Hontex ruling a valuable deterrent
Hong Kong ranks as one of the IPO capitals of the world, but it faces stiff competition from New York, London and Shanghai. If the city wants to maintain its position as an important fund-raising centre, a reputation for providing a level playing field for investors is crucial. In recent years, the market watchdog has adopted a more aggressive approach to regulation by pursuing cases of wrongdoing in the courts. This has led to a landmark double strike to safeguard the interests of investors.
The Securities and Futures Commission had already broken new ground by obtaining court orders to freeze the assets of wrongdoers. Now it has won a High Court order forcing a Hong King-listed mainland company to pay back more than HK$1 billion to 7,700 investors. Sports fabric maker Hontex International Holdings was ruled to have misled them by overstating turnover and pre-tax profit in its prospectus for its listing in 2009. Listing sponsor Mega Capital (Asia) had already been fined HK$42 million for failure to discharge its duty of due diligence and stripped of its corporate advisory licence - another first.
SFC chief executive Ashley Alder has rightly hailed the ruling as an important milestone in efforts to protect investors. A stream of profit warnings, audit problems, trading suspensions and delistings has undermined their confidence. Many cases stem from poor corporate governance standards on the mainland, compounded by inadequate due diligence by listing sponsors, who stand to earn big fees.
The SFC has uncovered a pattern of unsubstantiated revenue and profit claims and overstated asset prices. In the case of Hontex, according to the SFC, sponsor Mega Capital delegated most due diligence to inexperienced staff and agreed not to approach related parties directly. As a result, the listing applicant effectively controlled a process intended to protect investors.
In admitting contravention of the SFC ordinance, which bans anyone from giving misleading information to induce others to buy shares, neither Hontex nor its directors admit a criminal offence. But the SFC says this does not prevent it from launching criminal proceedings. Deterrent examples like the Hontex/Mega Capital case can be instrumental in helping raise corporate governance standards. Officials should bear that in mind in weighing market reaction to an SFC proposal to criminalise the failure of sponsors to ensure that information in listing prospectuses is accurate, exposing them to jail terms and heavy fines. While many investment bankers are understandably opposed, the proposal would enhance transparency.