Press Release

LCQ12: IPO process of China Life Insurance Company Limited

February 4, 2004

Following is a question by the Hon Sin Chung-kai and a written reply by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, in the Legislative Council today (February 4):

Question:

It has been reported that during the recent initial public offering (IPO) in Hong Kong of the China Life Insurance Company Limited, a series of blunders occurred. First, some securities firms complained that receiving banks had refused to accept yellow application forms dedicated for use by brokers. When the listing was about to take place, mistakes were found in the allocation lists, and some investors had made short selling wrongly and suffered losses as a result. In this connection, will the Government inform this Council whether -

(a) it has assessed if the Securities and Futures Commission (SFC) has sufficient measures to monitor IPOs of enterprises in Hong Kong under the existing financial and securities regulatory regime; if it has and the assessment results show that the measures are sufficient, of the reasons for the occurrence of the series of blunders during IPO of the above company;

(b) SFC has taken the initiative to investigate the above blunders, with a view to tracking down the responsible party and exploring ways to avoid the recurrence of such blunders; and

(c) SFC has received complaints from the above investors; if so, how SFC assists them in seeking compensation from the relevant company and its listing sponsor?

Reply:

Madam President,

(a) In an initial public offering (IPO), the sponsor has an overall responsibility of ensuring that the whole issue process is conducted smoothly and in a fair and orderly manner. Sponsors are regulated by the Securities and Futures Commission (SFC) under the licensing regime enshrined in the Securities and Futures Ordinance (SFO) (Cap. 571). Under the SFO, sponsors are required to have a licence to carry out Type 6 regulated activity, i.e. advising on corporate finance (Note). SFC shall refuse to grant a licence unless the Commission is satisfied that the applicant is a fit and proper person for the regulated activity. In considering whether one is fit and proper, SFC will have regard to, amongst others, the applicant's ability to carry on that regulated activity competently, honestly and fairly, and his reputation, character, reliability and financial integrity.

After an applicant is granted a licence, the licensee is required to remain fit and proper at all times and to comply with codes and guidelines issued by SFC. Amongst others, sponsors have to comply with obligations set out in SFC's Corporate Finance Adviser Code of Conduct concerning "role of sponsor in a public offer". Under the Code, a sponsor is responsible for the overall management of the public offer and for putting in place sufficient arrangements and resources to ensure that the public offer and all matters ancillary thereto are conducted in a fair, timely and orderly manner. He also has to avoid events of disorder or failure which may arise during the public offer period.

If a licensee is found to be guilty of misconduct or not fit and proper to be or remain the same type of regulated person, SFC may take disciplinary action against him, ranging from private or public reprimand, fines, to suspension or revocation of a licence.

This licensing regime was recently modernised and improved in April 2003 when SFO came into effect, and market views have been taken into account in shaping the new regime to improve the regulation of intermediaries.

That said, we note that there is always room for improving the regulation of IPO intermediaries. In this connection, SFC and Hong Kong Exchanges and Clearing Limited (HKEx) issued in May 2003 a consultation paper on the Regulation of Sponsors and Independent Financial Advisers (IFAs) proposing, amongst others, to have a list of acceptable sponsors and IFAs to prospective applicants or listed issuers in accordance with established criteria for admission to the list. The proposals involve, amongst others, amendments to the Listing Rules administered by HKEx. We understand from SFC that the Commission and HKEx are now considering the response to the consultation and will come up with new proposed measures and amendments to Listing Rules in the first quarter of 2004.

In light of market concerns on the IPO process of China Life Insurance Company Limited (China Life), the Administration urged SFC, HKEx and the Hong Kong Monetary Authority (HKMA) in December 2003 to review whether adequate regulatory measures were in place to ensure an orderly IPO process. We understand that the regulators have identified and are following up some improvement measures. We will continue to monitor the regulators to ensure that an appropriate regulatory framework is in place for governing the IPO process.

(b) The SFC has asked HKEx and the sponsor of the IPO of China Life for a full report of the events leading up to the publication of allocation results and the subsequent handling of the problem. SFC is currently analysing the reports and other information provided by various parties. The Commission aims to release a report in early February 2004 on this issue, setting out the facts of, and reasons for, the occurrence of the incident, and recommendations on how to improve the IPO process in future.

Separately, in response to the allegation of receiving banks refusing to accept yellow application forms with brokers' chop, HKMA has conducted a thorough investigation. The investigation does not reveal any evidence to substantiate the allegation. All the receiving banks of the IPO of China Life have confirmed to HKMA that the collection boxes at the receiving branches were there at all times until the closing date. There was nothing obstructing or prohibiting the investing public from putting in the applications forms, be they white or yellow.

HKMA's investigation, nevertheless, revealed that there might have been some internal communication problems at a receiving bank. Certain staff members of some of the receiving branches of the bank might have confused the internal deadline for the bank's own securities customers who wished to apply through the bank (using yellow forms) with the deadline for other investors to submit yellow forms. They had therefore provided somewhat confusing messages when answering telephone enquiries. HKMA has requested the bank concerned to take appropriate measures to improve its internal communication to prevent similar incidents in future IPO exercises.

(c) A stockbroking industry organisation has advised SFC and HKEx that clients of a few brokerage firms had experienced problems in submitting their application forms bearing brokers' chop to some of the receiving banks. This however does not involve any compensation from the relevant company and its listing sponsor. SFC has not received any complaint from investors directly on this issue.

As regards HKMA, it has not received any complaint on the matter from investors. There were three enquiries which have been referred to the relevant banks direct in accordance with the established procedures of HKMA.

As regards the errors in the newspapers concerning the allotment results of the IPO of China Life, SFC has not received any complaints from investors for having sold the wrong number of shares. SFC, HKEx and parties working on the IPO had rectified the problem prior to the commencement of China Life's trading on 18 December 2003.

Note: Under Schedule 5 to SFO, there are totally nine types of regulated activity.

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