White Collar
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Hong Kong regulatory probe on UBS underlines urgent need for listing reform

Swiss bank could face financial penalties, and may even be stripped of its ability to provide corporate finance advisory services in Hong Kong

PUBLISHED : Monday, 31 October, 2016, 3:15pm
UPDATED : Monday, 31 October, 2016, 11:22pm

The Securities and Futures Commission (SFC) is investigating the role played by Swiss bank UBS as a sponsor in a number of unnamed stock market listings in the city, it said on Friday – another case that illustrates just how urgent reforms are still needed in Hong Kong to tighten up the accuracy of the financial information being offered during flotations.

The disclosure by UBS, released with its third-quarter financial results, said the SFC first informed the lender about its investigation this month and that it may face a range of penalties from paying a fine to risking being banned from advising clients in Hong Kong.

Investment banks such as UBS who guide companies to market are legally liable for the information contained in a listing prospectus, increasing the potential of litigation.

Neither UBS nor the SFC confirmed which IPOs had triggered the investigation but publicly available records show there have been several listings sponsored by UBS that have already led to SFC investigations into possible accounting irregularities.

One was China Metal Recycling, which Hong Kong stock exchange data and court filings show UBS sponsored in 2009. It was delisted in January this year after the SFC in July 2013 concluded it should be wound up, alleging that the firm – one of the mainland’s largest recyclers of scrap metal – had fabricated its sales and profit in forged documents and transactions leading up to its listing.

The High Court granted the liquidation order last year and the ruling showed China Metal Recycling “appeared to have obtained its initial listing by fraud”. Hong Kong Exchanges and Clearing scrapped its listing status in January.

China Forestry, another firm co-sponsored by UBS, has been placed in liquidation and faces likely delisting too. The liquidator in April sued UBS and other advisers on the timber producer’s 2009 Hong Kong IPO for alleged offences, including breach of contract and misrepresentation.

And shares in the UBS-sponsored Tianhe Chemicals have also been suspended from trading since 2015 pending the results of an investigation after its previous auditor flagged accounting issues.

Cases such as these show the dark side of the city’s IPO market, despite the fact it has remained the world’s busiest from 2009 to 2011, and last year and this.

The commission introduced tighter rules on IPOs in October 2013 that placed greater responsibility on banks underwriting them in the city.

At present, the SFC needs to wait for the HKEX listing division and listing committee to suggest any listing rule changes before it can become involved in the discussion.

A listing reform consultation process, launched in mid-June by the SFC and HKEX and due to end on November 18, has already divided business groups in the city, sparking calls for it to be abandoned with many suggesting it would only lead to over-regulation that could deter companies from listing in Hong Kong.

The new reform proposes the creation of two new committees, a listing policy committee and a listing regulatory committee, on top of the existing listing committee. The committees would have equal representation by the SFC and the HKEX, and have the authority to approve complicated listings and to set listing policies.

This may help the regulator and the HKEX respond quicker after identifying any regulatory issues related to sponsors or other listing matters that arise, and propose measures for market consultation to improve market quality.

Everyone is united in wanting a strong Hong Kong IPO market, not just in terms of quantity but also in quality.

And as that November 18 closing date nears, the UBS case shows just how urgently this matter needs to be resolved.