HONG KONG: ‘Zero Tolerance’ For Listco Irregularities

Written by Andrew Vanburen (China Correspondent)
Friday, 07 October 2011 07:36

In April of last year, the Hong Kong bourse regulator executed an unprecedented freezing of the entire capital of casual wear firm Hontex International (HK: 946) – nearly one bln hkd – due to irregularities, resulting in an immediate suspension of trade of Hontex’s shares. Photo: HontexHONG KONG’S bourse regulator said it now has a policy of “zero tolerance” for listed firms evidencing any irregularities including suspicious trading activity, questionable accounting practices or suspected insider trading, with PRC-based H-shares being the primary target.

A Chinese language piece in Yangcheng News said the apparent uptick in market vigilance would apply equally to listed firms as well as those looking to launch IPOs in Hong Kong.

By upping the ante on compliancy, the Securities and Futures Commission (SFC) -- the watchdog for Hong Kong’s capital markets -- will provide a much-needed reality check over the rate and size of recent H-share IPOs on the Special Administrative Region’s (SAR) bourse.

Market watchers say the timing is ripe for Hong Kong to recalibrate its IPO conveyer belt to give serious consideration only to prospective PRC-based firms with more transparent and market-friendly auditing track records.

“Up to now, one of the biggest criteria for IPO consideration was recent earning power and cashflow. Hopefully with this recommitment to a more rigorous candidate vetting process, prospective H-share firms will look to Hong Kong as less of a place to make a quick buck and more as a stable platform to cultivate an enterprise over time.

“This can only be a plus for minority investors,” the report cited an analyst as saying.

The stricter oversight will inevitably result in a leaner, meaner capital market in Hong Kong, which will by default scare away some cash-rich Mainland Chinese firms with limited earnings potential going forward.


Tungda Innovative Lighting (HK: 8229) reported a nearly 75% plummet in recent quarterly revenue, with an executive director resigning shortly thereafter for unspecified reasons. Photo: TungdaBut market watchers say the enhanced oversight measures will result in a more competitive “financial center” in Hong Kong that practices the three principles necessary for successful listings: regulatory improvement, regulatory enforcement and regulatory market compliance, all of which will strengthen the SAR in the long run and serve as a positive example to other capital markets.

However, it is not only listed firms or prospective listcos that need be concerned about the tighter governance.

IPO underwriters and entities serving as proxies in a promotional capacity for listing candidate firms will also be held to higher standards by the SFC.

Mr. Long Keqiu, president of the Hong Kong Society of Financial Analysts, contends that each regulator should ensure a fair and impartial vetting and oversight process while also striving to protect against market misconduct.

“If any problems are discovered, then immediate and appropriate action should be taken, as with any regulatory body, blindly carrying out justice and instilling fairness is the sacred charge of all market watchdogs, regardless of the company’s origin,” he said.

The report pointed to some recent cases of market irregularities that may have been nipped in the bud had the SFC had a more rigorous vetting regime in place.

Tungda Innovative Lighting (HK: 8229) reported a nearly 75% plummet in recent quarterly revenue, with an executive director resigning shortly thereafter for unspecified reasons.

And in April of last year, the SFC executed an unprecedented freezing of the entire capital of casual wear firm Hontex International (HK: 946) – nearly one bln hkd – due to irregularities, resulting in an immediate suspension of trade of Hontex’s shares.

The bourse watchdog accused Hontex of presenting false or misleading information.

The report concluded by saying that extreme cases of noncompliance like these will likely be the exception rather than the rule if the letter of the law is enforced.

Q: i just wonder how SFC executed the freezing of the capital of hontex?

SGX should follow suit.
If not, the dubious folks who are unable to List in Shanghai/Hong Kong will flock here which will result in more pain for investors.

Big Toe Wrote:the dubious folks who are unable to List in Shanghai/Hong Kong will flock here which will result in more pain for investors.

Too late... this has already happened... in fact the reverse is now occurring with the credible companies delisting from SGX and relisting in HK:

Want Want
Sihuan
Man Wah
Hongguo

I am sure there will be more to come.

it seems like SFC executed the freezing of the capital of hontex quite easily..which makes me ponder how come sgx can't do the same?

the capital in subject here..is it referring to the cash that have to be kept by the exchange?
if is so, how come sgx doesnt implement such prudential measures?

seems like retail investors like us ought to look at HK market closer since more junk companies seem to make their way into sgx easily

which reminds me of the talk of Man United being listed here.
there was so much talk on how singapore was preferred over hong kong.
singapore was preferred only becoz of lax rules/controls.
to think that the media was hyping it up to make singapore feel like a winner.....

how wrong...how very wrong.

