World Markets

Crackdown on banks gives Hong Kong an IPO edge


By Alec Macfarlane

(The author is a Breakingviews columnist.)

HONG KONG, March 15 ( Breakingviews) - It may have taken a while, but Hong Kong finally showcased an investor-protection edge. The financial regulator banned UBS from leading market debuts for a year, and the Swiss bank and three of its peers will pay $100 million in fines for shoddy due diligence on initial public offerings stretching back to 2009. As bourses battle to host the next wave of unproven startups, the city's aegis provides a bit of extra comfort.

Some consequences became clearer on Thursday. In one case, UBS literally failed to see the forest for the trees, when it didn't verify that China Forestry had any woods to speak of. During the 2014 IPO of Tianhe Chemicals, sponsors Morgan Stanley, Bank of America Merrill Lynch and UBS neglected to follow up when a person claiming to represent the company's biggest customer refused to produce identification and stormed out of an interview.

Monetary penalties are a deterrent, but only up to a point. They can often be shrugged off as a cost of doing business. A suspension cannot be so easily dismissed, however, as the damage is harsher.

Making lead financial advisers liable for untrue statements in a client's prospectus, as Hong Kong does, is an uncommonly high bar. The U.S. legal system, by comparison, allows shareholders to band together in class action lawsuits. This allows for a different form of protection, but doesn't hold bankers responsible in the same way. Mainland China authorities, meanwhile, safeguard investors from wrongdoing in vigorous, but often unwritten, ways.

Having recently opened the door to dual-class shares that give some founders outsize control, Hong Kong leaves investors vulnerable in some ways. Even so, as a new batch of unprofitable tech companies and pre-revenue biotech ventures from China and beyond prepare to go public, at least the city can offer investors one extra layer of assurance.

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- Hong Kong's securities regulator said on March 14 it had banned UBS from taking the lead role, as a so-called sponsor, on initial public offerings in the city for one year, and fined the Swiss bank and three of its peers a combined 786.7 million Hong Kong dollars ($100.2 million) for failing to conduct sufficient due diligence on IPOs.

- The Securities and Futures Commission imposed a HK$375 million fine on UBS for sub-standard work overseeing the market debuts of China Forestry in 2009, Tianhe Chemicals in 2014 and a third company that was unnamed by the regulator, but which reported is now-defunct scrap merchant China Metal Recycling. China Forestry has been liquidated and Tianhe's shares have been suspended since 2015.

- Morgan Stanley and Bank of America's Merrill Lynch unit also were fined HK$224 million and HK$128 million, respectively, for their roles in the Tianhe IPO. Standard Chartered was fined HK$59.7 million for its work on China Forestry's offering. For one thing, the banks did not verify that China Forestry's forests existed, according to the agency.

- UBS, which is the first major bank to face such a suspension in Hong Kong, said in a statement that it was pleased to have resolved "these legacy issues". Morgan Stanley and BAML declined to comment. Standard Chartered, which closed its equity business in 2015, said it welcomed the opportunity to resolve the case.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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