Watchdog finally bites - now let's see teethmarks
Finally, our securities watchdog has put the axe to poorly performing listing sponsors. We now want to see more punishment inflicted on these people as they have done much damage to our markets.
Insiders last week tipped White Collar that the Securities and Futures Commission planned tougher liabilities for sponsors which placed misleading information in prospectuses. The SFC is seeking jail terms or heavy fines, which is good news.
More good news came on Sunday when the securities watchdog imposed a record HK$42 million fine and revoked the licence of Mega Capital (Asia) as a corporate finance adviser for its poor due diligence when it acted as sponsor for Fujian-based sports-fabric maker Hontex International Holdings. The company listed on Christmas Eve, 2009.
Hontex entered the Hong Kong market record books as the shortest-traded firm when ordered by the SFC to suspend trading after just 64 days. The SFC alleged it had boosted sales and turnover in its listing prospectus. A trial will be held in June and the SFC is seeking the refund of the HK$1 billion it raised in its IPO.
Hontex has replaced Euro-Asia Agricultural Holdings as the icon of dodgy listings in the local stock market and many would ask why either firm was allowed to list in the first place. Euro-Asia Agricultural Holdings, an orchid grower, collapsed in 2002, a year after its listing, amid allegations it overstated its income. Its sponsor, ICEA Capital, reached settlement with the SFC, paying HK$30 million but keeping its licence.
In the past two months, the Financial Reporting Council has put 13 companies on a watchlist for alleged accounting problems, including some newly listed mainland firms. This shows the issue of listing transparency is a serious one. Some bankers said it was hard for good mainland companies to attract investors because of a few bad apples. Some firms are being forced to delay their listing plans or to price at a low valuation because of the negative news surrounding mainland companies.
If the sponsors had done their work, they should be able to establish any problems before the listing. The suspicion is that some simply want to earn the sponsor's fee and accept whatever the client says. The SFC said that when Mega Capital conducted its due diligence, it allocated only junior staff to handle the job. When it asked customers, suppliers and franchisees about Hontex's business, the staff only carried out telephone interviews that were arranged by Hontex.
Obviously Mega Capital was keen on making sure the client was happy, and its due diligence work was not aimed at finding the correct information. Such poor due diligence explains why we have seen a wave of dodgy new listings in recent months. It makes sense for the SFC to introduce tougher due diligence requirements and to put criminal and civil liabilities on sponsors if they fail in their jobs.
Not everyone is happy with the new regulations. Some international investment bankers have already threatened to leave the city if the SFC proposes penalties that are considered too tough.
But consider this. Bankers who are doing their job properly do not need to worry too much about the new regulation.
In fact, they should be happy to have it in place to kick the bad apples out of the industry. This is important for market quality.