Going to Hong Kong is not a panacea
Since this forum has quite lot of high quality people, we'd also be familiar with Sino Forest listed in Canada, and other coys listed on NYC.

Here's something ppl continue to grapple with: profits for promoters & early birds vs long term integrity of the capital markets.

Subject Rusal Ipo In Hong Kong: All Risk, No Reward For Hkex?
Origin Consulate Hong Kong (China)
Cable time Wed, 20 Jan 2010 11:34 UTC
Classification CONFIDENTIAL
Source http://wikileaks.org/cable/2010/01/10HONGKONG113.html
Referenced by 10MOSCOW251
History First published on Thu, 1 Sep 2011 23:24 UTC
Extras ? Comments
VZCZCXRO2819
PP RUEHCN RUEHGH
DE RUEHHK #0113/01 0201134
ZNY CCCCC ZZH
P 201134Z JAN 10
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC PRIORITY 9439
INFO RUEHOO/CHINA POSTS COLLECTIVE PRIORITY
RUEHLO/AMEMBASSY LONDON PRIORITY 0771
RUEHMO/AMEMBASSY MOSCOW PRIORITY 0505
RUEHFR/AMEMBASSY PARIS PRIORITY 0326
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
Hide header
C O N F I D E N T I A L SECTION 01 OF 02 HONG KONG 000113

SIPDIS

STATE FOR EAP/CM AND EEB/IFD

E.O. 12958: DECL: 01/23/2025
TAGS: EFIN [Financial and Monetary Affairs], Econ [Economic Conditions], EINV [Foreign Investments], HK [Hong Kong], CH [China (Mainland)], RS [Russia; Wrangel Islands]
SUBJECT: RUSAL IPO IN HONG KONG: ALL RISK, NO REWARD FOR
HKEX?

Classified By: E/P Chief Martin Murphy, Reason 1.4 b/d

¶1. © SUMMARY: Russian Aluminum company Rusal is set to be
the first Russian company to list on the Hong Kong Stock
Exchange (HKEx) when it completes its Initial Public Offering
(IPO) on January 27. Rusal's questionable corporate
governance, precarious debt profile, and its CEO's alleged
ties to organized crime delayed HKEx approval for more than a
year before a complex debt restructuring deal and appointment
of two local independent directors facilitated HKEx approval.
HKEx is willing to accept the reputational risk of listing a
company with Rusal's problems to help diversify its
China-centric market. But Hong Kong's Securities and Futures
Commission (SFC) has thrown cold water on HKEx's plan by
restricting the IPO to institutional investors able to
purchase at least HK$1 million (US$130,000) in shares and
requiring trades in large board lots that will make the stock
unavailable to many smaller investors. Retail investors are
crying foul and HKEx fears its attempt to woo other Russian
companies will be undercut by the SFC's attempts to protect
small investors. END SUMMARY

HKEx Takes the Risk, Hopes for Rusal Rewards
============================================

¶2. (U) After several false starts and a complicated debt
rescheduling, Russian aluminum giant Rusal appears set to
issue shares in Hong Kong on January 27. Rusal would be the
first Russian company to list in Asia and seeks to raise as
much as US$2.6 billion to pay down its US$14.9 billion in
debt. Since its establishment in 2000, the product of a
merger of Sibirsky Aluminum (controlled by Oleg Deripaska)
and the aluminum assets of Millhouse Capital (a Russian
holding company controlled by Roman Abramovich), Rusal has
borrowed heavily to acquire manufacturing and raw materials
assets in Russia, Guinea, Guyana, Australia, and China.
(Note: companies controlled by Deripaska purchased all of
Millhouse Capital,s stake by 2004, leaving Rusal under
Deripaska,s control). Rusal is reportedly now the world,s
largest aluminum producer, accounting for 12% of global
aluminum output.

¶3. (U) HKEx and Hong Kong government officials have been
seeking greater diversification of companies listed on the
Hong Kong Stock Exchange for several years with limited
success. Mainland China-related companies have come to
dominate the HKEx, accounting for 40 percent of all listed
companies, 58 percent of market capitalization and 72 percent
of turnover in 2009. Less than ten percent of listed
companies are from outside Mainland China or Hong Kong, with
the largest share of those based in Taiwan. A handful of
companies from Southeast Asia, the UK, the US and Canada,
mostly with business interests in China, are also listed in
Hong Kong. Hong Kong is eager to add a large international
company with a global business reach to its stock market.

