May 28, 2019 05:49 AM

China Merchant Securities Fined for Failure in IPO Vetting

China Merchant Securities’ Hong Kong unit was fined for failing to carry out due diligence. Photo: VCG
China Merchant Securities’ Hong Kong unit was fined for failing to carry out due diligence. Photo: VCG

Hong Kong’s securities regulator fined a unit of mainland-based investment bank China Merchant Securities Co. HK$27 million ($3.4 million) for breaching its duties as a sponsor of a HK$1.8 billion initial public offering a decade ago.

The Securities and Futures Commission (SFC) said Monday it slapped the fine on China Merchants Securities Hong Kong (CMS Hong Kong) for its role in the 2009 listing of China Metal Recycling Ltd., a now-defunct scrap merchant. As a sponsor of the listing, CMS Hong Kong failed to carry out proper due diligence, the SFC said in a statement.

The punishment came as the city’s financial regulator tightened scrutiny of IPO sponsors and took a tougher stance against those who fail to meet their obligations.

UBS Securities Hong Kong, a unit of UBS Group AG and the other sponsor of the China Metal deal, in March was fined HK$375 million and suspended from sponsoring IPOs for 12 months for misconduct in the China Metal case and two other IPOs. They were the 2009 listing of logging company China Forestry Holdings Co. Ltd. and the 2014 offering of Tianhe Chemicals Group Ltd.

Three other global brokerages including Morgan Stanley Asia, Merrill Lynch Far East and Standard Chartered Hong Kong were also fined for involvement in problematic IPOs. The four companies were levied a combined HK$787 million, a record amount of penalties imposed by the SFC on sponsors.

CMS Hong Kong and UBS were the joint sponsors of China Metal’s offering in June 2009. The Guangzhou-based company claimed to be China’s largest metal recycling company and reported 117% average annual revenue growth in its first five years of business. The offering attracted global investors including IGM Financial, JPMorgan Chase & Co. and Norges Bank.

In 2013, China Metal was suspended from trading by Hong Kong regulators for allegedly fabricating financial information, including overstating its financial position in the IPO prospectus. China Metal was liquidated in 2015, and its shares were delisted the next year, leaving investors with big losses.

The SFC said in the Monday statement that its investigation found that CMS Hong Kong and UBS "failed in their due diligence as joint sponsors to address a number of unusual facts and findings" on China Metal and its customers during the listing process.

The two investment banks failed to verify China Metal’s sales contracts, its transactions with a number of third-party companies and its suppliers, the regulator found.

Although early-stage due diligence was carried out by UBS as the lead sponsor, CMS Hong Kong didn’t take any measures to address suspicious issues when it joined the sponsorship, the SFC said.

Contact reporter Han Wei (

You've accessed an article available only to subscribers
Share this article
Open WeChat and scan the QR code