Hong Kong IPO Sponsor Due Diligence ‘Inadequate,’ Securities Watchdog Says

Martin Wheatley, the outgoing head of Hong Kong’s securities market regulator, said today that sponsors’ due diligence of initial public offerings has been “inadequate” at times.

“In many cases, sponsors are spread too thinly in terms of the number of deals they’re bringing to the market at any one time,” the chief executive officer of the Securities and Futures Commission told participants at the FundForum Asia 2011 event in Hong Kong.

The Hong Kong regulator is reviewing the sponsor system after the local stock exchange saw a record HK$449.5 billion ($57.7 billion) worth of IPOs last year. International companies have joined the staple of Chinese firms to sell shares publicly in the city.

Hong Kong’s regulator may make sponsors of IPOs in the city liable for statements in their clients’ prospectuses to prevent fraud of locally listed Chinese companies, Wheatley said earlier this month. Chinese companies account for about 60 percent of Hong Kong’s stock market value, he said.

The SFC inspected 17 listing sponsors since late 2009 and found deficiencies in some of their work, according to a report published by the regulator today. Some sponsors failed to conduct adequate due diligence on the business activities of listing applicants, the report shows.

In some cases, the sponsors failed to keep proper records of their checks on the businesses of listing applicants, the report said. In others, inadequate manpower and resources were used by sponsors during IPOs, said the report.

‘Not Working’

“We’ve been concerned a number of times that the whole sponsor regime of the listing process is not working as well as it should be,” he said today. “We’ve been concerned that the levels of due diligence are inadequate.”

Arrangers designated as deal sponsors help prepare IPO documents and conduct due diligence into the listing candidates to ensure compliance with the listing rules.

The SFC has found deficiencies in both the due diligence work done by sponsors in the listing application process and internal workings and systems of the IPO sponsors themselves, Wheatley said.

“Of course, for a sponsor to perform the role of bringing a company to the market, they’ve got to have a reasonable understanding of the applicant’s business and there’s reasonable professional skepticism when the figures are presented to them,” Wheatley said. This has not always been the case, he added.

Wheatley, 52, was named last month to lead Britain’s planned finance regulator, and will leave the SFC in June. He has been CEO of the commission since 2006.

Wheatley’s tenure in Hong Kong was marked by a crackdown on market manipulation as the city bolstered its image as a financial center. Successes include a seven-year sentence for a former Morgan Stanley managing director for insider trading.

To contact the reporters on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net Fox Hu in Hong Kong at fhu7@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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