Harsh light cast on listing sponsors
The securities watchdog's decision to levy a record fine of HK$42 million and to strip the corporate finance advisory licence of a local unit of a Taiwanese firm has cast a spotlight on the shoddy work of listing sponsors.
The harsh punishment of Mega Capital (Asia), a subsidiary of Mega Securities, follows the Securities and Futures Commission's (SFC) announcement last week that it would consult the market about enacting tougher regulations on share listing sponsors.
The firm was found to have performed inadequate and substandard due diligence as the listing sponsor of Fujian-based clothes maker Hontex International. Trading in Hontex shares was suspended just three months after its listing after it was accused of fabricating its financial figures.
Doubts have been raised about the due diligence process of investment banks that act as listing sponsors after recent share-trading suspensions of firms that allegedly included misleading information in their prospectuses.
'The regulator's tough punishment of Mega Capital underscores the importance of maintaining Hong Kong's reputation as an international financial hub,' said Donny Wong, executive director of Guotai Junan International and an investment banker in the city for more than a decade.
'It reminds sponsors to be more mindful and prudent when conducting due diligence with our clients.'
The number of IPOs in the city surpassed 100 over the past three years, nearly double the number in the past, which will increase the work load and stretch the manpower of some investment banks, Wong said.
The recent stream of fallouts involving companies that recently listed in Hong Kong has raised concerns about the quality of the sponsors, given that Hong Kong was the largest IPO market in the world for a third year last year.
Boshiwa International, a mainland children's garment maker, filed an announcement on March 15 that Deloitte was resigning as its auditor because it was dissatisfied with certain information that the company had supplied. Shares in the company suspended trading while the annual report for 2011, its second results announcement since it went public, was delayed.
OTO Holdings, a message machine manufacturer which was oversubscribed 242 times in its IPO in December, filed a profit warning in March that it may not be able to meet the profit forecast of HK$50.8 million set out in its prospectus for the 2011 financial year.
An investment banker said the due diligence conducted by sponsors should be more in-depth and comprehensive. 'Talking to the management and getting to know the operation of the company is not enough. I will talk to his competitors, suppliers and peers to know the full picture,' he said. 'First of all , you have to convince yourself whether the management are trustworthy.'