on. I doubt that the hospitals will be closed with employees laid off particularly during this critical time of Covid-19. In a worst-case scenario, where no private buyer can be found, it’s possible that the UAE government could step in to buy and operate the assets."
What are the key takeaways from this case?
"Investors need to be aware of the creative accounting methods used and ask for greater disclosure of information to mitigate any information asymmetries. Auditors should also bear some responsibility; they should ask for more detailed information and expand their risk zones. Regulators should instruct firms, particularly those with operating activity far away from their listing market, to disclose more information and to have strong governance mechanisms, with a large proportion of independent directors and a split of the CEO and the chairman.
"Generally speaking, managers of bankrupt companies do not lose much. The regulator should place greater responsibility on the executive directors and also on the non-executive directors. The board should take responsibility for any misleading information and fraudulent behaviour. Investors do take risk in investing in listed firms. However, such risks should be limited to business, financial, and macroeconomic risks, but not be subject to fraudulent activities of insiders."
All quotes can be attributed to Professor Meziane Lasfer, Professor of Finance, Cass Business School.