Last year, Hong Kong skyrocketed to become the world’s ‘hottest’ IPO destination, hosting the initial offerings of 125 companies. But there is the Dark side of the Moon.
On March 14th, a decade long story of alleged improper handlings of Hong Kong IPOs seemed to reach its conclusion. The Securities and Futures Commission (SFC) ruled that a group of banks were negligent in their duties as bookrunners and failed to conduct an adequate due diligence during the IPOs of China Forestry and Tianhe Chemicals. SFC, an authority responsible for the enforcement of securities market regulations in Hong Kong, imposed a fine totaling $100 million on UBS ($47.8 million), Morgan Stanley ($28.5 million), Merrill Lynch ($16.3 million), and Standard Chartered ($7.61 million). UBS, in addition, was hit by a one year prohibition on the provision of corporate finance advisory and a one and a half year embargo on sponsorship services. This article analyzes the cases of China Forestry and Tianhe Chemicals and attempts to draw similarities between them.
SFC is in a precarious position whereby it has to balance carefully between preserving Hong Kong’s attractiveness to Chinese companies and, at the same time, enforcing stricter accounting rules to combat the falsification and misreporting that have plagued a significant portion of the IPOs. Among them were the IPOs of China Forestry and Tianhe Chemicals. British Standard Chartered and Swiss UBS were mandated as joint bookrunners of China Forestry’s initial offering in 2009, which resulted in raising $216 million, whereas UBS, Morgan Stanley, and Merrill Lynch served as sponsors of Tianhe’s IPO that raised $654 million. However, both tickers were suspended within two years of respective IPOs after severe misreporting were uncovered. China Forestry was liquidated, whereas Tianhe’s shares are still suspended.
On the one hand, SFC, which is severely criticized as being too lenient towards accounting fraudulence, has taken steps to strengthen investor protection. Firstly, SFC has engineered legislation that allows the suspension of trading of shares of listed issuers whose accounting standards and published financial reports were deemed questionable. Secondly, in response to waves of bad floats, SFC ordered in 2013 that the investment banks acting as IPO sponsors would be held legally accountable for the information contained in the prospectuses. This decision, in fact, served as a foundation to the indictment of the aforementioned group of investment banks.
On the other hand, in an environment of stiff competition between stock exchanges, each additional regulation is tantamount to shooting oneself in the foot. In 2018, Hong Kong generated $36.3 billion in IPO proceeds, which was $7.4 billion more than New York. This 174% year-over-year increase in listings volume was primarily fueled by two ‘relaxations’ of the IPO regulations: approval of the listings by dual-class share structure issuers and by biotechnology companies that are yet to generate revenue. It is expected that Hong Kong will not be able to demonstrate the equivalent magnitude of initial offerings in 2019 due to the disappointing aftermarket performance and an overall decline of HKE in 2018.
On March 14th, a decade long story of alleged improper handlings of Hong Kong IPOs seemed to reach its conclusion. The Securities and Futures Commission (SFC) ruled that a group of banks were negligent in their duties as bookrunners and failed to conduct an adequate due diligence during the IPOs of China Forestry and Tianhe Chemicals. SFC, an authority responsible for the enforcement of securities market regulations in Hong Kong, imposed a fine totaling $100 million on UBS ($47.8 million), Morgan Stanley ($28.5 million), Merrill Lynch ($16.3 million), and Standard Chartered ($7.61 million). UBS, in addition, was hit by a one year prohibition on the provision of corporate finance advisory and a one and a half year embargo on sponsorship services. This article analyzes the cases of China Forestry and Tianhe Chemicals and attempts to draw similarities between them.
SFC is in a precarious position whereby it has to balance carefully between preserving Hong Kong’s attractiveness to Chinese companies and, at the same time, enforcing stricter accounting rules to combat the falsification and misreporting that have plagued a significant portion of the IPOs. Among them were the IPOs of China Forestry and Tianhe Chemicals. British Standard Chartered and Swiss UBS were mandated as joint bookrunners of China Forestry’s initial offering in 2009, which resulted in raising $216 million, whereas UBS, Morgan Stanley, and Merrill Lynch served as sponsors of Tianhe’s IPO that raised $654 million. However, both tickers were suspended within two years of respective IPOs after severe misreporting were uncovered. China Forestry was liquidated, whereas Tianhe’s shares are still suspended.
On the one hand, SFC, which is severely criticized as being too lenient towards accounting fraudulence, has taken steps to strengthen investor protection. Firstly, SFC has engineered legislation that allows the suspension of trading of shares of listed issuers whose accounting standards and published financial reports were deemed questionable. Secondly, in response to waves of bad floats, SFC ordered in 2013 that the investment banks acting as IPO sponsors would be held legally accountable for the information contained in the prospectuses. This decision, in fact, served as a foundation to the indictment of the aforementioned group of investment banks.
On the other hand, in an environment of stiff competition between stock exchanges, each additional regulation is tantamount to shooting oneself in the foot. In 2018, Hong Kong generated $36.3 billion in IPO proceeds, which was $7.4 billion more than New York. This 174% year-over-year increase in listings volume was primarily fueled by two ‘relaxations’ of the IPO regulations: approval of the listings by dual-class share structure issuers and by biotechnology companies that are yet to generate revenue. It is expected that Hong Kong will not be able to demonstrate the equivalent magnitude of initial offerings in 2019 due to the disappointing aftermarket performance and an overall decline of HKE in 2018.