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This client alert discusses a recent disciplinary action taken by the Securities and Futures Commission (SFC) against ICBC International Capital Limited (ICBCI Capital) and ICBC International Securities Limited (ICBCI Securities) (collectively, ICBCI) for their failures in their roles in the initial public offering of Powerlong Real Estate Holdings Limited (Powerlong) in 2009.
ICBCI Capital was one of the joint sponsors and bookrunners, and ICBCI Securities was one of the joint lead managers, in the listing of Powerlong in 2009. The other joint sponsors, bookrunners and lead managers included Macquarie Capital Securities Limited (which is also the sole global coordinator) and Goldman Sachs (Asia) L.L.C..
Powerlong’s IPO price was originally set in an indicative range of HK$3.3 to HK$4.9 per offer share, but due to insufficient demand, it lowered the price to HK$2.75.
The SFC investigated into the process adopted by ICBCI in underwriting Powerlong’s IPO following an anonymous complaint which alleged that ICBCI Securities procured nominee accounts to subscribe for Powerlong’s offer shares and that such subscriptions were financed by Powerlong.
The Placing Guidelines set out in Appendix 6 to the Rules (Listing Rules) Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (Stock Exchange) provide, among other things, that no allocation will be permitted to directors or existing shareholders of the applicant or their associates, whether in their own names or through nominees. As a lead manager, ICBCI Securities was required under Listing Rule 9.11(35) to submit to the Stock Exchange a “Marketing Statement” (Form D), in which it was required to certify that to the best of its knowledge and belief, none of the securities placed by it had been placed with the directors of the issuer or their associates or any existing shareholder of the issuer or any nominee of any of the foregoing.
As a sponsor, ICBCI Capital was required under Listing Rule 9.11(36) to submit to the Stock Exchange a “Sponsor’s Declaration” (Form E), in which it was required to declare to the best of its knowledge and belief having made all reasonable enquiries that 25% of the total issued share capital of the applicant had been placed or would be held in the hands of the public in accordance with Listing Rule 8.08 at the time of listing.
Relevant regulatory requirements
The principal regulatory requirements that ICBCI were found to be in breach of include:
Breaches revealed by SFC’s investigation
Given the above breaches, the SFC was of the view that ICBCI was guilty of misconduct and/or not a fit and proper person to remain licensed.
The SFC reprimanded and fined ICBCI Capital and ICBCI Securities HK$12.5 million respectively, having taken I nto account ICBCI’s otherwise clean record and cooperation with the SFC, as well as ICBCI’s commitment to engage a firm of independent reviewers to undertake a comprehensive review of its systems and controls and to implement the recommendations made by the reviewer to the satisfaction of the SFC.
Lesson to be learned
This disciplinary action sends a clear message to investment banks involved in IPOs that while they are performing their functions in making an IPO a success, they should always bear in mind that they also owe an obligation to help ensure the integrity of the market, and failure to do so can attract severe consequences.
The full text of the Statement of Disciplinary Action can be accessed via the link below: http://www.sfc.hk/web/EN/files/ER/PDF/14PR58_s.pdf
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