We look at the latest action by the SFC against ICEA, the second in three years, and also at the complicated structure of state-controlled banking giant ICBC in Hong Kong.

ICEA déjà vu
6 June 2008

Reading today's press release from the SFC that it has "resolved certain compliance issues" with ICEA Capital Ltd (ICEAC) and ICEA Securities Ltd (ICEAS) gives us a feeling of déjà vu.

ICEAC and ICEAS are both owned by ICEA Finance Holdings Ltd (incorporated in the British Virgin Islands), which is 75% owned by state-controlled giant Industrial and Commercial Bank of China Ltd (ICBC, 01398) and 25% by The Bank of East Asia, Ltd (BEA, 00023).

The SFC found that from 2002 to 2004, senior staff members (all of whom have since left) created an impression that ICEAC and ICEAS were providing improper support to a certain listed stock, although the SFC didn't say which one, so Webb-site.com finds that the SFC falls short on disclosure in this respect. The SFC also found a failure to maintain a sufficiently robust Chinese Wall between proprietary trading and corporate finance on two occasions, and various other failings.

Under the resolution, ICEAC and ICEAS have been fined HK$38m (US$4.87m), and have agreed to engage an independent audit firm to conduct reviews of their internal control and compliance systems at a time to be chosen by the SFC within the next 3 years. If the companies are found to have committed material breaches or failures within that period, their licenses may be revoked.

We emphasise "may", because this isn't the first time they've settled with the SFC and agreed to clean up their act.

Back on 27-Jan-05, the SFC announced that ICEAC agreed to pay HK$30m to settle disciplinary proceedings in which the SFC alleged that ICEAC had not exercised due skill, care and diligence as sponsor of the listing of Euro-Asia Agricultural (Holdings) Co Ltd, which was suspended in Sep-02, 14 months after it listed, and eventually liquidated. ICEAC did not admit liability and the SFC "made no finding of wrongdoing" despite its allegations. ICEAC agreed to engage a firm of independent accountants to undertake a comprehensive review of its systems and controls.

In the Jan-05 release, the SFC noted that "the members of senior management responsible for ICEAC's work on the Euro-Asia listing are no longer with ICEAC". Skip forward to 2008, and the SFC notes that "since 2005, ICEAC and ICEAS have installed entirely new management teams".

According to ICBC's 2007 annual report, ICEA made net profit of US$23.82m and had net assets of US$69m at year end, so the  fine this time amounts to about 20.4% of last year's profit - but then they may only have to make such payments every 3 years. One has to wonder how many changes of management, how many undertakings to clean up compliance, and how many financial settlements are allowed before a firm actually gets its licence revoked - it hasn't happened yet, to any firm. Perhaps a three-strikes-and-you're-out rule should apply.

ICBC (Asia) Securities

Incidentally, ICEA isn't the only arm of ICBC to get into trouble with the SFC. On 6-Nov-07, ICBC (Asia) Securities Ltd, a fellow subsidiary wholly-owned by Industrial and Commercial Bank of China (Asia) Ltd (ICBCA, 0349), was reprimanded and fined a paltry HK$350,000 for failing to maintain the required liquid capital of 5% of its liabilities on 4 days between 27-Oct-06 and 3-Nov-06. This was when a client sold a large amount of a newly-listed stock on 2 days. Again, the SFC didn't say which stock they were talking about, but it was probably ICBC itself, which listed on 27-Oct-06.

The brokerage fell short by HK$41m of liquid capital, which implies that the client sold at least HK$820m of ICBC stock, probably more. That client certainly wasn't an applicant in the Public Offer, since the highest allocation in the heavily over-subscribed IPO was only 16.417m shares worth about $57m. So it must be someone who got shares in the placing. Since the brokerage isn't known for its institutional client base, you have to wonder who was the lucky client which got such a generous placing allocation.

One market, two listings, three investment arms?

It can only be a matter of time before ICBC privatises ICBCA, formerly Union Bank of Hong Kong Ltd, of which ICBC acquired control in 2000. After ICBC's own listing, ICBCA is just a loose end, although the parent denies any plans. The continued separate existence of ICBCA also results in continuing related party transactions - ICBCA's largest single borrower is ICBC itself, and as of 5-Jun-08, the amount ICBC owes ICBCA had risen to HK$34.6bn, or about 2.5 times the net tangible assets of ICBCA. That's up from HK$18.4bn on 23-Nov-07. Loans from banks to their parents in the "ordinary and usual course of business" are exempt from the connected transaction rules by Listing Rule 14A.65(1) and 14A.10(9), so independent shareholders of ICBCA have no say over this. There are also advances in the opposite direction, although we don't know what the latest level of those is.

ICEA itself is beginning to look short-dated; on 27-May-07 a new company, ICBC International Capital Ltd (ICBCIC), was licensed by the SFC for corporate finance (but not for advising on Takeover and Mergers). So far it only has two responsible officers, and no other licensed staff. Another company, ICBC International Securities Ltd, was incorporated in HK on 7-Apr-08, the same day as ICBCIC, although it does not yet have an SFC licence. It seems likely that these two will form the nucleus of a new investment banking group, and ICEA may find itself absorbed into ICBC or closed.

© Webb-site.com, 2008

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