SFC proposes to raise scrutiny of listing sponsors
Hong Kong's Securities and Futures Commission (SFC) yesterday launched a two-month consultation on proposals to increase its scrutiny of listing sponsors - the first step towards a law that could put them in jail if a company's prospectus for listing misleads investors.
SFC chief executive Ashley Alder said there was no definite timetable for implementing the proposed regulatory changes.
The consultation also proposes tougher codes of conduct for sponsors, who, the watchdog says, may be 'overly reliant' on opinions from auditing firms and lawyers when carrying out due diligence.
Edward Au, who is responsible for overseeing initial public offerings for auditing firm Deloitte, said sponsors might sometimes decide to carry out more due diligence work above and beyond the level normally performed by auditors, who act according to Hong Kong Institute of Certified Public Accountants (HKICPA) guidelines.
For example, under HKICPA guidelines, auditors might only visit a few outlets of a retailer planning a listing, but the sponsor might decide to check more shops as part of its due diligence.
In IPOs involving more than one sponsor, an auditor has to liaise with banks over due diligence work. The SFC is proposing that there should either be a single sponsor for a listing or that a limit be set on the number of sponsors for a listing.
'There has been a proliferation of sponsors on a single deal,' said Alder, saying a large deal might have five or six sponsors. 'That could lead to gaps and overlaps in due diligence work, and co-ordination problem between sponsors.'
He said different sponsors could have differences of opinion.
While a move towards fewer sponsors should have limited impact on listing timelines and costs, it could have repercussions on sponsors, according to industry experts. Banks may have to move from handling 10 deals at the same time, as co-sponsors with other banks, to dedicating most of their resources to a single deal over a set period of time.
Alder said that so far there had been mixed responses from the finance industry to the consultation paper, but he believed that the market was more mature than it had been a few years ago and understood the need for more regulations.
The SFC attempted a similar proposal in 2005 to make sponsors liable for misleading information, but it was scuppered by strong opposition from the finance sector.
Alder stressed that tougher standards were not intended to deter listings in Hong Kong, but to improve their quality, benefiting both the finance sector and investors.
Hong Kong has been the world's top destination for firms seeking to raise funds through initial public offerings for three consecutive years; last year HK$271 billion was raised through 88 listings.
More transparency would make Hong Kong more attractive, said Alder.
He said many prospectuses, including the summary sections which were intended to give a succinct outline of the company listing, had become 'too long and legalistic' and 'virtually unreadable'.
The amount, in Hong Kong dollars, that was raised in the city last year through 88 listings