Steve Vickers, a retired senior policeman turned commercial investigator, who has supervised over 300 initial public offering due diligence exercises across Asia over the past seven years, praised planned reforms to initial public offering (IPO) rules, saying he had encountered serious problems in the sector.
"There were about 10 per cent of companies that I've looked at which were just not suitable to go public. Another 20 per cent or so of the companies had some issues which needed to be clarified or fixed before going listing. The rest were generally suitable for listing,'' the chief executive of Steve Vickers Associates told the South China Morning Post.
But investment banks did not always welcome being told about problems with listing hopefuls, he said.
"On a few occasions I have had to either resign from an assignment or to refuse to take it on because the sponsors concerned did not approve a sufficiently wide scope of work; one sufficient to fully understand the real circumstances of the target company," Vickers said.
"Sometimes, the sponsors just did not want to upset their clients."
After the 2008 global financial crisis caused mass lay-offs at investment banks, sponsors have cut their due diligence budgets, effectively limiting the scope and depth of due diligence work.
Vickers said that in some cases conflicts of interest would lead sponsors to deliberately and blindly rely entirely on reports by accountants or valuers, but that this would eventually jeopardise sponsors' reputations.
Some of the cases he had refused to take on, because of insufficient scope or budget, eventually went public but had problems after the listings, Vickers said.
Sometimes, sponsors' staff lacked the skills and experience for rigorous investigation on the mainland or elsewhere in Asia, he said. "Many analysts and investment bankers are bright, young and intelligent, but there is a tendency to accept or to believe everything they see at face value; especially if their activities are 100 per cent Web-based.
They often just used Google on the internet without going into more in-depth investigation," Vickers said. "Much reliable and accurate information on many Chinese companies and historical data cannot be found on the internet."
He said for any IPO hopeful, it would be crucially important to acquire and directly check the original hard copy of the Chinese-language State Administration for Industry and Commerce (SAIC). Sponsors should also verify whether or not companies had the right to use land, or if they had the required regulatory approvals.
Good due diligence required investigation of the background of key shareholders and management, suppliers, customers as well as examining the company structure and comparing it with the IPO prospectus. In many instances they would turn out to be different.
"Sometimes it is common sense to do the job. If a company claims it has a profit margin over 35 per cent, it is too good to be true and we have to check out more,"' he said.