China Sky-SGX saga a test case
Investors of China Sky Chemical Fibre are caught in the stand-off between the Singapore Exchange (SGX) and China Sky Chemical Fibre. And there appears to be no easy way out of the mess.
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By LYNETTE KHOO
11 January 2012
Investors of China Sky Chemical Fibre are caught in the stand-off between the Singapore Exchange (SGX) and China Sky Chemical Fibre. And there appears to be no easy way out of the mess.
There are many ‘firsts’ in this saga. This is the first time a listed company has defied a directive from SGX to appoint special auditors. Instead of complying by appointing special auditors, China Sky appointed a legal adviser to act as the go-between for SGX and the company.
SGX has also responded with the unprecedented move of going to the courts to enforce its directive. With more juicy information being revealed by one party or the other, it is easy to get lost among the side plots and lose sight of the main issues at hand.
But when the noise and smoke finally clears, several sobering questions will remain. Are shareholders of China Sky getting a true and fair representation of the company’s accounts?
What else can SGX do to issuers that refuse to comply with its directives? And what can the court do if foreign directors refuse to step into Singapore even when they are summoned?
These are issues that will be sorely tested in the case of China Sky.
To recap, the saga at China Sky began with a directive from SGX to the group in November to appoint special auditors. China Sky’s continued refusal to comply drew a public rap from SGX.
All three independent directors of China Sky abruptly stepped down when their final attempts to persuade the company to appoint special auditors were unsuccessful. SGX has now resorted to going to court to get its directive enforced.
This unprecedented move itself has stoked much debate over whether it would yield any results.
Some market watchers are sceptical about whether China Sky directors would heed the court’s order and are speculating that the worst fears of investors - delisting of the company - are likely to play out.
After all, there have been cases of blatant fraud such as Oriental Century and Sino-Environment, where alleged embezzlement took place and police reports against the Chinese management have been lodged in Singapore and China. But none of the directors at these companies have been known to be called to account.
China Sky is a different kettle of fish - it has not been accused of any wrongdoing. This might give the directors even less reason to yield to SGX’s demands.
Investors expecting a no-show from China Sky directors in court next Monday would probably draw some clues from China Sky’s release of minutes for a confidential meeting with SGX in December, immediately after SGX’s application to the court.
China Sky has strongly defended its position, saying that it has had unqualified audit opinion from Deloitte all these years. It cited the issue of costs and the potential disruption to its operations from a special audit.
Its management also accused SGX of taking out of context certain information shared at a confidential meeting on Dec 24.
In the meeting, China Sky likened itself to a ‘bullied child’ in this whole episode, putting up with the various demands of SGX ‘even when they appeared unreasonable but even then, the prompt and full cooperation rendered by the company failed to satisfy the SGX’.
China Sky also published its own excerpt from a telephone conversation between its chief executive Huang Zhong Xuan and SGX deputy chief regulatory officer Richard Teng on Dec 9 that was conducted in Mandarin.
These lurid details have set everyone thinking. Is China Sky really a defiant kid who refuses to explain its past actions and who disregards the rules of its parent? Or is it a bullied child as it has made itself to be?
The group’s defence has also raised questions on whether there is merit in having a special audit in the case of China Sky and whether SGX could have taken a slightly different approach, such as using more polished Mandarin when conversing with a CEO who speaks only Putonghua (Chinese).
Clearly, no company would welcome special auditors or willingly seek to undertake a special audit. But deciding on the merits of a special audit does not lie with the company itself.
In Singapore’s caveat emptor regime, investors expect SGX to play an active role in prodding companies to make timely material disclosures, sometimes through the appointment of and investigation by special auditors.
Clearly, the exchange could possibly run the risk of looking bad if, after all the hoo-ha, a special audit later uncovers little or no material irregularities at China Sky.
But SGX, as a frontline regulator, has to make a value judgment on when to step into a whole spectrum of corporate behaviour, ranging from bad practices to blatant fraud - and be judged by it. Some may argue that it would be unfair to use the outcome of a special audit, in hindsight, to assess the merits of a probe in the first place.
The longer this impasse drags on, the more that minority investors would suffer. What remains central to investors in the case of China Sky is whether its past financial statements present a true and fair view of its financial position.
Although China Sky’s financial statements have been given a clean bill of health by its statutory auditors, SGX says that it has received contradictory responses from the company when queried. Hence, the regulator’s directive to appoint special auditors to clear the air.
Still, while SGX has the right to direct companies to appoint special auditors under its listing rules, it also appears that there is little that it can do if companies choose to defy its directives.
The developments over the next few weeks will be pivotal in setting the precedent on how SGX could compel compliance of its directives and listing rules.
Certainly, how far and wide Singapore rules and laws can go in addressing defiant foreign issuers will be something to be closely watched by 150-odd S-chip companies here.
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As it help students alot for tjeir exam.