Sun, May 27, 2012 - Page 8 News List

EDITORIAL : Foreign firms’ TDRs prove damaging

Last week, prosecutors investigated a case of alleged price manipulation involving the Taiwan depositary receipts (TDRs) of United Envirotech Ltd, which surged from NT$16 to NT$37 per unit from October 2010 to December 2010. If proved true, this would be the nation’s first case of TDR price manipulation.

After questioning several people and searching their homes and offices, prosecutors said Chung Wen-chih (鍾文智), president of Mo Tan Li International Investment Co, was the main suspect in the alleged stock price manipulation and accused him of netting more than NT$10 million (US$337,700) in the process.

Allegations of TDR manipulation involving United Envirotech, a Singapore-based water treatment firm, come less than 10 days after the Taiwan Stock Exchange (TWSE) banned margin trading in the TDRs of Singapore-based Oceanus Group Ltd. The world’s largest land-based abalone producer will now have to conduct all its TDR transactions in cash.

The TWSE’s move came as a response to a recent Deloitte & Touche LLP audit of Oceanus Group in Singapore. The auditor issued a disclaimer of opinion saying that it could not provide a basis for an audit opinion due to insufficient and inappropriate evidence and, consequently, it could not express an opinion on the group’s financial statements for last year. In other words, Deloitte & Touche was warning investors to keep the group at a safe distance.

The latest worries about TDR trading may be the tip of the iceberg regarding foreign firms’ depositary listings. Some may recall the outcry from various sectors over the full information and synchronized disclosure by TDR issuers to help safeguard local investors’ rights after New Focus Auto Tech Holdings Ltd and Kith Holdings Ltd were found in late 2010 to have suspended trade of their shares in Hong Kong ahead of the release of sensitive information. This happened while they still allowed trading of their TDRs in Taiwan.

Taiwan has so far granted 34 foreign companies the rights to issue TDRs, an instrument that allows an existing issuer to create a new security that can be listed on a foreign market based on the same securities used in its primary listing. However, recent developments have raised concerns as to whether the government — which has been aggressively expanding local capital markets — is capable of keeping Taiwanese investors informed and protected.

This was all brought into sharp focus after the TWSE delisted Elpida Memory Inc’s TDRs on March 28 after the Japanese memorychip maker filed for bankruptcy protection in Tokyo. TDR holders’ confidence in the receipts has declined substantially and requests to convert these into original shares of the foreign issuers have increased, a situation that has pushed Super Group Ltd, the largest instant-coffee producer in Southeast Asia, and Mustek Ltd, the largest supplier of computer products in southern Africa, to the brink of delisting their TDRs on the local bourse as their TDRs continue to slide and cannot climb back over the minimum 10 million units required by financial authorities.

Recent worries over TDR trading by foreign companies suggests there is still room for greater improvement in the transparency of market information and disclosure. One big issue for investors is whether the financial authorities could have better supervised TDR listings, including the choice of financial advisors for TDR issues alongside audits of the issuers’ financial statements during the underwriting process. As for the current TDR issues, the financial authorities should require companies to disclose earnings and sales outlooks on a regular basis, as well as perform stress tests on them to have a more reasonable estimate of their worth, which would allow investors to better understand foreign firms’ financial circumstances. If the authorities cannot take the issue seriously and demand corporate governance of TDR issuers, it will hurt overall market confidence.

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