HONG KONG’S bourse regulator said it now has a policy of “zero tolerance” for listed firms evidencing any irregularities including suspicious trading activity, questionable accounting practices or suspected insider trading, with PRC-based H-shares being the primary target.
A Chinese language piece in Yangcheng News said the apparent uptick in market vigilance would apply equally to listed firms as well as those looking to launch IPOs in Hong Kong.
By upping the ante on compliancy, the Securities and Futures Commission (SFC) -- the watchdog for Hong Kong’s capital markets -- will provide a much-needed reality check over the rate and size of recent H-share IPOs on the Special Administrative Region’s (SAR) bourse.
Market watchers say the timing is ripe for Hong Kong to recalibrate its IPO conveyer belt to give serious consideration only to prospective PRC-based firms with more transparent and market-friendly auditing track records.
“Up to now, one of the biggest criteria for IPO consideration was recent earning power and cashflow. Hopefully with this recommitment to a more rigorous candidate vetting process, prospective H-share firms will look to Hong Kong as less of a place to make a quick buck and more as a stable platform to cultivate an enterprise over time.
“This can only be a plus for minority investors,” the report cited an analyst as saying.
The stricter oversight will inevitably result in a leaner, meaner capital market in Hong Kong, which will by default scare away some cash-rich Mainland Chinese firms with limited earnings potential going forward.
But market watchers say the enhanced oversight measures will result in a more competitive “financial center” in Hong Kong that practices the three principles necessary for successful listings: regulatory improvement, regulatory enforcement and regulatory market compliance, all of which will strengthen the SAR in the long run and serve as a positive example to other capital markets.
However, it is not only listed firms or prospective listcos that need be concerned about the tighter governance.
IPO underwriters and entities serving as proxies in a promotional capacity for listing candidate firms will also be held to higher standards by the SFC.
Mr. Long Keqiu, president of the Hong Kong Society of Financial Analysts, contends that each regulator should ensure a fair and impartial vetting and oversight process while also striving to protect against market misconduct.
“If any problems are discovered, then immediate and appropriate action should be taken, as with any regulatory body, blindly carrying out justice and instilling fairness is the sacred charge of all market watchdogs, regardless of the company’s origin,” he said.
The report pointed to some recent cases of market irregularities that may have been nipped in the bud had the SFC had a more rigorous vetting regime in place.
Tungda Innovative Lighting (HK: 8229) reported a nearly 75% plummet in recent quarterly revenue, with an executive director resigning shortly thereafter for unspecified reasons.
And in April of last year, the SFC executed an unprecedented freezing of the entire capital of casual wear firm Hontex International (HK: 946) – nearly one bln hkd – due to irregularities, resulting in an immediate suspension of trade of Hontex’s shares.
The bourse watchdog accused Hontex of presenting false or misleading information.
The report concluded by saying that extreme cases of noncompliance like these will likely be the exception rather than the rule if the letter of the law is enforced.
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