Ashley Alder looks at tightening rules as regulatory scrutiny grows

Hong Kong may announce new rules for sponsors of initial public offerings (IPOs) in the "next few months", said Ashley Alder, chief executive officer of the Securities and Futures Commission (SFC).

"I expect that in the next few months we'll come out with some new proposals," Alder told reporters on Friday in response to questions, declining to give details.

Alder took over at the SFC earlier this month as regulators worldwide intensify scrutiny of mainland companies after short-sellers accused some including Sino-Forest Corp and Longtop Financial Technologies Ltd of exaggerating operations.

His predecessor, Martin Wheatley, said that the Hong Kong regulator may propose making sponsors of IPOs legally liable for false statements in prospectuses.

"There is a responsibility on sponsors, as there always has been, to ensure they bring the right companies to the market," Alder said.

The city's IPO market was ranked as the world's number one in terms of total fund-raising in 2009 and 2010. According to the data of "big four" accounting firm Ernst and Young, the city's bourse has raised $57.4 billion and $21.9 billion from IPO activities in 2010 and 2009 respectively.

In 2010, the figures accounted for 20.2 percent of total global IPO fund-raising. In terms of total IPO deals, the city was ranked number three in 2010 by making 87 IPO deals representing approximately 6.2 percent of the global total, according to Ernst and Young.

The city's IPO business has been robust in the past two years as the local bourse is seen as attractive by corporations which want to expand their footprint on the mainland. However, the quality of local IPOs have come under scrutiny as well - particularly after the Hontex case.

Taiwan fabric manufacturer Hontex International had its almost HK$1 billion in assets frozen after the SFC filed for an injunction on March 30, 2010 to prevent the firm from unloading its assets in Hong Kong. The Court of First Instance granted the request the following day, just three months after the company's listing in the city in December 2009. And in May of this year, the SFC also made an application to the High Court requesting that Hontex refund the proceeds from its IPO on the grounds that the company had disclosed a significant amount of false and misleading information in its listing prospectus.

However, Judge Jonathan Harris of the Court of First Instance adjourned the case until July 22 citing a related case where he had to consider the regulator's reach. A lawyer for the SFC, Simon Westbrook, said people involved in the Hontex case are in Taiwan or the mainland. Hontex's manufacturing operations are located in Fujian province.

Following orders made by the Court of First Instance on July 22, the SFC made a claim earlier this month against Hontex in a bid to return subscribed capital to public shareholders. The case has been set down for trial starting June 4, 2012.

Meanwhile, finance academics said that local financial regulators still have a lot of work to do.

"They should reinforce the local disclosure-based regulatory regime by encouraging corporations to reveal more accurate and timely business and accounting information to investors," said Hong Kong Baptist University Finance and Decision Sciences Associate Professor Billy Mak. "The local and mainland financial regulators should ensure consistent regulatory standards be applied in the city and on the mainland."

Regarding the wish by the SFC to make IPO sponsors legally liable for false or misleading information, Mak said it could be an option but a number of legal issues need to be solved first.

"Hong Kong and the mainland do not have any extradition treaties, so if some company managers flee to the mainland when some sort of business or accounting scandal hits after the IPO process, local regulators are unable to extradite the related parties back to Hong Kong to face criminal charges," Mak added.

Bloomberg contributed to this story.

oswald@chinadailyhk.com

China Daily

(HK Edition 10/29/2011 page2)