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In the stocks

25 April 2012 By John Foley

Hong Kong shouldn’t rush to lock up miscreant sponsors of initial public offerings. The city’s securities regulator rightly wants to toughen up the regime for new listings. But talk of making bankers individually and criminally liable for what goes in the prospectus is overkill, and such policy would make Hong Kong less efficient.

The Securities and Futures Commission has argued often that sponsors – whose job is to shepherd an IPO and conduct due diligence – often do too little homework. Sending juniors to quiz management, and relying on desk-based research, are common complaints. Last week the SFC suspended Mega Capital, a Taiwanese broker, and imposed Hong Kong’s biggest fine so far, at $5.4 million.

Reputation should make sponsors behave, but doesn’t always. That may be because a lot of banks are crowding a single deal – commodities trader Glencore named 18 underwriters in its 2011 IPO prospectus – so the reputational hit of an issue gone bad is shared. At worst, some issuers might favour sponsors who have the lightest touch.

Opening negligent sponsors to lawsuits, as the United States does, therefore makes sense. It may mean overall IPO fees, currently a third of what they are in America, go up. But that should be offset by increased trust in the market. Now, if a mainland Chinese company proves to have cooked its books, Hong Kong investors have little chance of seeing their money again.

But to make individual bankers criminally liable could have unintended consequences. Sponsors may turn to “box ticking” rather than using their common sense – already a problem among auditors. Global banks would be incentivised to run even their high quality IPOs through other markets, like Singapore or London.

Besides, Hong Kong faces other issues that are harder to tackle. Its exchange has touted for listings from risky jurisdictions where its authorities lack enforcement powers. That increases the chances of investors encountering a bad egg. And there does seem to be a market malfunction in investors’ repeated failure to price risk properly and demand that IPOs sell at a discount, as in other markets. It’s not just the underwriters who aren’t doing their homework.


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