Tue, Jan 12, 2010 page10

• HK leads IPO race, but critics warn over quality

  ‘QUALITY PROBLEM’ Unproven allegations that UC Rusal’s chief executive has links to organized crime are dogging the Russian firm’s attempts to list in HK

  • AFP
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  Hong Kong’s stock exchange was the world’s hottest initial public offering (IPO) market last year with more than US$30 billion in new listings, but it stands accused of sacrificing quality for quantity.

  The bourse is keen to stay ahead of rival Shanghai and attract non-Chinese companies, but criticism has mounted after the controversial approval of Russian aluminum giant UC Rusal’s share sale and a string of listing debacles.

  The exchange repeatedly delayed approving Rusal’s US$2.6 billion IPO.

  

  Traders are pictured at the stock exchange in Hong Kong on Oct. 10, 2008. The stock exchange was the world’s hottest IPO market last year, with more than US$30 billion in new listings, but it stands accused of sacrificing quality for quantity.

  PHOTO: AFP

  Unproven allegations that chief executive Oleg Deripaska has links to organized crime dogged the world’s biggest aluminum maker in its attempts to become the first Russian company to list in Hong Kong.

  And when the listing was finally approved last month, the Securities and Futures Commission (SFC) stepped in with what observers call “unprecedented” restrictions for the IPO.

  The SFC stipulated a minimum investment in Rusal equivalent to about US$130,000 — reportedly a bid to shield small investors from the complicated offering.

  “It was quite a surprise that the SFC agreed to Rusal’s listing,” said Raymond Chan, acting director of the Centre for Corporate Governance and Financial Policy at Hong Kong Baptist University.

  “I think the exchange and SFC are aware of the quality problem,” he said.

  Chan said the exchange could be putting its reputation at risk.

  “Listing in Hong Kong would be associated with low quality,” he said.

  Concern over the issue spiked after a string of Chinese companies shocked the market with less-than-full disclosure last year.

  “We list a lot of fairly substandard companies here — just look at the listings in the past year,” a corporate governance expert said on condition of anonymity.

  “It doesn’t do anything for this exchange,” the expert said.

  Trading in shares of Asian Citrus (亞洲果業), China’s largest orange plantation owner, was suspended on their debut amid claims that executives had misrepresented the company’s value.

  Aluminum producer China Zhongwang Holdings (中國忠旺) raised more than US$1 billion in April and then was also accused of misrepresenting details in its share sale prospectus and obscuring its links to the Chinese military.

  The company said last week that it had been cleared of wrongdoing after an independent review by accounting giant Ernst & Young. It did not make that report public and China Zhongwang has since suspended trading in its shares without explanation.

  China Metal Recycling (中國金屬再生資源), which also listed in Hong Kong last year, saw its shares plunge almost 50 percent when its chief financial officer quit, saying he was denied access to company financial records.

  Chan said Hong Kong was perceived as a good place to list because of the lighter regulatory touch.

  “That’s one reason why many mainland Chinese companies select the city as their first overseas exchange — the regulations are not too tight for them, especially compared with the US,” he said.

  “But the transparency and disclosure in Hong Kong is less stringent than in most Western exchanges,” he said.

  “We need to improve that to get the same standard as other exchanges,” Chan said.

  For its part, the exchange said it had joined a general trend away from so-called merit-based listings to a disclosure-based regime, putting the onus on company directors for the accuracy of information flowing to investors.

  Loss-making Rusal did not meet the bourse’s profit test, but companies can still list if they meet other criteria, including positive cash flow, an exchange spokesman said.

  “HKEx agrees entirely that good corporate governance is of paramount importance and therefore over the years has committed itself to building a quality market,” the spokesman said in a statement.

  “A quality market will result in a virtuous cycle which attracts issuers and investors,” he said.

  But a high-profile critic questioned the adequacy of the exchange’s disclosure rules, with no requirement for quarterly financial reports.

  “Virtually every place in Asia requires quarterly reporting now,” shareholder activist David Webb said.

  “Some people think that the easier we make it to list, the better. If that’s the case, we might as well just trade on eBay without any regulation at all,” he said.
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