Loophole-infested rules need complete overhaul

Rules covering financial disclosure to the Hong Kong stock exchange need a total overhaul to stop companies appearing to slide out of their obligations.

Two key aspects of the rules that need going over cover interim results statements and significant events of material importance to the companies involved.

Recent cases involving Giordano International, Kingboard Chemical, Iwai's International and Hopewell, to name but a few, have highlighted weaknesses in the exchange's disclosure regime.

In principle the exchange's overall guidelines about disclosure are clear. Disclosure should be prompt and orderly. This relates to information of a price-sensitive nature. What is intended under the disclosure rules is the avoidance of false markets in the share trading.

On-going disclosure is required of companies when big deals occur. According to the practitioner's guide to the listing rules, a big deal needing disclosure at the exchange is one where there is a 15 per cent change or more in a company's net assets, net profit, aggregate value or equity capital value.

Major transactions are deals where there is a change in one of the value tests of 50 per cent or more. Some companies have been suggesting certain deals were not disclosed at the time of completion because they did not constitute major transactions. Exactly what a company should and should not disclose in this respect needs to be cleared up.

In an interim report for the six months to December 31, 1994, Hopewell Holdings revealed a $1 billion sale of 2.5 per cent of the Guangzhou Super-highway to long-time business associate Kanematsu. The amount represented the 78 per cent of profit attributable to shareholders at the interim stage, but 37 per cent of market expectations of the profit for the full year.

Hopewell said under chapter 14 of the exchange listing rules this $1 billion deal did not constitute a notifiable transaction. Clearly, this is a load of rubbish. If the spirit of the exchange's rules and the intention behind the rules were to be applied, this deal should have been disclosed at the time of completion.

At Kingboard Chemical, doubts were raised regarding the prospect of provisions being made on inventory and bad debts. The amount rumoured to be involved is about $15 million, representing almost 50 per cent of the interim profit to the end of September last year, and 20 per cent of the expected year-end profit of $72 million, in the Estimate Directory.

In a statement intended to clarify things, the group said any provisions deemed necessary by the management had been made at the interim stage. Yet no mention of provisioning was made on the face of the published interim statement.

The company was able to do this because the rules governing interim disclosure are limp. Only rudimentary guidelines exist on what should be in the interim statement. It remains an unaudited document so who is to say what was or was not included.

Iwai's interim profit to September 30, 1995, fell from $7.6 million to $9,000. Yet in the company listing prospectus, issued in October, the company said it did not expect significant profit growth for the period to March 31. In the previous period reported annual profit was $20.9 million, on an adjusted basis. No breach of rules had been effected, however, because the implied forecast did not cover interims, even though interims are used by investors to provide an indication of how things are going at the company.

Yesterday we had Giordano International saying it would look into rumours of store shutdowns in China, where 15 per cent of group revenues come from.

All this haziness makes it difficult for investors to assess what the risks are of holding shares in these companies. The exchange needs to consider toughening up its disclosure rules with clearly defined thresholds governing what shareholders need to be told. In addition the rules covering interim results announcements are in need of being tightened up.