- Hong Kong's market watchdog threatened to make it easier to prosecute for false reports
- Hong Kong eclipsed London and New York as the world's biggest IPO centre in 2010 and 2011
- The Securities and Futures Commission proposed civil and criminal liability for brokers
Hong Kong's market watchdog threatened to make it easier to prosecute investment banks and their staff if they allow false information to appear in the prospectuses of companies that float on the local stock exchange.
The move by Hong Kong to create an explicit criminal liability for investment bank sponsors of new listings would make its prospectus regimes one of the strictest in the world. Only Singapore and the US have similar provisions.
The Securities and Futures Commission on Wednesday proposed the introduction of civil and criminal liability for brokers that operate in the largest global market for initial public offerings.
Hong Kong eclipsed London and New York as the world's biggest IPO centre in 2010 and 2011, raising almost $100bn. In the dealmaking frenzy, some investment banks took on too much work and failed to conduct adequate due diligence on their clients, the SFC has found.
"Unfortunately the big names have behaved as badly as some of the smaller firms," said Charles Grieve, senior director at the SFC.
"Some of the household names have been responsible for some of the cases we are most concerned about," he added. "In some ways it is quite depressing how [the problems have] been across the board."
One of the regulator's core aims in a two-month consultation on the role of IPO sponsors was to reduce its own involvement in the production of prospectuses.
Ashley Alder, SFC chief executive, said it had become increasingly common in recent years for sponsors to submit "half-baked" prospectuses to the SFC and only then refine the document based on the regulator's comments.
"Effectively there is a syndrome that has developed, an over-reliance on the regulatory commenting process [to get the prospectus into shape]," he said.
The regulator wants to see sponsors produce a much higher quality prospectus in the first draft and believes the threat of criminal liability will encourage them to do so.
"It requires a fairly high degree of pressure to improve standards across the board," Mr Alder said.
However, David Webb, the Hong Kong-based corporate governance activist, said the SFC's measures did not go far enough, even if enacted in full. Investors would still find it prohibitively expensive to sue sponsors, he said, because Hong Kong does not allow class action lawsuits or legal contingency fees.
The SFC can already find ways to punish investment banks that it deems as having not met the required standards. In April, the regulator banned Mega Capital Asia, a Taiwanese broker, from advising on listings in Hong Kong. Mega had helped Hontex, a Chinese fabric maker accused by the SFC of issuing a prospectus containing false and misleading information, to raise HK$1bn when it floated in December 2009.