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Diligence overdue on IPO sponsors
By Louise Ho |
May 8, 2012, Tuesday
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Print Edition
Print Edition
THE China Securities Regulatory Commission could learn a thing or two from its counterpart in Hong Kong, where new rules addressing malfeasance by IPO sponsors are being aggressively implemented.
The Hong Kong Securities and Futures Commission announced on April 22 that it revoked the license of Mega Capital (Asia), sponsor of a 2009 listing of Chinese textile company Hontex, and fined Mega Capital a record HK$42 million (US$5.4 million) for shoddy due diligence work.
Three days later, Hong Kong regulatory chief Ashley Alder said the body is looking at possible criminal and civil liability related to company prospectuses, with attention on investment banks and corporate finance companies that perform due diligence and recommend listings.
"Hong Kong's regulator gave a rare demonstration to how to achieve zero tolerance to market malpractice," said financial analyst Ye Tan.
Guo Shuqing, chairman of the China Securities and Regulatory Commission, pledged last year that he would take a "zero tolerance attitude" toward insider trading. The Hong Kong actions may provide a valuable lesson in how to put the interests of investors ahead of the interests of gilded market players.
False information
The Hontex case in Hong Kong dates back two years, when shares in the company were suspended only three months after the initial public offering. The regulator said the company had misled investors with false information in its prospectus. It also told Hontex to return to investors the HK$1 billion raised in the IPO.
Cases of malpractice not dissimilar to that of Hontex are all too common among A-share companies listed on the mainland. But punishment here is less onerous, if it is meted out at all.
For example, biological technology company ST Yunnan Greenland remains listed on the ChiNext, the Nasdaq-style board in Shenzhen, even after the company was found to have falsified accounts in 2009. According to the securities regulations in the mainland, Huatai United Securities, the sponsor of that IPO, could face a maximum fine of 600 million yuan (US$9.5 million) and the revocation of its license.
But to date, the only slap on the wrist the company Yunnan Greenland has received was a fine of 4 million yuan. Neither senior executives of the company nor anyone at Huatai United Securities has been held to account.
That's not surprising. Most sanctions on the books are never carried out even when wrongdoing is uncovered.
The mainland's regulator has so far revoked the licenses of only four sponsors for failing to exercise due diligence during the IPO process. Another 13 IPO sponsors have received warnings since 2006.
"The mainland does not lack for strict laws on the responsibility of IPO sponsors," Xu Feng, a lawyer at Shanghai Huarong Law Firm, wrote in an article that appeared in the Securities Times on April 28.
"The problem," he explained, "is that the laws are not always enforced. If we don't use the laws properly, nothing will stop the sponsors from becoming accessories to false listings."
Mainland investors, particularly those who have been burned by lax enforcement, were naturally disappointed when new delisting measures for ChiNext that took effect on May 1 were silent on the subject of penalties for dishonest IPO sponsors. IPO sponsors on the mainland, as in over the world, are extremely well paid. The 56 sponsors that recommended the floating of 281 companies last year earned an aggregate 13 billion yuan. But was the quality of their due diligence up to par?
Lacking of enforcement
For example, Changjiang Securities, which sponsored the float of technology company Shenzhen Sunway Communication on the ChiNext last year, broke the rules by failing to point out in its report that fewer than 30 percent of staff at the company had tertiary education, which was required by the rules of ChiNext.
According to financial data provider Wind, the share prices of the five companies that Changjiang Securities sponsored in the past three years have dropped more than 30 percent.
With a lack of serious enforcement, sponsors have little impetus to clean up their acts. They can recommend companies with high risk and low investment value and not bear any responsibility.
"Given the important role played by sponsors, these failures must be regarded most grimly," Mark Steward, head of enforcement at the Hong Kong Securities and Futures Commission, said when his agency took action against Mega Capital (Asia).
Mainland investors want the same watchdog vigor. They want to see immediate action when false auditing is uncovered in IPO applications. They want to see guilty companies delisted and remuneration made to investors. They also want to see IPO sponsors held to account for their part in deception.
"Whether the mainland should introduce a system to return money to investors from false listing information after an IPO should be considered in any future amendments to securities law," said Huarong Law Firm's Xu.
Currently on the mainland, money invested in initial share offers is returned only if malfeasance is found before the actual listing.
