China’s oldest securities firm Shenwan Hongyuan has named and shamed one of its cornerstone investors for failing to pay for stock subscriptions made during its recent initial public offering (IPO) in Hong Kong.
The brokerage said China Saite, a construction services firm, had defaulted on payments for almost 65 million shares during its US$1.16 billion IPO, the biggest in Hong Kong so far this year. It said it was considering legal action against the company.
China Saite agreed to buy 64,193,600 H shares at HK$3.63 each as a cornerstone investor, according to an earlier announcement made by Saite. That makes the default value HK$233 million (US$29.74 million).
Analysts said it was extremely rare for cornerstone investors to fail to meet their financial obligations.
“Cornerstone investments are made by professional investors. The IPO team consists of professional brokers and lawyers. The book building party and the cornerstone investor would have assessed their ability, financially, administratively, and procedure-wise, to complete the investment prior to entering into the cornerstone investment agreement,” said Andrew Lam, director of accounting giant BDO in Hong Kong.
He said the default conjured up many questions to be addressed, including how to make up for the shortfall in proceeds, which parties should be held accountable, and how much money Shenwan is going after from Saite.
“As of the date of this announcement, China Saite and Saite Group failed to make any payment for the H shares originally allocated to China Saite, which constitutes a default … the company reserves all of their rights against China Saite and Saite Group … including but not limited to, taking legal action for all losses and damages,” Shenwan Hongyuan said in a filing to the stock exchange on Monday night.
China Saite, also a Hong Kong-listed entity, had made an agreement with Shenwan Hongyuan to buy the H shares offered by the latter during its Hong Kong listing, but both parties had agreed to delay the delivery of the shares, according to earlier filings. China Saite had agreed to make the payment before May 17, according to a filing by Shenwan Hongyuan on May 20.
China Saite confirmed the termination of the deal in a filing on Monday night, without providing reasons for the default. Calls to the company on Tuesday morning went unanswered.
Shenwan said on Monday they would take “appropriate actions” to dispose of the defaulted shares, and will make further announcements later.
Shenwan said the board believed the termination of the deal with Saite China does not have any material adverse impact on the company’s business operation and financial condition, and Shenwan had received all the proceeds raised through the stock offering, except for the part under the deal with Saite.
Shares of Shenwan Hongyuan dropped by as much as 15 per cent to an intraday low of HK$3.10 during its first day trading, and have been struggling to recover since then.
Shenwan Hongyuan closed 0.33 per cent higher to close at HK$3.03 on Tuesday. The company is dual-listed in Shenzhen, where it closed 0.2 per cent higher at 4.85 yuan.
China Saite rose 0.8 per cent to close at HK$0.24. The company has a market cap of only HK$611 million.
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