¶4. © Rusal's listing application has been fraught with
problems. The HKEx Listing Committee approval in December
2009 came after three previous applications were deferred due
to questions about Rusal's corporate governance, Deripaska's
alleged ties to Russian organized crime, and financial
solvency. A complex deal to restructure US$16.7 billion of
debt to over 70 creditors and an agreement by Russian
state-controlled bank Venesheconombank (VEB) to invest US$600
million in Rusal and roll over a US$4.5 billion loan due in
late 2010 appear to have addressed HKEx concerns about
Rusal's solvency for now. The December 2009 appointment of
two well-known Hong Kong independent directors, Hong Kong
Mercantile Exchange Chairman Barry Cheung Chun-yuen and
former Secretary for Justice Elsie Leung Oi-sie, gave HKEx
officials the additional comfort needed to approve the
listing. Leung was a well-regarded Justice Secretary but has
no previous business experience. Her appointment is widely
viewed as an attempt to reassure HKEx officials and Hong Kong
regulators that Rusal will abide by HKEx rules.

SFC's "Bizarre" Efforts to Protect Investors
============================================

¶5. © HKEx officials may be satisfied, but the Hong Kong
Securities and Futures Commission (SFC) clearly has its
doubts. The SFC has taken the unique step of restricting
Rusal IPO subscriptions to institutional investors, requiring
a minimum investment of HK$ 1 million (US$130,000), and will
require Rusal shares to be traded in board lots of 200,000
shares, effectively shutting out most small retail investors

HONG KONG 00000113 002 OF 002


in Hong Kong. The SFC's decision was criticized as "bizarre"
by former HKEx Independent Director and noted gadfly David
Webb, who noted that Rusal's lack of an offering to retail
investors not only violated HKEx rules but, ironically,
reduced protections for these investors. This is because,
following the IPO, individuals could not be excluded from
trading in Rusal shares, and those buyers on the secondary
market would have no recourse to the courts in the event of
misinformation in the prospectus.

¶6. © Webb criticized the SFC decision as inconsistent with
previous rulings rejecting large board lots and noted that
large board lots actually increase risk by making it more
difficult for investors to diversify their equity holdings.
Several commentators speculated that the SFC's ruling was
heavily influenced by investor complaints about Lehman
Minibonds but noted that the SFC's attempts to protect small
investors were unlikely to prevent them from investing in
Rusal stock once it began trading in the secondary market.
Indeed, the restrictions were likely to result in more
complaints if the share price increased in early trading,
said former Legislative Councilor and political commentator
Albert Chan.

HKEx Didn't Realize Biggest Risk was SFC
========================================

¶7. © The HKEx was disappointed with the SFC restrictions,
said HKEx Executive Vice President Lawrence Fok. A
successful Rusal launch was seen as a first step towards
attracting additional listing business from outside greater
China, a key part of Hong Kong's plan to compete with rival
Shanghai. The review process was thorough and demanding, he
said, pointing to Rusal's 1,100 page prospectus as proof.
But Fok worried that Rusal's restricted listing would
discourage other companies from listing in Hong Kong. Noting
that Rusal Global Depository Receipts would begin trading on
Euronext at the end of January, Fok dismissed suggestions
that Rusal's listing would be profitable for the HKEx. Most
of the Rusal trading was likely to take place on the Euronext
platform, he said. Given the lengthy and expensive vetting
process in this case, HKEx was unlikely to see any
significant financial benefits, but HKEx officials were
hoping that the high profile listing would attract others to
the Hong Kong exchange. The SFC's restrictions might
encourage other Russian companies to look again at the London
Stock Exchange, where they faced less scrutiny, groused Fok.


¶8. © But others warn that HKEx is risking its good name by
listing a company like Rusal. Raymond Chan, director of the
Center for Corporate Governance and Financial Policy at Hong
Kong Baptist University, told the press that Rusal's listing
in Hong Kong could tar the exchange's reputation as a home
for high-quality companies. Several Hong Kong-listed
companies were the subject of governance and regulatory
inquiries in 2009, including a firm that was suspended
shortly after its IPO for misrepresenting the company,s
value. Chinese firms have been drawn to Hong Kong for
overseas listing due to its less stringent disclosure and
reporting requirements compared to other international
exchanges, said Chan. That increased Hong Kong,s
attractiveness but also damaged its aspirations to be a
world-class financial center.

