The Securities and Futures Commission (SFC) has reprimanded and fined BOCOM International (Asia) Limited (BIAL) $15 million, for failing to discharge its duties as a sponsor in relation to the listing application of China Huinong Capital Group Limited (China Huinong) (Notes 1 & 2).
Failure to conduct all reasonable due diligence before submitting an application
China Huinong is a company established in Mainland China. During its track record period, the principal business of China Huinong was providing short-term loans to its customers which were small and medium-sized enterprises and individuals in Danyang City, Jiangsu Province. A majority of the loans were not secured by collateral but guaranteed by individuals or companies.
In the course of conducting due diligence, BIAL discovered that a number of China Huinong’s connected persons (Note 3), including its executive director and Chief Executive Officer and a company controlled by its second largest shareholder, had guaranteed some of the short-term loans (Connected Guarantees). However, BIAL did not conduct any due diligence in relation to the Connected Guarantees or the concerned connected persons (Connected Guarantors), before submitting the listing application of China Huinong to the Stock Exchange of Hong Kong Limited (SEHK). For example, BIAL did not ascertain:
- the percentage of the Connected Guarantees to the total amount of loans granted by China Huinong during the track record period;
- the relationship between the borrowers and the Connected Guarantors;
- whether there was any dealings between the Connected Guarantors, the borrowers and China Huinong that would require closer scrutiny;
- the genuineness of the Connected Guarantees; and
- whether the Connected Guarantees would continue, and if so, how would China Huinong manage the conflicts of interests between itself and the Connected Guarantors.
By failing to conduct reasonable due diligence on issues related to the Connected Guarantees, BIAL breached the Code of Conduct, under which BIAL as a sponsor should have:
- performed all reasonable due diligence on China Huinong before submitting a listing application on its behalf; and
- done more due diligence to ascertain the truth and completeness of the information provided by China Huinong, after it becomes aware of circumstances that cast doubt on the information provided to it or otherwise indicated a potential problem or risk (Notes 4 & 5).
Failure to ensure that all material information has been included in the Application Proof
The Connected Guarantees were not disclosed in the Application Proof submitted to the SEHK. As a result, the SEHK returned China Huinong’s listing application on the ground that the disclosure of information in the Application Proof was not complete in all material respects to enable a reasonable investor to make a fully-informed investment decision (Note 6).
The SFC also found that the Connected Guarantees raised material issues relating to China Huinong’s business model, its internal controls to manage conflicts; and whether the Connected Guarantees should have been considered as connected transactions. In the absence of reasonable due diligence on these issues, BIAL was not in a position to assess the materiality of the Connected Guarantees to the operation of China Huinong and to ensure that all material information in relation to China Huinong has been included in the Application Proof in breach of the Code of Conduct (Notes 7 & 8).
Failure to ensure that all information provided to the regulators is accurate and not misleading
During the listing application, the SEHK and the SFC asked about the independence of the persons who guaranteed the loan advanced by China Huinong. Due to negligence on the part of BIAL’s transaction team, BIAL initially did not disclose the existence of the Connected Guarantees or that parties related to China Huinong had guaranteed its short-term loans, but only did so until after rounds of queries from the SEHK/SFC.
The SFC found that BIAL breached the Code of Conduct by failing to ensure that all information provided to the SEHK and the SFC is accurate and not misleading in any material respect (Note 9).
Sponsors play a crucial role in the Hong Kong stock market being responsible for assessing the listing suitability of a company to be listed and verifying the information disclosed in the prospectus. The SFC and the investing public expect sponsors to examine information provided by the listing applicants with professional scepticism and ensure that the draft listing documents contain relevant and meaningful disclosure about the listing applicants. Sponsors who fail to fulfil these requirements will face tough sanctions, even if the listing application is eventually withdrawn or returned by the SEHK.
In deciding the disciplinary sanction, the SFC took into account that:
- BIAL cooperated with the SFC in accepting the disciplinary action and not disputing the SFC’s findings and regulatory concerns;
- there is no evidence to suggest a systemic failure in BIAL’s policies, procedures and practices relating to its sponsorship work;
- the senior management of BIAL agreed to review and enhance its policies, procedures and practices relating to its sponsorship work, particularly in the areas of performing due diligence on the listing applicants and preparing listing application documents; and
- BIAL has an otherwise clean disciplinary record.
- BOCOM International (Asia) Limited is licensed under the Securities and Futures Ordinance to deal in securities and advise on corporate finance.
- China Huinong applied for the listing on the Main Board of the SEHK on 10 November 2014 with BIAL as its sole sponsor. The SEHK has not approved China Huinong’s listing application.
- “Connected person” is defined in rule 14A.06(7) of the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (Listing Rules).
- Under paragraph 17.4(a)(i) of The Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct), before submitting an application on behalf of a listing applicant to the Stock Exchange, a sponsor should have performed all reasonable due diligence on the listing applicant except in relation to matters that by their nature can only be dealt with at a later date.
- Under paragraph 17.6(c) of the Code of Conduct, a sponsor should not merely accept statements and representations made and documents produced by a listing applicant or its directors at face value. Depending on the nature and source of the information and the context in which the information is given, the sponsor should perform verification procedures that are appropriate in the circumstances, such as reviewing source documents, inquiring of knowledgeable persons or obtaining independently sourced information. Where the sponsor becomes aware of circumstances that may cast doubt on information provided to it or otherwise indicate a potential problem or risk, the sponsor should undertake additional due diligence to ascertain the truth and completeness of the matter and information concerned. Over-reliance on management’s representations or confirmations for the purposes of verifying information received from a listing applicant cannot be regarded as reasonable due diligence.
- Under rule 9.03(3) of the Listing Rules, an applicant must submit a listing application form, an Application Proof and all other relevant documents under rule 9.10A(1), and the information in these documents must be substantially complete except in relation to information that by its nature can only be finalised and incorporated at a later date.
- Under paragraph 17.4(a)(ii) of the Code of Conduct, before submitting an application on behalf of a listing applicant to the Stock Exchange, a sponsor should ensure that all material information as a result of this due diligence has been included in the Application Proof.
- Under paragraph 17.4(b) of the Code of Conduct, before submitting an application on behalf of a listing applicant to the Stock Exchange, a sponsor should come to a reasonable opinion that the information in the Application Proof is substantially complete except in relation to matters that by their nature can only be dealt with at a later date.
- Under 17.9(a) of the Code of Conduct, a sponsor should reasonably satisfy itself that all information provided to the Stock Exchange and the SFC during the listing application process is accurate and complete in all material respects and not misleading in any material respect and, if it becomes aware that the information provided does not meet this requirement, the sponsor should inform the Stock Exchange and the SFC (as the case may be) promptly.