Investors have voiced doubts about the financial transparency of companies listed in Taiwan that are headquartered and operate factories overseas, due to their remoteness and inaccessibility. These misgivings have sparked persistent debate about tightening regulations on such firms, but these debates have come to nothing.
The Financial Supervisory Commission and Taiwan Stock Exchange had insisted that these types of enterprises, whose shares are traded under ticker symbols beginning with the letter “F,” are well-regulated, as they are subject to the same “strict” regulations and scrutiny as all other listed companies and therefore make regular financial disclosures.
The idea of tightening regulations on locally listed firms based abroad never crossed the minds of the nation’s securities regulators until speculation over an accounting scandal disrupted the domestic markets.
On Thursday last week, US-based Glaucus Research Group California LLC released a report saying Asia Plastic Recycling Holding Ltd’s (APR) earnings report was “too good to be true.” The resulting speculation yesterday drove APR’s stock down by close to the 7 percent daily limit for the fourth day in a row.
Citing tax records on a Chinese local government Web site, Glaucus suggested that APR’s profit was inflated 10-fold, since it paid taxes of 28 million to 80 million yuan (US$4.47 million to US$12.78 million) from 2010 to last year, which is between 96 and 88 percent less than the profit it reported in Taiwan.
Investors’ fear about a potential accounting scandal sent APR stock down another 6.89 percent yesterday to NT$64.9, despite the company having said it committed no wrongdoing and providing proof that it made tax payments of 397 million yuan from 2010 to last year. The recycling firm also said it would launch a share buyback program to support its stock price.
It is unclear if APR inflated its earnings, or if Galucus miscalculated the figures or misunderstood China’s complex tax rules. It will take time for regulators to review APR’s statements; meanwhile, worries about fraudulent accounting will scare away investors, since F stocks are widely considered to lack transparency and capable of easily evading oversight.
APR recycles plastic to make ethylene-vinyl acetate foam in China and trades its shares on the local stock market, but is registered in the Cayman Islands.
Securities regulators should step up their oversight of F stock companies to prevent any damage to investors’ interests and restore market confidence. Oversight measures should include more detailed financial examinations and on-site operation inspections.
Yesterday, the commission and the Taiwan Stock Exchange took a small step toward increasing oversight by unveiling a precautionary measure against potential loopholes. This step includes prohibiting foreign companies from applying to launch an initial public offering (IPO) in local markets within three years of their major shareholders switching nationalities. That will prevent China-based firms from getting around existing IPO rules, as some Chinese firms’ controlling stakeholders change their citizenship to skirt mandatory special review procedures.
Still, more measures should be crafted.
Two years ago, regulators launched two trading platforms allowing foreign companies, including China-based ones, to raise capital in Taiwan by floating their shares under F stocks or Taiwan depositary receipts (TDRs), on local markets. TDRs are used for firms to make a second listing after launching IPOs in other markets. That was part of the government’s efforts to boost trading activities on local equity markets and bring Taiwan’s stock markets to the international stage.
These efforts were beneficial, but insufficient oversight turned the TDR market into a disaster after Singapore-based Oceanus Group Ltd, Want Want China Holdings Ltd and Japan’s Elpida Memory Inc delisted their shares over financial woes, casting a chill on TDR investment. Regulators should ensure they prevent F stocks from following in the footsteps of TDRs.
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