Lining up to be Signing up
==========================

¶9. (U) Despite the criticism and the potential risk,
institutional investors, led by some of Hong Kong's
wealthiest residents, have lined up to buy Rusal shares.
According to the press, Paulson & Co., Nathanial Rothschild,
Malaysian billionaire Robert Kuok, and Li Ka-shing have
signed up to purchase shares worth US$20 million to US$100
million each, and Rusal's IPO was fully subscribed just three
days after being made available, suggesting many respected
investors believed a big bet in Rusal was likely to pay off.

Quote:in Hong Kong. The SFC's decision was criticized as "bizarre"
by former HKEx Independent Director and noted gadfly David
Webb, who noted that Rusal's lack of an offering to retail
investors not only violated HKEx rules but, ironically,
reduced protections for these investors. This is because,
following the IPO, individuals could not be excluded from
trading in Rusal shares, and those buyers on the secondary
market would have no recourse to the courts in the event of
misinformation in the prospectus.

¶6. © Webb criticized the SFC decision as inconsistent with
previous rulings rejecting large board lots and noted that
large board lots actually increase risk by making it more
difficult for investors to diversify their equity holdings.
Several commentators speculated that the SFC's ruling was
heavily influenced by investor complaints about Lehman
Minibonds but noted that the SFC's attempts to protect small
investors were unlikely to prevent them from investing in
Rusal stock once it began trading in the secondary market.
Indeed, the restrictions were likely to result in more
complaints if the share price increased in early trading,
said former Legislative Councilor and political commentator
Albert Chan.

d.o.g. Ur comments please.....


My Thots....
I agree with Red Corolla (RC) comments here; but up to a certain point.

Be aware that as biz entities operating as exchanges, the HKEx or SGX has different motivations from the person who invests in stocks or IPOs.
Both exchanges are competitors going for the same pie and they want to build "critical mass" or size that will facilitate further growth in certain clusters. In doing so, there is an inherent conflict between the profit maximising objectives of the exchanges and the regulators who are trying to protect "Mom N Pop" investors.

Many bizs delist from SGX, only to list in HKEx later; indicative of "arbitraging".
Is this good, short term or long term for the exchanges?
While the act of arbitraging is short term, the structural impediments and huge expenses, for delisting and relisting make the migration "irreversible" ( for most cases).
It will appear that SGX has to come up with real fundamental change to address this "exodus" issue or there will be a serious hollowing out, long term.

Perhaps that's why the fight is so intense ( SGX failed M&A with ASX, looking to digest LME, luring ManU etc)....
But , in the Sg context, I will like to see better protection of retail investors of the Mom N Pop kind.
Altho Webb disagreed with the SFC moves for Rusal; at least, the motivations were right.

(11-10-2011, 12:47 AM)Big Toe Wrote: which reminds me of the talk of Man United being listed here.
there was so much talk on how singapore was preferred over hong kong.
singapore was preferred only becoz of lax rules/controls.
to think that the media was hyping it up to make singapore feel like a winner.....

how wrong...how very wrong.

For those who have not read Mr. Chen Show Mao's view on this:

Quote:Free Market
by Chen Show Mao on Wednesday, September 21, 2011 at 5:28pm

I was glad to learn that the football club Manchester United will soon be offering its shares in Singapore. Glad for the club, which I'm sure could use more cash, but mostly for Singapore.

The news also drew reactions from Hong Kong, where the club had apparently abandoned its earlier plans for a similar offering, in favor of the Singapore stock market. A column in the South China Morning Post called SGX, the Singapore Stock Exchange, a "cowboy market" with "pretty low standards", for letting through the offering, part of which will be of non-voting preference shares. "A respectable exchange does not accept shareholding structures that undermine the voting rights of the investing public." Similar concerns are echoed by some Man U supporters.

I hope all this furor will serve to focus the attention of potential investors on the specific terms of the shares that they will be buying (i.e. no voting rights among other things). The information flow will help the (Singapore) stock market work better when the offering comes around. But I think the criticism is misplaced.

Some Man U fans may distrust the Glazers and do not wish to see them further entrench themselves at the club with a share offering, particularly one in which shares with no voting rights will be sold, in effect enabling the Glazers to raise cash without conceding the proportionate amount of control. But that is a different issue from how good the Singapore stock market is in serving the interests of its participants. As long as the investors have easy access to information on what they are buying (Watch out!), the fact that the Singapore stock market offers them more choices (i.e. you can pay less for your shares by skipping the voting rights) makes Singapore a better market for them, not worse. In this case, in addition to the customary disclosure requirements, publicity of the long-drawn green-and-gold anti-Glazer protests could only have helped to sound the alarm "Buyer Beware" to potential investors (many of them fans). In the "democracy" of the listed companies, shareholders can easily vote with their feet and many choose to. They prefer exit to voice and simply sell the shares or demand a lower price before buying.

