The regulators are out to decipher the web of cosy relationships between finance companies and their subsidiaries, explain Thanong Khanthong and Vatchara Charoonsantikul.

BANKING regulators are embarking on an overdue mission to plug the loopholes in their supervision of financial institutions, after it has emerged that Finance One Plc's fall from grace can be traced directly to its intriguing relationship with its subsidiaries.

Investigation of irregular transactions ­ or outright siphoning in several cases ­ between finance companies and their subsidiaries will be conducted on an unprecedented scale. This reflects the banking regulators' attempt to clean up the mess in the Thai financial industry, the supervision of which must also take the blame for being lackadaisical until the damage became almost irreparable.

In the case of Fin-One, the regulators will zero in their investigation on the finance company's intriguing relationship with its subsidiaries, particularly Ekkaphak Co Ltd and One Holding Plc.

Ekkaphak Co is a private firm wholly owned by Pin Chakkaphak and his family. One Holding, in which Fin-One has a 10 per cent stake, is a listed company, whose portfolio investment activity and real-estate activities have outgrown its original rubber latex business. Fin-One's financial position, as confirmed by Pin last week during the signing of a preliminary merger agreement with Thai Danu Bank, is not worse than its finance peers. However, Fin-One's problems stem largely from its mishandling of its subsidiaries, which are suffering from financial losses that directly affect the livelihood of their parent company during this time of sharp economic downturn.

Fin-One has had to dig into its pockets to support its subsidiaries to the extent that when there were rumours of problems, it faced a withdrawal of its promissory notes from the public and call deposits from other finance companies until it ran out of liquidity. Fin-One is now seeking a merger with Thai Danu Bank as a safe exit.

Earlier, Bank of Thailand Governor Rerngchai Marakanond admitted regulators had been lax in their supervision by allowing finance companies to grow through their subsidiaries without proper regulation. From now on, he added, any finance companies wishing to establish a subsidiary or hold a stake in another firm will need prior consent from the authorities.

The BOT will require finance companies to submit the balance sheets of their subsidiaries for official scrutiny as part of a so-called consolidated supervision.

For the Bank of Thailand and the Securities and Exchange Commission, there is a dilemma in probing transactions between Fin-One and Ekkaphak since the latter is a privately-owned company and a non-financial institution. A financial executive said Fin-One had lent at least Bt3 billion to Ekkaphak, an investment company which is now facing difficulties in servicing its debts.

A case for Fin-One's imprudent lending to Ekkaphak can be established, given the intimate relationship between the two companies, the financial executive said.

''Ekkaphak is a dummy of the Finance One empire. Nobody knows what is going on there because it is not a listed company, neither does anyone know how the funds have been transferred between the two parties," another executive familiar with the Fin-One affair said.

Fin-One's relationship with One Holding is more transparent by virtue of the latter's exchange listing status. Fin-One reported that it had only Bt1 billion in lending exposure to One Holding, which has already defaulted on three tranches of its bills of exchange worth a combined US$13.5 million (Bt351 million).

When ordered to disclose its foreign debts by the Stock Exchange of Thailand, One Holding yesterday informed the investing public that its one-year borrowings currently amount to Bt1.41 billion (at the market rate), its one-year dollar and yen-denominated B/E to $62.5 million and ¥3.6 billion respectively (Sibor plus 2 to 3 per cent), its three-year B/E to $15 million (Libor plus 1.1 per cent), its three-year debts to $25 million and ¥510 million (Libor and Tibor plus 1.15 per cent), its debentures matured by 2001 to Bt1.5 billion (12.125 per cent), and its convertible bonds matured by 2000 to Bt562 million (6.5 per cent).

One Holding's debt burden is part of the chronic symptoms of the overall external debts of Thai corporations, which have racked up around $74 billion out of the country's total external debts of $90 billion.