Hong Kong’s securities regulator stripped Mega Capital (Asia) Co (兆豐資本) of its corporate finance license for failing to highlight misleading information in the share sale prospectus of Hontex International Holdings Co (洪良國際控股).
Mega Capital, the sole sponsor in the 2009 listing of Hontex, was also fined a record HK$42 million (US$5.4 million), Hong Kong Securities and Futures Commission (SFC) said in a statement on Sunday.
Hontex, a Chinese fabrics manufacturer, was suspended from trading on Hong Kong’s stock exchange in March 2010 after the commission alleged the company disclosed materially false or misleading information in its prospectus. Mega Capital denies all allegations of wrongdoing, the regulator said.
The punishment comes as auditor disputes and delistings involving Chinese companies trading on foreign exchanges are fueling investor distrust, hurting valuations and damaging the market for new listings.
It is the first time the commission has stripped a license from a sponsor and the fine was the highest it had imposed against such a company, company spokesman Jonathan Li said.
“This highlights the fact that the SFC is paying attention, you just can’t get away with substandard work,” said Low Chee Keong (劉殖強), an associate professor at the Chinese University of Hong Kong.
“Sponsors are very important gatekeepers in maintaining the quality of our markets. If they fail, the implication is quite significant,” Low said.
Mega Capital will pay the fine and may sue “the advisory body or professionals who provided auditing views,” according to a filing to the Taiwan Stock Exchange by Mega Financial Holding Co (兆豐金控), the parent company. No auditors were identified in the statement.
KPMG was the auditor for Hontex’s initial public offering (IPO) in 2009, according to a prospectus for the share sale. The auditor resigned less than five months after the IPO, Hontex said in a filing on May 13, 2010. KPMG declined to comment on Mega Financial’s filing.
Deal sponsors help prepare documents for an IPO and conduct due diligence into the listing candidates to ensure compliance with the rules.
Mega Capital’s due diligence was “inadequate and sub-standard” in assessing the authenticity of Hontex’s business performance, the SFC said in the statement. Most of it was done by Mega Capital’s junior and inexperienced staff, while work on Hontex’s suppliers, customers and franchisees were sourced from Hontex, jeopardizing impartiality, the regulator said.
“Given the important role played by sponsors, these failures must be regarded most grimly,” SFC enforcement chief Mark Steward said. “The sanctions imposed on Mega Capital should make it clear that the SFC condemns such failure in the strongest terms.”
The commission said last week that new rules making bankers legally liable for prospectus information would be introduced for public consultation “in the coming weeks.”
Accounting scandals by Chinese companies listed overseas and quality of due diligence by IPO underwriters have dented investor confidence. Four Hong Kong-listed Chinese firms, including Boshiwa International Holding Ltd, a Shanghai-based Harry Potter apparel licensee, said their auditors resigned this year because of disputes over financial data or other key information.
That’s four times the number in the same period last year and in the first quarter of 2010. Two other companies reported that their auditors needed more time to verify earnings.
Hong Kong’s Financial Reporting Council announced on April 11 that it had identified 13 Chinese companies in need of close monitoring.
The agency, which investigates auditing and reporting irregularities of publicly traded companies, declined to identify them.
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