There are many reasons why some majority shareholders and management feel strongly about issuing shares with different voting rights. Some may indeed, as the SCMP column suggests, wish to steal from the listed company (I wouldn't know as much as the experts from Hong Kong). But others have offered rationales relating to company performance that seem to sit well with investors. Many "respectable" folks have fiddled with different voting rights for different classes of shares: Google, Warren Buffett, Her Majesty's Government in the British privatizations. Stock exchanges in the United States and elsewhere permit the listing of different classes of common shares with different voting rights, as well as the listing of different securities such as common shares and preference shares with different voting rights.

Singapore has little to apologize for in offering up to the world a free market.

http://www.facebook.com/notes/chen-show-...7246378210

I tend to disagree with the comments on sub-par offerings/allowing dubious companies to list in the quest to become a free market.
Here's why...

1. I hold a traditional view of the stock market. That is, the investing public gets a chance to own a part of a company. Ownership must come with voting rights at the very least. As for the company, it gets the much needed funds to execute its business plans. The market is a place where capital is transferred and put to work. All the derivatives/warrants/etc that is being traded has no real value on its own, designed by folks who profit from more market/trading activities.

2. Sure...buyer beware, but how fair is it to the investing public when we discover that a lot of these offerings are in fact, full of worms; where financial statements cannot be trusted. Where do we draw the line? Do we want Sub-prime loans being offered to the investing public?
Seriously, do we really want that?

IMHO David Webb was justified in criticizing the Rusal offering as it was clear that HKEx was bending/amending its own rules.

As for the issue of Manchester United trying to use a structure that would have left the Glazers in control, it is a free market. I agree with Chen Show Mao's view that if you don't like it, don't buy it. Nobody forced you to invest.

Regarding the furore over unequal voting rights, people seem to forget that SPH has a dual-class share structure too. There are ordinary shares, held by regular shareholders, and there are management shares, held by various entities such as Great Eastern, OCBC, NTUC Income, SingTel, DBS, UOB, NUS and F&N.

The management shares outstanding are equal to only 1% of the ordinary shares in issue, but they have 200x voting power when it comes to "any resolution relating to the appointment or dismissal of a director or any member of the staff of the Company". In other words, the holders of the management shares wield unlimited power since they can appoint or dismiss anyone at the company, from the cleaning lady all the way up to the chairman of the board.

Clearly, the holders of ordinary shares have no say at all over the affairs of the company. The ordinary shares are effectively non-voting shares; you can vote, but it's meaningless since you will always be outvoted on the really important matters. Yet, there are plenty of people who own ordinary shares in SPH. Either they are all completely deluded about their voting rights, or they don't care about their lack of voting power.

As to who can own management shares, that is stated in the Newspaper and Printing Presses Act. I will leave interested readers to enlighten themselves at the Attorney-General's Chambers:

http://statutes.agc.gov.sg/

---

Big Toe Wrote:Do we want Sub-prime loans being offered to the investing public?
Seriously, do we really want that?

Whether we want it or not, we already have it.

1. Babcock and Brown Global Investments (now Global Investments) was a fund whose investments included sub-prime loans. It listed without any objections from SGX or MAS. Investors took severe losses during the 2008-2009 crisis, and it still trades at less than 20% of its IPO price today. I wrote on Wallstraits about BBGI when it went IPO and pointed out the awful things it owned. Didn't seem to stop people from buying it and losing money.

2. The Lehman Minibonds were far worse than sub-prime loans. Investors who bought them did not become sub-prime lenders, they became sub-prime insurers. Needless to say the losses suffered were horrendous. MAS was happy to let the financial institutions sell them, and when the Minibonds blew up the punishment was that the financial institutions couldn't sell these things for 6 months, which was no punishment at all since the bad PR meant nobody could move these things anyway.

The reality right now is that we have a disclosure based regime, which essentially means you can do anything you want, within the law, as long as you disclose it. Whether it is ethical or not is not the concern of the authorities, they are only concerned with legal matters, not moral matters.

Investors have to learn to think for themselves and not depend on the government to spoonfeed them. Kind of like how children have to be allowed to fall down and fail sometimes, otherwise they will never learn to get up and fend for themselves.