HK SFC raps Citi as widespread IPO crackdown continues

Hong Kong’s securities regulation fines the US bank HK$57 million for sponsor failures, part of the watchdog's crackdown to ensure the quality of newly-listed companies and protect investors.

Citigroup has been slapped with a HK$57 million ($7.2 million) fine over the discharge of its duties as a listing sponsor of China’s Real Gold Mining on the Hong Kong Stock Exchange.

Hong Kong's Securities and Futures Commission (SFC) said on Thursday its investigation had revealed Citi failed to conduct adequate due diligence on Real Gold’s customers and did not properly supervise the US bank's staff ahead of its initial public offering.

SFC boss Thomas Atkinson has promised he will take bold action against IPO sponsors that put in sub-standard sponsor work. This comes at a time when banks are putting less resources into due diligence, since listing candidates now pay lower advisory fees compared to a few years ago.

Inner Mongolia-based Real Gold was listed on the main board of the exchange on February 23, 2009 with Citi as its sole sponsor. Macquarie was joint book runner. At the request of the company, trading in the shares of Real Gold was suspended in May, 2011. On June 28, 2016, the SFC suspended the company’s shares.

Real Gold owned three gold mines in Chifeng Municipality, Inner Mongolia, and specialised in the mining of gold and the processing of ore into concentrates containing gold and other minerals for subsequent sale, according to the com-pany’s 2009 prospectus.

The IPO prospectus disclosed that Real Gold’s sales increased more than twenty-fold between the year ended December 31, 2007 and the 10 months ended October 31, 2008.

The SFC found that information provided to Citi during its due diligence inquiries showed that apart from one customer, the customers of Real Gold for the two periods were completely different.

In reaching this resolution, the SFC took into account this was the first and only listing application in which the watchdog has had concerns over Citi’s work as a listing sponsor.

In responce to the SFC's statement Citi said that it has agreed to resolve this legacy issue with the SFC relating to its work as sponsor to Real Gold Mining`s listing application in 2009.

"The resolution announced by the SFC today does not involve any licence suspension and does not place any constraints on Citi’s business activities or on any individual in Hong Kong or elsewhere. Citi cooperated fully with the SFC’s investigation and has already taken appropriate action to ensure that it meets its legal and regulatory obligations at all times,” said a Citi spokesperson in an emailed statement to FinanceAsia.

To be sure, Citi's fine is a far milder blow than the one the SFC dealt to UBS's Asia investment banking business in March. The watchdog slapped the Swiss bank with an 18-month ban on sponsoring IPOs in the city and imposed a fine of HK$119 million.

Sources have told FinanceAsia that IPO sponsors typically share over 80% of the underwriting fees in an IPO.

UBS has been turning its focus away from sponsoring IPOs in Hong Kong since the SFC started investigating it in October 2016.


In any case, the fines underscore SFC's effort to increase scrutiny on IPO sponsors in order to ensure the quality of newly-listed companies and protect investors.

In recent years, the increasing number of boutique investment banks and Chinese brokerages also forced bulge-bracket banks to lower their demands on sponsor fees in order to secure deals.

The securities regulator said last year it was investigating as many as 15 IPO sponsor cases.
SFC is the gatekeeper for regulatory compliance in Hong Kong's IPO market, and its role is even more important as the city has accepted the so-called dual-class share structure, which will allow companies to conduct IPOs with unequal voting rights.

The move raised concern over corporate governance issues and fears of undermining investor protection, although HKEx has said it will offer more choices to investors and allow Hong Kong to host more IPOs of new economy companies and technology start-ups.

This story has been updated to include a statement from Citi

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