Timid market regulators give little to cheer
The process leading up to the issuing of new rules for investment banks that sponsor stock-market listings followed a familiar pattern. Strong remedies to faults in the existing regulations were proposed, then watered down after consulting market players. The final package is better than nothing, but it falls well short of what was needed to prevent the kind of due-diligence scandals that have been cropping up with embarrassing frequency.
In this case, the stock exchange and the Securities and Futures Commission, which share responsibility for listings under an imperfect and muddled regulatory system, accepted initial proposals requiring companies to appoint outside compliance officers for a period after listing and requiring at least one listing sponsor to pass an independence test.
However, they declined to take up other suggestions, including letting regulators blacklist sponsors guilty of serious violations, and requiring sponsors to make public declarations of the truth and accuracy of listing prospectuses. Minimum capital and experience requirements for sponsors, too, were scrapped but might be tackled in a separate, later consultation on sponsor qualifications.
For anyone who has been following the halting pace of stock market reform in Hong Kong, the conclusion of the latest consultation exercise will come as little surprise. After agonising for many months, the government earlier this year declined to transfer responsibility for the vetting of listing applicants to the statute-backed SFC. It transferred some rules to the SFC but left the primary responsibility in the hands of the for-profit stock exchange, despite the confusion and conflict of interest this arrangement creates.
Considering how long it is taking to iron out the wrinkles in the basic regulatory regime, there is slim hope the government will move to handle the more complicated market oversight issues any time soon. These include how to vet and regulate the growing number of Hong Kong-listed companies that base the bulk of their operations, assets and management just over the border. The Euro-Asia Agricultural Holdings scandal, in which company founder Yang Bin inflated years of revenue and profit data before the listing, shed light on some of the shoddy sponsorship work being done. It also revealed the obstacles Hong Kong faces in summonsing witnesses, accessing records and enforcing shareholders' rights in cross-border cases.
The changes require listing sponsors to declare in a private statement to the exchange that they have made reasonable efforts to confirm statements made by their clients are true and complete. The exchange, however, derives part of its income from listings and has shown little appetite for imposing stiff penalties when its rules are broken. The amendments represent minimal change: it is a shame the will to go any further was lacking.
