Investors fail to read prospectuses
Regulators are trying to improve corporate transparency. But do small shareholders care?
The regulators have worked hard to improve corporate disclosure standards but it is a question whether small investors really care.
White Collar attended the shareholders' meetings of two problematic companies last week and talked to a number of retail investors about how closely they read prospectuses. At one of the meetings, more than 100 shareholders gathered to approve fabric maker Hontex International's proposal to repay HK$1.03 billion it raised in its 2009 initial public offering. This came after the Securities and Futures Commission ordered Hontex in March 2010 to be suspended from trading after alleging its listing prospectus had overstated its profit and turnover figures.
White Collar found that few cared about what was published in the prospectus.
"I never read any prospectuses; there are several hundred pages. I do not know if a particular number is inaccurate," one investor said.
Another said he also did not read it, saying that he did his own research rather than simply rely on brokers' tips.
He said he agreed with SFC moves to improve disclosure as analysts relied on prospectuses to make recommendations to investors. "Although I do not read the big book (prospectus) myself, the analysts need to rely on the figures in it. Overall, I think the SFC is doing the right thing," the investor said.
In another move to boost corporate transparency, the SFC suspended China High Precision Automation on Wednesday from trading after the firm said state secrets was the reason for not giving all information to its former auditor KPMG. The company, which makes watch components and instruments for firms to measure temperatures and pressure, had asked shareholders to vote to appoint Pan-China to replace KPMG as its auditor.
China High Precision was voluntarily suspended from October following a dispute with its auditor and resumed trading only earlier this month after it said it was involved in "state secrets" and could not share certain information with KPMG. It then appointed Pan-China to conduct a special audit, which said the company's financial statement for the year ending in June last year was "true and fair".
A shareholder who attended the shareholders' meeting said he invested in the company as he believed the stock exchange had allowed it to resume trading.
From these conversations, we have learned that many retail investors still rely on analysts or regulators instead of making their own judgments about whether to invest in a company.
More investor education is needed. The government's long-awaited Investor Education Council needs to be set up as soon as possible.