Tougher rule on IPO sponsors
Updated: 2012-12-13 07:46
By Oswald Chen(HK Edition)
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The Securities and Futures Commission (SFC), the regulator of the local securities market, will enhance regulations on initial public offering (IPO) sponsors starting October next year in a bid to enhance the quality of IPO activities in the city.
The SFC proposed to make IPO sponsors liable for civil and criminal action if they make false statements in IPO documents, seeking to strengthen investor protection after a series of accounting scandals involving IPO activities.
The city's securities watchdog said that criminal liability should depend on whether a sponsor firm knowingly or recklessly approved prospectus information containing an untrue statement (including an omission) which was materially adverse from an investor's perspective.
The new requirements will apply to listing applications submitted on or after October 1, 2013. The Stock Exchange and Clearing Ltd will make appropriate changes to the Listing Rules to bring the revised rules into force when the requirements become effective.
The SFC's new recommendations on prospectus liability are not legally binding and the regulator will now have to apply to the government to put the proposals before the city's Legislative Council.
The SFC recommended four enhancement measures to strength the IPO sponsor role: * the IPO sponsor's appointment should be made at least two months before a listing; * the IPO sponsor fees' specification are based solely on the sponsor's role; * the whistle-blowing obligations of the sponsors; and, * requirement of IPO sponsors to ensure listing applicants and all professional advisers have full cooperation in the IPO exercise.
"The changes, along with a streamlined regulatory process, will incentivize sponsors to raise standards, pick the right deals and manage them well which should in turn reduce risks for investors and all those involved in IPOs," SFC Chief Executive Officer Ashley Alder said at the Wednesday press conference.
The SFC in May 2012 started the consultation on how to enhance the city's sponsor regulatory regime. The securities watchdog received 71 written responses from sponsor firms, the investor community, lawyers, accountants and other corporate governance bodies after the six-month consultation.
Investment banks expressed concerns that the proposed changes may increase the costs of arranging IPOs because it will require more onerous due diligence work. The sponsors are also worried that the stricter rules may stifle the city's IPO activities and harm smaller underwriters.
The respondents cautioned that the reforms would hurt the city's attractiveness and competitiveness as a premier listing venue, as well as leading to regulatory arbitrage whereas listing applicants may seek listings in jurisdictions other than Hong Kong.
"Although we are now experiencing lower IPO volumes these reforms will underpin market confidence during all market cycles," Alder said.
"Having someone on the hook for the quality of the information is a positive step," said Mark Konyn, chief executive officer of Cathay Conning Asset Management Ltd. "Whether or not the market can bear that level of liability is a question for the sponsors."
The proposal comes as Hong Kong is on track for its worst year for IPOs since 2003, with proceeds falling 68 percent from last year to $6.6 billion, Bloomberg data showed.
The SFC's proposals followed a series of scandals at mainland companies that have listed in Hong Kong.
Shares in mainland textile maker Hontex International Holdings Co were suspended in 2010, just three months after listing, when regulators alleged it had overstated its financial position in the listing prospectus. In April, the SFC revoked the licence of the sponsor of the Hontex listing, Mega Capital (Asia), and slapped it with a record fine of HK$42 million.
The textile company agreed to pay shareholders HK$1.03 billion in June, representing the first time the securities regulator has struck a share repurchase deal by a listed company to compensate IPO investors.
Bloomberg and Reuters contributed to this story
(HK Edition 12/13/2012 page2)