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Eric Ng

Oil producer may have breached listing rules by depositing 6.6 billion yuan with connected entity

Hong Kong Exchanges and Clearing (HKEx) has launched a probe into transactions between CNOOC and a finance company controlled by its parent, China National Offshore Oil Corp.

The red chip oil and gas producer has confirmed that it did not make a public announcement, or seek shareholder approval, before placing as much as 6.6 billion yuan with CNOOC Finance, set up in June 2002 to provide financial services to the CNOOC family of companies.

This would appear to leave the company in breach of HKEx listing rules, under which financial assistance given to a connected entity valued at greater than 0.03 per cent of  the listed company's net assets must be disclosed. Deposits are considered a form of financial assistance under the rules.

For any connected transactions amounting to more than 3 per cent of net company assets, shareholder approval is required.

CNOOC Finance is regulated by the People's Bank of China  but operates under a restricted mandate as it not a fully licensed bank.

The company is 62.8 per cent owned by China National Offshore Oil Corp and 31.8 per cent by CNOOC. The remaining stake is owned by other China National Offshore Oil Corp subsidiaries.

According to an April 8 CNOOC announcement, the listed company had placed deposits amounting  to 6.6 billion yuan with CNOOC Finance 'from time to time'.

The sum is equivalent to 14.12 per cent of CNOOC's net assets of 46.73 billion yuan at the end of last year.

'We have been following up on the case since the company's  announcement,' an HKEx spokesman said.

CNOOC will hold an extraordinary shareholders meeting  next Wednesday, at which it will ask shareholders  to approve  deposits of up to 6.8 billion yuan with CNOOC Finance over the next three years.

CNOOC chief financial officer Mark Qiu confirmed that it would be the first time  the company had requested shareholder approval for such deposits, but he could not explain why this had not been done before for earlier deposits.

'You have to ask a lawyer about such things,' he said. 'The 6.6 billion yuan was deposited for only a brief period of time, and as of now we have zero balance with CNOOC Finance.'

The comment may raise eyebrows on the mainland, as CNOOC Finance is prohibited from taking deposits for less than three months under People's Bank of China rules.

Corporate governance activist David Webb said listed companies that placed money with units controlled by their majority shareholders ran into the risk of conflict of interest.

'If CNOOC Finance gets into trouble, is CNOOC really going to demand its money back, given that both are controlled by the same entity and chaired by the same person?' he wrote.

'It is a golden rule of good governance that listed companies should not lend money to their controlling shareholders.'

This is not the first time that CNOOC, which has enjoyed a reputation for corporate transparency,  has come under the spotlight on governance issues.

Last year, it told an analysts' briefing it would probably issue a special dividend, raising regulators' concerns it may have selectively disclosed price-sensitive information.



HKEx launches CNOOC investigation