Singapore Exchange, where 40 percent of listed firms are based outside the city state, is going to court to enforce its listing rules for the first time after a Chinese company ignored a deadline to appoint a special auditor.
The exchange sued China Sky Chemical Fibre Co. and four of its Chinese directors on Jan. 6 to compel the Quanzhou City, Fujian-based company to have a special auditor investigate “interested party transactions,” a failed land acquisition and certain costs. A closed hearing was held today.
“This is the first time that a company has been so defiant,” said Lan Luh Luh, an associate professor at the National University of Singapore’s business school. “They’re testing the will and limits of the SGX. All eyes are on SGX to see the extent of its enforcement.”
Singapore investors have pressed for tougher rules as accounting scandals have wiped out the market values of China-based firms from New York to Hong Kong, including Sino-Forest Corp. and FerroChina Ltd. Singapore Exchange, Southeast Asia’s biggest bourse by the value of shares traded, accused China Sky of “flagrant disregard” of its directive.
China Sky, in minutes of a Dec. 24 meeting in Singapore between its Chief Executive Officer Huang Zhong Xuan and Lawrence Wong from the bourse, submitted to the exchange that some of its demands “were extremely unreasonable.” China Sky released the minutes of the meeting in a statement to the Singapore Exchange.
“Huang told them that the company’s position was similar to that of a bullied child,” according to the minutes.
Joan Lew, a spokeswoman for Singapore Exchange, declined to comment on the case today because it’s before the courts.
“The board of directors may need more time to be able to give me meaningful instructions on how to respond to the present proceedings,” China Sky’s lawyer, Leonard Chia, said today.
Trading in China Sky shares has been suspended since Nov. 17, a day after the exchange first ordered the company to appoint the special auditor. The shares had tumbled 96 percent from their peak of S$2.74 in October 2007.
The watchdog and China Sky have issued 25 regulatory filings since the Nov. 16 directive. All three independent directors at the nylon fiber maker quit on Jan. 5, citing non-compliance with the exchange’s order.
There’ve been no further statements since Singapore Exchange started legal proceedings on Jan. 6.
Spirit ‘Beyond Form’
“Issuers must comply with the listing rules in accordance with the spirit, intention and purpose by looking beyond form to substance,” Lorraine Chay, vice president of the exchange’s issuer regulation unit, said in a 640-page court filing. The exchange is seeking a court order for China Sky to follow its directive and get its approval for board hires.
Refusing to heed a court order would be in contempt of court, which carries a jail term, a fine or both. No maximum penalty has been specified under Singapore’s constitution.
Er Kwong Wah, Lai Seng Kwoon and Yeap Wai Kong, the three Singaporean independent directors who quit on Jan. 5, declined to comment on China Sky’s dispute with the exchange, saying it was “inappropriate.”
In March, a Singapore court sentenced Peter Madhavan, a former independent director at Singapore-based freight forwarder Airocean Group Ltd., to four months in prison for his role in issuing a misleading regulatory filing. He was the first independent director to be jailed.
Chinese firms listed on overseas exchanges including North America and Hong Kong have come under increased scrutiny from regulators and investors. In Singapore, at least 20 Chinese firms on the city’s S$775.8 billion ($600 billion) stock market have been suspended or ordered to delist since 2008.
The FTSE Strait Times China Index of 53 Chinese stocks tumbled 33 percent last year, compared with a 17 percent fall on the benchmark Straits Times Index.
Shares of Singapore Exchange Ltd. fell 2.2 percent to S$6.10 at the close of trading today. The bourse reported a 12 percent fall in net income for the three months ended December today as daily trading volumes plunged 37 percent.
The U.S. Securities and Exchange Commission has set up a task force to look for fraud in overseas companies, specifically from China, with listings on U.S. exchanges, and in 2010 began a probe asking auditors for information on audit practices of such companies.
Shanghai-based Deloitte Touche Tohmatsu CPA Ltd. was ordered this month to appear in a U.S. court after rejecting a SEC demand for documents related to an investigation of its former client Longtop Financial Technologies Ltd.
Deloitte & Touche LLP in Singapore had recommended that its client China Sky hire an external consultant, supporting the exchange’s view that special auditors should be appointed, according to Singapore Exchange’s court filing.
Doreena Tong, a Singapore-based spokeswoman at Deloitte, declined to comment on China Sky, citing client confidentiality. China Sky’s net income rose 87 percent to 111.1 million yuan ($17.6 million) for the nine months ended Sept. 30.
“The company’s financial statements have been audited by a Big Four accounting firm and the company has been receiving a clean bill of health since IPO to date,” China Sky’s lawyer Chia said in a Dec. 8 letter to the exchange, according to court filings. “The directive was issued with no apparent regard for the various explanations and clarifications painstakingly provided to you.”
The next day, the Chinese firm sent a letter to the exchange’s Chay saying while there’ve been “inadvertent disclosure lapses, it is never the intention of the company to hide or deliberately misinform the investing public.”
China Sky had devoted substantial time and resources to answer the regulator’s queries, which has been “most disruptive” to its operations and distracted it in “this difficult time,” the company said in the letter signed by Huang, its CEO and largest shareholder with a 37.8 percent stake.
Guoco Group Ltd., the second-largest investor in China Sky with a 10.3 percent stake, “strongly urges the board to speedily resolve and to comply” with the exchange’s directive, said Stella Lo, a Guoco spokeswoman. Hong Kong-based Guoco is controlled by Malaysian billionaire Quek Leng Chan.
“China Sky and its directors should act promptly to comply with their listing obligations in the interests of all shareholders,” said the Monetary Authority of Singapore, the capital markets regulator with oversight of the exchange.
“It clearly indicates that the Singapore Exchange is prepared to do what is within its powers to make companies comply,” said Lock Yin Mei, who advises on initial public offerings at London-based law firm Allen & Overy LLP’s Singapore office. “Listed companies should take heed.”
The case is Singapore Exchange Securities Trading Ltd. v China Sky Chemical Fibre Co., Huang Zhong Xuan, Cheung Wing Lin, Song Jian Sheng and Wang Zhi Wei OS11/2012 in the Singapore High Court.