HKEx plan for independence of IPO sponsors 'too lax'
Corporate finance firm says proposals allow for dependence or conflict of interest
Stock exchange proposals to ensure listing sponsors are independent from their initial public offering clients are too lax, according to Ernst & Young Corporate Finance.
The independence criteria are contained in proposals by the stock exchange to improve the quality of information given to investors following scandals such as Euro-Asia Agricultural, which is alleged to have inflated its revenue figures in the four years before listing.
The fine print of the proposals was released by the stock exchange earlier last month. Ernst & Young Corporate Finance recently issued a response which was sent to the exchange.
'The stock exchange's proposals do not set a test for the independence of sponsors,' the response said. 'In each of the ... categories of permitted interests of the sponsor group in the listing applicant, there is either real dependence or a real conflict of interest ...
'We believe that it is in the best interests of the investing public for the rules to be tightened.'
Ernst & Young Corporate Finance objected to rules which will allow the sponsor to hold up to 5 per cent of a client being listed. Sponsors will also be able to hold stock in an IPO client worth up to 15 per cent of the sponsor group's net assets. The stock exchange's definition of sponsor includes parent and connected firms.
'If a sponsor has invested in the new listing applicant, how on earth can such a sponsor be said to be independent?' the advisers wrote.
The firm also objected to up to 15 per cent of IPO proceeds being permitted to settle debts with the listing sponsor. Up to 30 per cent of the new listing's business can be funded by a bank connected to the sponsor.
'A sponsor/sponsor group which is owed money by the listing applicant surely cannot really be said to be independent,' it wrote.
The proposed rules are more relaxed than in London, where a sponsor usually cannot have an interest of more than 3 per cent of an IPO firm's shares, debt and loan capital.
The submission argues the proposals favour large investment banks over smaller local corporate finance firms by making the independence requirements for sponsors less stringent than for independent financial advisers.
An independent financial adviser is not allowed to hold a 'material interest' or be a debtor or creditor of its client, according to the proposals. Banks connected to the independent financial adviser are also not allowed to provide services to the latter's clients.
'The concerns ... about the stock exchange denying market practitioners a level playing field appear to us now sadly to be confirmed,' according to Ernst & Young Corporate Finance.
A stock exchange spokeswoman said responses to the proposals were still being considered. 'The exchange has received a variety of responses ... some of which suggest the criteria be tightened and others that they be relaxed.'
The exchange expects the rule changes to take effect on October 1.