Singapore Exchange (SGX), where 40 percentof listed firms are based outside the city state, is going tocourt to enforce its listing rules for the first time after aChinese company ignored a deadline to appoint a special auditor.
The exchange sued China Sky Chemical Fibre Co. and four ofits Chinese directors on Jan. 6 to compel the Quanzhou City,Fujian-based company to have a special auditor investigate��interested party transactions,�� a failed land acquisition andcertain costs. A closed hearing was held today.
��This is the first time that a company has been sodefiant,�� said Lan Luh Luh, an associate professor at theNational University of Singapore��s business school. ��They��retesting the will and limits of the SGX. All eyes are on SGX tosee the extent of its enforcement.��
Singapore investors have pressed for tougher rules asaccounting scandals have wiped out the market values of China-based firms from New York to Hong Kong, including Sino-ForestCorp. (TRE) and FerroChina Ltd (FRC). Singapore Exchange, Southeast Asia��sbiggest bourse by the value of shares traded, accused China Skyof ��flagrant disregard�� of its directive.
China Sky, in minutes of a Dec. 24 meeting in Singaporebetween its Chief Executive Officer Huang Zhong Xuan andLawrence Wong from the bourse, submitted to the exchange thatsome of its demands ��were extremely unreasonable.�� China Skyreleased the minutes of the meeting in a statement to theSingapore Exchange.
��Bullied Child��
��Huang told them that the company��s position was similarto that of a bullied child,�� according to the minutes.
Joan Lew, a spokeswoman for Singapore Exchange, declined tocomment on the case today because it��s before the courts.
��The board of directors may need more time to be able togive me meaningful instructions on how to respond to the presentproceedings,�� China Sky��s lawyer, Leonard Chia, said today.
Trading in China Sky shares has been suspended since Nov.17, a day after the exch! ange fir st ordered the company toappoint the special auditor. The shares had tumbled 96 percentfrom their peak of S$2.74 in October 2007.
The watchdog and China Sky have issued 25 regulatoryfilings since the Nov. 16 directive. All three independentdirectors at the nylon fiber maker quit on Jan. 5, citing non-compliance with the exchange��s order.
There��ve been no further statements since SingaporeExchange started legal proceedings on Jan. 6.
Spirit ��Beyond Form��
��Issuers must comply with the listing rules in accordancewith the spirit, intention and purpose by looking beyond form tosubstance,�� Lorraine Chay, vice president of the exchange��sissuer regulation unit, said in a 640-page court filing. Theexchange is seeking a court order for China Sky to follow itsdirective and get its approval for board hires.
Refusing to heed a court order would be in contempt ofcourt, which carries a jail term, a fine or both. No maximumpenalty has been specified under Singapore��s constitution.
Er Kwong Wah, Lai Seng Kwoon and Yeap Wai Kong, the threeSingaporean independent directors who quit on Jan. 5, declinedto comment on China Sky��s dispute with the exchange, saying itwas ��inappropriate.��
In March, a Singapore court sentenced Peter Madhavan, aformer independent director at Singapore-based freight forwarderAirocean Group Ltd., to four months in prison for his role inissuing a misleading regulatory filing. He was the firstindependent director to be jailed.
Increased Scrutiny
Chinese firms listed on overseas exchanges including NorthAmerica and Hong Kong have come under increased scrutiny fromregulators and investors. In Singapore, at least 20 Chinesefirms on the city��s S$775.8 billion ($600 billion) stock markethave been suspended or ordered to delist since 2008.
The FTSE Strait Times China Index (FSTC) of 53 Chinese stockstumbled 33 percent last year, compared with a 17 percent fall onthe benchmark Straits Times Index.
Shares of Singapore ! Exchange Ltd. fell 2.2 percent toS$6.10 at the close of trading today. The bourse reported a 12percent fall in net income for the three months ended Decembertoday as daily trading volumes plunged 37 percent.
The U.S. Securities and Exchange Commission has set up atask force to look for fraud in overseas companies, specificallyfrom China, with listings on U.S. exchanges, and in 2010 began aprobe asking auditors for information on audit practices of suchcompanies.
Deloitte
Shanghai-based Deloitte Touche Tohmatsu CPA Ltd. wasordered this month to appear in a U.S. court after rejecting aSEC demand for documents related to an investigation of itsformer client Longtop Financial Technologies Ltd. (LGFTY)
Deloitte & Touche LLP in Singapore had recommended that itsclient China Sky hire an external consultant, supporting theexchange��s view that special auditors should be appointed,according to Singapore Exchange��s court filing.
Doreena Tong, a Singapore-based spokeswoman at Deloitte,declined to comment on China Sky, citing client confidentiality.China Sky��s net income rose 87 percent to 111.1 million yuan($17.6 million) for the nine months ended Sept. 30.
��The company��s financial statements have been audited by aBig Four accounting firm and the company has been receiving aclean bill of health since IPO to date,�� China Sky��s lawyerChia said in a Dec. 8 letter to the exchange, according to courtfilings. ��The directive was issued with no apparent regard forthe various explanations and clarifications painstakinglyprovided to you.��
��Inadvertent Lapses��
The next day, the Chinese firm sent a letter to theexchange��s Chay saying while there��ve been ��inadvertentdisclosure lapses, it is never the intention of the company tohide or deliberately misinform the investing public.��
China Sky had devoted substantial time and resources toanswer the regulator��s queries, which has been ��mostdisruptive�� to its operations and distracted it in ��thisdifficul! t time,� � the company said in the letter signed byHuang, its CEO and largest shareholder with a 37.8 percentstake.
Guoco Group Ltd. (53), the second-largest investor in China Skywith a 10.3 percent stake, ��strongly urges the board tospeedily resolve and to comply�� with the exchange��s directive,said Stella Lo, a Guoco spokeswoman. Hong Kong-based Guoco iscontrolled by Malaysian billionaire Quek Leng Chan.
��China Sky and its directors should act promptly to complywith their listing obligations in the interests of allshareholders,�� said the Monetary Authority of Singapore, thecapital markets regulator with oversight of the exchange.
��It clearly indicates that the Singapore Exchange isprepared to do what is within its powers to make companiescomply,�� said Lock Yin Mei, who advises on initial publicofferings at London-based law firm Allen & Overy LLP��s Singaporeoffice. ��Listed companies should take heed.��
The case is Singapore Exchange Securities Trading Ltd. vChina Sky Chemical Fibre Co. (CSCF), Huang Zhong Xuan, Cheung Wing Lin,Song Jian Sheng and Wang Zhi Wei OS11/2012 in the Singapore HighCourt.
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