City must continue to punish and protect in its role as a leading IPO destination

Initial public offerings are big business in Hong Kong, so there is enormous pressure and temptation for those involved to cut corners. This is why regulators have to be especially vigilant and tough. We cannot solely rely on IPO sponsors and investment bankers to preform proper due diligence, and the Securities and Futures Commission has shown this by imposing record fines of HK$786.7 million on investment banks UBS, Morgan Stanley, Merrill Lynch and Standard Chartered for failing in their duties as IPO sponsors.

Swiss lender UBS bore the brunt of the fines as two of its investment units were ordered to pay HK$375 million for failing to conduct proper due diligence as co-sponsors of China Forestry Holdings in 2009, Tianhe Chemicals Group in 2014 and a third whose name was not disclosed because of an ongoing probe. China Forestry collapsed two years after its 2009 listing. Tianhe has been suspended from trading since 2015. In addition, the commission also banned UBS Securities from sponsoring IPOs for one year and suspended the licence of a former UBS banker for two years for failing in his supervisory duties in the China Forestry IPO. Morgan Stanley Asia was fined HK$224 million and Merrill Lynch Fast East HK$128 million for failures as joint sponsors in Tianhe Chemicals’ IPO. Standard Chartered Securities (Hong Kong) was fined HK$59.7 million for a similar offence as co-sponsor of China Forestry.

Many mainland companies use international investment banks not only for their financial expertise in stock markets, but also their reputation to add a patina of respectability to their listings. In a perfect world, reputable investment banks will use their expertise to educate their client companies on best international practices and make sure nothing is amiss. It’s better to kill a deal than to compromise. In the real world, the heavy hand of the law is needed at times to remind well-paid bankers that their duties go beyond making lots of money for themselves and their employers.

The stock market is often compared to a casino. That is not always true. It offers well-run companies a place to raise capital and for investors to put their money. But the integrity of the market is compromised by dodgy companies looking for a quick listing and careless sponsors failing in due diligence. In such situations, those in the know can play the system while small investors without the expertise and resources will suffer.

Hong Kong stands or falls as a financial hub, and at its heart is the stock market, which must be protected from abuse. If the city is to remain as a premier IPO destination, especially for the mainland, we must protect investors, enforce rules and punish those who prefer to make a quick buck and ignore their fiduciary duties.