In a much-awaited move, Hong Kong’s Securities and Futures Commission (SFC) yesterday launched a two-month consultation on proposals to enhance sponsor regulations. The move comes in light of growing concerns about the quality of some companies that have sought a listing status in Hong Kong, which continues to be the world’s top market for IPOs.
Just last month, the SFC revoked Mega Capital’s licence to advise on corporate finance and fined it HK$42 million ($5.4 million) for failing to discharge its sponsor’s duties in relation to the listing application of Chinese fabric maker Hontex International in 2009. The regulator cited reasons such as inadequate and sub-standard due diligence work and failure to act independently and impartially, while Mega Capital denied any wrongdoing.
Under the listing rules, sponsors — investment banks and brokerages — should be appointed by listing applicants to help with their initial applications for listing and be closely involved in preparing the listing documents.
“Sponsors play a lead role in coordinating an IPO. They advise and guide directors and are centrally involved in ensuring that prospectuses contain reliable and relevant information for potential investors,” said SFC chief executive officer Ashley Alder yesterday.
“Our proposals are aimed at encouraging best practice across all sponsor firms whom investors rely on as key gatekeepers of market quality.”
The current companies ordinance sets out provisions regarding civil and criminal liability for untrue statements, including a material omission in a prospectus, but the regulator is now proposing to make clear that a sponsor has civil and criminal liability under the provisions.
“We are not doing this in order to put people in jail,” Adler told a press conference. “The core of what we are saying and what takes up most of the paper is: ‘Let’s have a better quality product’, and if we have a better quality product, then what we should end up with is a better quality output.”
The SFC also proposed that a sponsor not submit an IPO application unless it has completed the vast majority of due diligence, and to publish the first draft of a prospectus on the Hong Kong stock exchange website to make vetting more efficient.
Another issue involves the number of advisers on a deal. The regulator proposed to restrict the number of independent sponsors for each listing to only one or a limited number, as the appointment of multiple sponsors can lead to fragmentation of work and gaps and overlaps.
As for a timetable, Alder said his organisation will want to implement proposals concerning parts not dealing with changing law, such as due diligence and code of conduct as quickly as possible, after it assesses the response from the two-month consultation period.
But because proposals concerning prospectus liability will involve the administration and the legislative process, Alder said he cannot give an exact timetable for them at this time.
Broadly, the reaction so far has been mixed to positive, he added.
Martin Rogers, partner at Clifford Chance, who along with Bonnie Chan of Davis Polk has been retained by the leading investment banks to assist them in responding to the SFC’s consultation paper, said that the industry welcomes the opportunity for a review of the regulatory framework around IPOs.
“There clearly have been a few problem cases in the past, and the risk is regulators and the government will all of the sudden over-regulate. What nobody would want to see will be over-regulation with a result that Hong Kong becomes less attractive for listing,” said Rogers.
“But the SFC has put out a consultation paper that allows two months for responses, and hopefully whatever comes out of it at the end of the day will be carefully considered and balanced proposals.”
In late 2009, the SFC established a specialised team, which had since conducted a theme inspection on 17 sponsors, focusing primarily on their work undertaken in initial listing applications, the regulator said in a report in March last year.
During the sponsor theme inspection, the SFC said it uncovered certain deficiencies in the work performed by some sponsors. It also found some inadequacies in their internal systems and controls, including unsatisfactory due diligence on listing applicant’s business and questionable disclosure to the Hong Kong stock exchange during the listing application process.
The SFC said at the time that it will review existing requirements relating to the work of sponsors, taking the concerns raised in the report into consideration, to enhance the sponsor regulatory regime for better investor protection and market quality.
”We look forward to assisting the regulators in finding the most effective, appropriate and balanced way to address the issues they raise, in the best interests of the Hong Kong market,” Rogers said.