The recent news that UBS was being investigated by Hong Kong’s SFC in connection with its work as IPO sponsor in the city has taken the local financial community by storm, not least because of the very real possibility that the firm may loose its corporate finance licence – at least for a period of time.
This wasn’t helped by the subsequent announcement that Standard Chartered Bank was also under scrutiny for the same reasons, seemingly in relation to a transaction executed around seven years ago, and even though the bank has, for some time now, exited its cash equities business.
To understand what may be going on behind the scenes, it’s important to know what acting as an IPO sponsor on HKEX actually means and also entails in terms of responsibility.
As joint author in 2013 of the study manual for IPO sponsor examinations published by the Hong Kong Securities Institute (a guide which many candidates attempting to be qualified as Principals – execution team leaders – or Representatives – execution team members – will have read, with many of them also attending related lectures I gave), I spent a great deal of time getting acquainted with the sponsor regime, and what the regulators now expect on the part of banks and brokers.
An important thing to note is that, while a listing document must contain all the specified items of information set out in the listing rules, there is no absolute check list for the quantum of due diligence that must be performed or the information that must be disclosed.
The overriding principle is that any listing application must contain such particulars and information that will allow an investor to make an informed decision on the issuer and the securities for which listing is sought. Now – that’s rather vague and could be loosely interpreted, although guidance provided by the exchange adds that, generally, all information obtained through due diligence must be disclosed.
In practice, therefore, much is left to the appreciation of the sponsors as to how much, and what needs to be disclosed, and whether anything has been omitted, or might be misleading. This also extends to investigations into a company’s suppliers, customers, franchisees and the like.
In addition, the rules specifically state that “a higher degree of examination may be required on the part of the sponsors in relation to PRC issuers”, which basically includes, nowadays, virtually all new listing candidates in Hong Kong. This requires detailed discussions with the directors of a company about the rationale for the IPO, and briefings on events or decisions on their part that may later affect the share price and valuation of the business, as well as further investigations into land use and building ownership certificates, many of which are commonly not available or missing for mainland properties.
Killer document
The first letter is an “undertaking and statement of independence”, whereby the sponsor confirms, among other things, that the firm will comply with the listing rules (in so far as they are applicable to sponsors), ensure that all information provided to the regulators is true in all material respects (and, importantly, that no information is omitted), and promptly advise them of any new developments in relation to information already submitted.
The real killer, however, is a document called the “sponsor’s declaration”, which must be submitted as soon as possible after the listing hearing. A key item covered in this confirmation addresses the fact that the sponsor is satisfied as to the sufficiency of information in the listing document. Further, a sponsor firm is asked to state that such information is true in all material respects, and that it is satisfied with the adequacy of the issuer’s procedures, systems and controls, the experience and qualification of the directors, and that there are no other facts that should be disclosed to the exchange.
Subsequent enquiries by the SFC therefore always point to such declaration, if and when new information casting doubt on disclosure, or the applicant’s business, comes to light.
Another issue, of course, is the qualification and experience of, and consideration given to the bankers involved in the execution work for IPOs. It’s well known that senior bankers are basically rewarded for bringing in new mandates, rather than for working on them, and that much of the execution work is often (and increasingly) left to the more junior ranks.
Philippe Espinasse was a capital markets banker for almost 20 years and is now an independent consultant in Hong Kong. He is the author of “IPO: A Global Guide”, “IPO Banks: Pitch, Selection and Mandate”, and of the Hong Kong thrillers “Hard Underwriting” and “The Traveler”.