Cases of insider trading and false auditing have severely damaged the credibility of mainland stock markets for years. Only by stepping up regulatory enforcement can the confidence of investors be restored. The Hontex case in Hong Kong is a good case in point.
The Hong Kong Securities and Futures Commission announced on April 22 that it revoked the license of Mega Capital (Asia), sponsor of a 2009 listing of Chinese textile company Hontex, and fined Mega Capital a record HK$42 million (US$5.4 million) for shoddy due diligence work.
Three days later, Hong Kong regulatory chief Ashley Alder said the body is looking at possible criminal and civil liability related to company prospectuses, with attention on investment banks and corporate finance companies that perform due diligence and recommend listings.
"Hong Kong's regulator gave a rare demonstration to how to achieve zero tolerance to market malpractice," said financial analyst Ye Tan.
Guo Shuqing, chairman of the China Securities and Regulatory Commission, pledged last year that he would take a "zero tolerance attitude" toward insider trading. The Hong Kong actions may provide a valuable lesson in how to put the interests of investors ahead of the interests of gilded market players.
False information
The Hontex case in Hong Kong dates back two years, when shares in the company were suspended only three months after the initial public offering. The regulator said the company had misled investors with false information in its prospectus. It also told Hontex to return to investors the HK$1 billion raised in the IPO.
Cases of malpractice not dissimilar to that of Hontex are all too common among A-share companies listed on the mainland. But punishment here is less onerous, if it is meted out at all.
For example, biological technology company ST Yunnan Greenland remains listed on the ChiNext, the Nasdaq-style board in Shenzhen, even after the company was found to have falsified accounts in 2009. According to the securities regulations in the mainland, Huatai United Securities, the sponsor of that IPO, could face a maximum fine of 600 million yuan (US$9.5 million) and the revocation of its license.
But to date, the only slap on the wrist the company Yunnan Greenland has received was a fine of 4 million yuan. Neither senior executives of the company nor anyone at Huatai United Securities has been held to account.
That's not surprising. Most sanctions on the books are never carried out even when wrongdoing is uncovered.
The mainland's regulator has so far revoked the licenses of only four sponsors for failing to exercise due diligence during the IPO process. Another 13 IPO sponsors have received warnings since 2006.
"The mainland does not lack for strict laws on the responsibility of IPO sponsors," Xu Feng, a lawyer at Shanghai Huarong Law Firm, wrote in an article that appeared in the Securities Times on April 28.
"The problem," he explained, "is that the laws are not always enforced. If we don't use the laws properly, nothing will stop the sponsors from becoming accessories to false listings."
Mainland investors, particularly those who have been burned by lax enforcement, were naturally disappointed when new delisting measures for ChiNext that took effect on May 1 were silent on the subject of penalties for dishonest IPO sponsors. IPO sponsors on the mainland, as in over the world, are extremely well paid. The 56 sponsors that recommended the floating of 281 companies last year earned an aggregate 13 billion yuan. But was the quality of their due diligence up to par?
Lacking of enforcement
For example, Changjiang Securities, which sponsored the float of technology company Shenzhen Sunway Communication on the ChiNext last year, broke the rules by failing to point out in its report that fewer than 30 percent of staff at the company had tertiary education, which was required by the rules of ChiNext.
According to financial data provider Wind, the share prices of the five companies that Changjiang Securities sponsored in the past three years have dropped more than 30 percent.
With a lack of serious enforcement, sponsors have little impetus to clean up their acts. They can recommend companies with high risk and low investment value and not bear any responsibility.
"Given the important role played by sponsors, these failures must be regarded most grimly," Mark Steward, head of enforcement at the Hong Kong Securities and Futures Commission, said when his agency took action against Mega Capital (Asia).
Mainland investors want the same watchdog vigor. They want to see immediate action when false auditing is uncovered in IPO applications. They want to see guilty companies delisted and remuneration made to investors. They also want to see IPO sponsors held to account for their part in deception.
"Whether the mainland should introduce a system to return money to investors from false listing information after an IPO should be considered in any future amendments to securities law," said Huarong Law Firm's Xu.
Currently on the mainland, money invested in initial share offers is returned only if malfeasance is found before the actual listing.
Cases of insider trading and false auditing have severely damaged the credibility of mainland stock markets for years. Only by stepping up regulatory enforcement can the confidence of investors be restored. The Hontex case in Hong Kong is a good case in point.
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