Hontex case a model for A-share market

Hontex International Holdings Co, that was accused of misleading investors by overstating earnings in its IPO prospectus has agreed to pay shareholders HK$1.03 billion ($133 million) in a landmark court settlement. An article in the Beijing Youth Daily said defrauding the public should be severely punished and Hong Kong's handling of the Hontex case is a model for the mainland's A-share market.

Excerpts:

Hontex is a manufacturer of fabrics for sports and leisure apparel from internationally renowned labels, such as Li Ning, Decathlon, Kappa, and Mizuno. It was listed on the Hong Kong Stock Exchange in December 2009. But after just three months of trading, shares of Hontex were suspended after Hong Kong's Securities and Futures Commission alleged it had inflated sales, profit and cash figures in its listing prospectus.

Now, after more than two years of lawsuits, the SFC and Hontex reached an agreement and Hontex agreed to repurchase the shares held by its minority shareholders at a price of HK$2.06 a share. After finishing the share repurchase, Hontex will be delisted.

The SFC also fined Mega Capital, the sponsor of Hontex's IPO, a record sum of HK$42 million, and revoked its license due to inadequate and substandard due diligence work, failure to act independently and impartially, and other failures to discharge its sponsor duties.

The SFC protected investors from being misled by false information in IPO prospectuses. A case of fraud being punished and proceeds from an IPO being returned to shareholders by court order is unprecedented in Hong Kong, and aroused repercussions in the A-share market.

However, investors in the A-share market cannot enjoy such treatment. A-share investors must go to court to gain civil compensation, and only those investors who file a lawsuit will be benefited. It is unlikely that a case of IPO compensation like Hontex can happen in A-share market.

Defrauding the public should be punished severely. In addition to fraud, "excessive making-up" in IPOs, which is more common in the A-share market, also is very hard to deal with.