Tinker data, bankers, spies – daunting IPO landscape: Starting tomorrow, bankers and listing professionals could be jailed in the worst case scenario for their role in public listings in Hong Kong

Tinker data, bankers, spies – daunting IPO landscape
Vanson Soo
Monday, September 30, 2013

Starting tomorrow, bankers and listing professionals could be jailed in the worst case scenario for their role in public listings in Hong Kong. Up till recently the SAR has been a top capital-raising center and magnet for initial public offerings from mainland companies. The current clampdown on data and corporate investigations in China further complicates the situation. The Hong Kong Securities and Futures Commission announced last December new measures to step up the regulatory regime for listing sponsors, including clarifications of their liabilities – up to civil and criminal liabilities – to be put into effect from October 1 and apply to all public listings filed from that date.These measures supplement the new listing rules previously announced by the Stock Exchange of Hong Kong to promote more extensive and thorough due diligence of listing candidates.

According to the SFC, any untrue statement found in the listing prospectus and resulting losses for investors mean the directors of the listing debutant, listing sponsors and any others who have authorized the issue of the listing prospectus could face up to three years behind bars.

The core message: listing sponsors had better conduct their due diligence properly and detect any risks before formally filing the companies for listing.

Hong Kong has recently lost its crown status from the world’s top IPO center in 2010 to fourth place last year, when 68 percent of its IPOs originated from the mainland.

But Chinese listing have also captured “IPOs gone wrong” headlines in recent years.

Stock market regulators generally agree that many of these IPOs, causing huge financial losses to investors, could have been avoided had the due diligence been thorough and proper. There are various types of due diligence, including legal, financial, environment and reputation due diligence. Reputation due diligence falls under the domain of commercial investigations and business intelligence. Corporate investigators are engaged to comb data and identify well- placed sources to ascertain facts and claims made by the listing applicants and also verify any issues and concerns raised by the listing sponsors.

After all, the listing applicants may not be forthcoming, especially with any dark history that may hinder their listing aspirations.

It is the process of finding out if the businesses and people on the other side of the table are exactly who they are and what they claimed to be.

However, these investigative works are currently curtailed in the mainland. According to recent reports, scores of corporate investigators have been arrested after the government began clamping down on access to information, such as corporate and household registration documents that provide insights and confirmation about company structure, corporate history, the business interest of directors etc. These are integral parts of any typical background checks and investigative works.

It is anyone’s guess if and when the Chinese government would loosen up on its tightening of data access.

Apart from bankers and listing sponsors fearing the violation of new rules on one hand and coping with the limitations placed on their due diligence on the other hand, investors must now wonder if any new mainland IPOs do get properly scrutinized .

Foreign companies would also need to conduct proper due diligence prior to any investment. The tinkering on data access is a shot on one’s foot. Definitely not a conducive and sustainable scenario.

Vanson Soo runs an independent business intelligence and commercial investigations practice specialized in the Greater China region.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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