April 23, 2012 / 3:13 AM / 7 years ago

Hong Kong watchdog punishes underwriter for lax IPO standards

HONG KONG/SINGAPORE (Reuters) - Hong Kong’s stock market regulator has revoked the license of an underwriter of a troubled 2009 listing and slapped it with a record fine in a warning to investment banks working in one of the world’s biggest IPO markets to strengthen their due diligence.

Many mainland Chinese firms are tapping capital markets for the first time, but standards have fallen short. The penalties come just as the Securities and Futures Commission (SFC) is preparing to toughen listing regulations.

Last week sources told Reuters the commission will issue proposals in the next few weeks calling for stricter rules governing IPO sponsors. It is expected to look at whether sponsors should be held liable for the contents of deal documents.

The SFC stripped Mega Capital (Asia) of its license and imposed a HK$42 million ($5.4 million) fine, saying the sponsor of Chinese fabric maker Hontex International Holdings’ IPO failed to obtain materially important information from suppliers and customers and failed to act independently and impartially.

“It’s a very clear message that sponsors will be held to account for serious deficiencies in listing applications,” said James Wadham, a partner at law firm Clifford Chance in Hong Kong.

Chien Hung-Wen, chairman of Mega Capital’s parent company Mega Securities, told Reuters the company would not appeal the SFC’s decision and that it plans to discipline some of the staff involved.

He added that the move would not have any impact on Mega Securities’ profit as Mega Capital’s main business had been declining anyway.


Hong Kong has been the world’s biggest IPO market for two of the past three years with $97.9 billion being raised between 2009 and the end of 2011, according to figures from Thomson Reuters.

As many firms raising money in Hong Kong are based in mainland China, regulators have found it difficult to take action against a company if there are problems with the IPO.

That means sponsors, who are responsible for preparing a company’s IPO documents and ensuring compliance with listing rules, are seen as gatekeepers for new entrants to the market.

Authorities have been stepping up their warnings. In March 2011, an SFC inspection of 17 sponsors found a raft of deficiencies in their work, including inadequate due diligence and disclosure to the stock exchange in listing applications.

The Hong Kong Monetary Authority said in April it had made recommendations to JPMorgan, UBS AG, HSBC, Royal Bank of Scotland and Deutsche Bank on ways to improve their listing work.

Wadham and other lawyers say that further strengthening of rules could have the unintended consequence of some big name banks pulling back from the market, which would mean work would then flow down to less experienced corporate finance advisers.

“Sponsors will be more careful from a risk management perspective, as, if you’re a bigger player, having your license revoked will be very serious,” said Mark Johnson, head of law firm Herbert Smith’s Hong Kong practice.

Hontex went public in December 2009, but its shares were suspended just three months later after the commission alleged it had materially overstated its financial position in its listing prospectus.

The SFC said Mega Capital had conducted inadequate and sub-standard due diligence work but found no evidence that the firm was involved in any fraud.

Shares in Mega Securities’ parent, Taiwan’s Mega Financial Holdings, which is partly state-owned, were 3.5 percent higher on Monday.

The regulator has also taken court action against Hontex, freezing the $128 million in proceeds from its listing, but it is still trying to win the right to return that money to investors, with a court hearing scheduled later this year. All of Hontex’s executives are believed to be either in mainland China or Taiwan.

Additional reporting by Jonathan Standing and Emily Chan in TAIPEI; Editing by Edwina Gibbs and Matt Driskill

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