Prospectus listing plan under fire
A Securities and Futures Commission's proposal that would require listing sponsors to post the first draft of a company prospectus on the internet has drawn criticism.
The proposal is among a range of measures suggested in an SFC consultation paper released last month to tighten regulation of sponsors in order to enhance the quality of new listings. The reforms follow several new companies encountering problems soon after listing.
Fabric manufacturer Hontex International was suspended from trading after only 64 days after the SFC found its 2009 prospectus contained misleading information. In March and April, the government-appointed Financial Reporting Council put 13 companies on a watch list, including some newly listed firms that allegedly have accounting problems.
Among the proposals, it suggests sponsors face jail terms and heavy fines if the prospectus is found to have serious misleading information. The SFC also suggests sponsors complete most of their due diligence before submitting listing applications and publish the first draft of the prospectus on the website of Hong Kong Exchanges and Clearing.
While the criminal liability proposal has faced stiff opposition from many investment bankers, it has been supported by lawmakers and investors who want to see enhanced transparency. The SFC may introduce the reforms in phrases.
Putting the draft prospectus online is also causing controversy as investment bankers say it could cause problems if the company does not end up listing. This is because their business information will already be known to the public. The bankers would prefer keeping the existing situation whereby the draft prospectus is only posted if the application is approved.
'A draft is a draft and it is not going to be prefect. It will create more confusion for investors,'' said Chan Mo-po, the legislator for the accountancy sector.
A person familiar with the situation said the proposal had been included because some sponsors submitted drafts that were poorly written and some had not done their due diligence. Sometimes the figures provided in the first draft were substantially different from the later versions.
In the US and Australia, listing sponsors need to post their first draft of a prospectus as well as every updated version. Britain does not have such a requirement.
The SFC proposal also envisages limiting the number of sponsors to one to ensure a sponsor takes full responsibility for the listing. Bankers say this limits flexibility. Chan said he also opposed the proposal as he considered the more sponsors sharing the due diligence work the better.
Joseph Tong, executive director of Sun Hung Kai Financial, said requiring sponsors to put the first draft of a listing prospectus online would give the market more time to study the figures.
'This would allow Hong Kong to catch up to the practice in the US,' he said. 'But there would be a concern if the listing application is rejected or if their listing planning is postponed.'
The number of IPO deals pulled so far this year in Asia
- 12 IPOs were withdrawn or postponed in the US in May