| HONG KONG
HONG KONG Dec 20 Hong Kong's securities
regulator has set up an independent task force to detect fraud
by listed companies, extending its increasingly muscular
approach into an area traditionally overseen by the city's stock
The power shift marks the latest step by the Securities and
Futures Commission (SFC) to try to tackle fraud in the Hong Kong
stock market, which is particularly tough to police given the
majority of its companies are based overseas.
The move suggests the watchdog is set to take a tougher line
against company management and majority shareholders, stepping
in after a series of accounting scandals threaten to damage the
city's reputation as a leading international financial centre.
The independent SFC established the corporate regulation
group last month to comb through stock market announcements,
research notes and press articles looking for possible red
flags, mirroring the approach taken by the Securities and
Exchange Commission (SEC) in the United States.
The move underlines the SFC's more hands-on role in
monitoring corporate governance, a task previously taken by the
publicly-traded Hong Kong Exchanges and Clearing Ltd,
the frontline regulator and operator of the city's stock market.
"The SFC is assuming direct regulatory oversight that was
historically undertaken by the exchange, resulting in increased
listed company surveillance and enforcement by them," said James
Wadham, a partner at Davis Polk and Wardwell in Hong Kong.
The SFC has already beefed up its role this year as the
stock market's gatekeeper by bringing in tough new rules for
investment banks and finance firms that sponsor initial public
offerings (IPOs), making them liable for the contents of listing
This latest move was first flagged by SFC chairman Carlson
Tong in a speech last week and confirmed by lawyers.
The group is in a soft launch phase and the SFC declined to
provide further comment.
"A major priority for the SFC is to take on broader, more
proactive oversight of listed companies as a corporate
regulator," Tong said.
"By actively detecting misconduct and following up on
suspicious activity, we hope to identify red flags and enhance
the SFC's role in maintaining quality markets and high corporate
governance standards, as well as protecting investors."
Tong added the SFC is working with Hong Kong Exchange to
ensure they don't duplicate work.
The team sits in the SFC's corporate finance division and
has half a dozen people right now but could grow if its approach
proves effective, according to people familiar with the matter.
It will be focusing on issues such as related party
transactions and other forms of financial engineering that see
value transferred out of a company, trying to provide greater
protection to minority shareholders.
If the group spots anything amiss, it will take it up with
the company. It will refer cases to the SFC's enforcement
division if it suspects serious wrongdoing.
OUT OF REACH
More than half of Hong Kong-listed companies are based in
mainland China, with several involved in accounting scandals in
There is no extradition treaty between Hong Kong and the
mainland making it hard to take criminal action for fraud.
Allegations of fraud have been levelled at several companies
including China Metal Recycling Holdings Ltd and
Chaoda Modern Agriculture by short-sellers who often
target stocks that have carried out suspicious looking
transactions. That has raised questions about why short-sellers,
who stand to profit from a falling share price, are raising
these concerns rather than the regulators.
Hong Kong Exchange has primary responsibility for ensuring
companies follow listing rules and shares are suspended from
trading if regulations are not being complied with or if a
company is in a precarious financial position.
A report by the exchange shows that on Nov. 30, there were
42 companies whose shares had been suspended for more than three
months. Of those, 17 are under formal investigation for
The SFC's new team is likely to raise questions about
whether it is assuming more of the exchange's surveillance role.
How the exchange handles the conflict of interest between
earning money from listing and trading fees on one hand and
regulating the market on the other has come under scrutiny as a
result of Alibaba's possible Hong Kong listing. Alibaba wanted
to use a structure not allowed under the exchange's listing
rules, and the bourse is under scrutiny to see if it will try to
change its rules to accommodate a company worth an estimated $80
The SFC's move should help counter any suspicion that
companies can get an easy ride in the Hong Kong market.
"This should definitely serve as a wake up call to companies
to ensure they have their house in order," said Gareth Hughes, a
partner at Ashurst law firm.