Rusal strains HK rules to the limit By John Helmer
MOSCOW - Hong Kong Exchange executives and the Hong Kong stock market regulator
appear to be cracking and splitting under the strain of a proposed share sale
and listing for United Company Rusal, Russia's aluminum monopoly and one of the
world's leading producers of bauxite, alumina and primary aluminum.
Anonymous sources insist in press leaks that Rusal's listing application has
been approved, while the exchange and the Securities and Futures Commission of
Hong Kong decline to say this, or issue any of the notices, announcements and
public disclosures that are standard in such cases.
The Hong Kong Exchange chief executive, Paul Chow, steps down next month and
will be replaced by Charles Li, a JP Morgan
and Merrill Lynch alumnus. Chow refuses to take telephone calls on the subject
of the listing application by Rusal.
With at least US$17 billion in debt, assets under revocation order in Guinea,
and net equity value between $2 billion and zero, according to one of its
bankers, the company's principal shareholder, Oleg Deripaska, is being bailed
out by the Kremlin. Two state banks - Vnesheconombank chaired by Prime Minister
Vladimir Putin, and Sberbank, chaired by former economy minister, German Gref -
have publicly undertaken to buy at least a third, possibly most, of the
proposed 10% share issue, if the Hong Kong Exchange (HKEx) and the exchange
regulator, the Securities and Futures Commission (SFC), approve the application
and the prospectus.
The non-Russian underwriters - Credit Suisse and BNP Paribas - who are owed
roughly $2 billion by Rusal and stand to improve their balance sheets if cash
is passed to them from the share sale - may also buy the shares on offer, if
there is no free-market buyer.
Through November and this month, the HKEx listing committee has repeatedly
postponed a decision on whether to approve the listing. Reports from anonymous
sources purportedly close to the SFC say that in its parallel review of Rusal's
prospectus, the commission has decided that it will approve the listing on
condition that the sale of shares is restricted to exclude individual or retail
investors.
Chow's spokesman, Scott Sapp, was asked on Monday to say if Chow and the
exchange had approved the Rusal listing. Sapp responded at first by saying he
had been preoccupied with "very, very urgent matters", and regarding the
question of approval, "I haven't looked at it yet." Late on Monday, Sapp
refused to confirm that the Rusal listing had been approved by the exchange.
Sapp had previously claimed that when the exchange listing committee and senior
management approve a listing application, it will post an announcement on the
exchange website. The company will then be required to publish a "web proof
information pack" (WIPP), setting out a description of its business, its
financial condition and strategy, and issues of interest to potential
sharebuyers in the Hong Kong market.
So far, HKEx has not posted any announcement relating to Rusal, and there is no
disclosure of a Rusal WIPP. The Financial Times of London has reported that the
Rusal prospectus runs to a thousand pages.
Chow was asked to explain the HKEx's decision-making on the Rusal application.
In particular, he was asked by Asia Times Online to say if he believed the
Securities and Futures Ordinance (SFO) made unlawful and disallowed a public
listing of company shares according to which different classes of shareholders
were accorded differential or preferential treatment. He was also asked to say
what was the legal mandate for the HKEx to approve shares for sale to certain
institutions but to prohibit the sale to retail investors. Finally, he was
asked what provision of the SFO and of the HKEx rules allowed the secret
(non-public) listing and sale of an applicant company's shares.
Sapp avoided specifics, claiming only that "as a general matter, the Securities
and Futures Commission has power to impose conditions under the Securities and
Futures [Stock Market Listing] Rules Section 6(3)."
This is a reference, not to the commission's authority to approve a listing,
but rather "to require further information and to object to listing". The
objections spelled out in the rule book include a determination by the
commission that "the application is false or misleading as to a material fact
or is false or misleading through the omission of a material fact". Also
included is an objection that "it would not be in the interest of the investing
public or in the public interest for the securities to be listed".
London and Hong Kong sources have confirmed that the Dechert law firm of the
United Kingdom, acting for Michael Cherney, the founding partner of Deripaska
in the creation of the Russian aluminum concern a decade ago, has issued a
warning that Deripaska may have misled the exchange, and Rusal's prospectus may
have omitted details of Cherney's lawsuit in the UK High Court to recover a 13%
shareholding vouchsafed by Deripaska's agreement of March 2001.
The UK appeal courts have dismissed Deripaska's objections and have ordered him
to face trial on Cherney's suit in the High Court, where an initial ruling has
already been issued to say that Cherney's claim has "a reasonable prospect of
success". The trial is likely to start within weeks.
The HKEx listing rules require the SFC to send Rusal an objection notice or a
non-objection notice, and it allows the exchange to list the securities for
sale if, after a 10-day time period, there is no objection from the regulator;
or that the SFC issues a formal approval notice; or if "the conditions referred
to ... in relation to the application have been complied with".
From the latest limited disclosures from HKEx's Chow, it appears that a 10-day
deadline for Rusal is still running. Until it expires, the Rusal listing is
formally not approved by either the exchange or the regulator. This may account
for the silence on Chow's part - and for the blitz of press leaks from the side
of the applicants and its promoters.
Bloomberg has reported two anonymous sources as claiming that both the exchange
and the SFC have approved the listing. According to Sapp, "the HKEx cannot
confirm accuracy of press reports".
According to the leaks, the SFC has told Rusal it will "be excluded from
offering stock to retail investors, according to two people, who declined to be
identified because the approval hasn't been announced". Bloomberg's version
claims that "under an SFC proposal, wealthy individuals would be allowed to buy
Rusal shares in the IPO with a minimum subscription of HK$1 million
(US$129,000), the people said."
Martin Wheatley, the head of the SFC, was asked to explain how the SFC believed
it could proceed if this condition violated the listing rules. He initially
refused to respond to an e-mail. His secretary, identifying her name as Chiu,
refused to put calls through to him, but agreed to relay messages.
According to the Securities and Futures Ordinance, the legal mandate under
which the SFC regulates the market and reviews listing applications in parallel
with the exchange, the SFC may impose restrictions and conditions on proposed
applicants like Rusal, and on their prospectuses, but the Bloomberg version
isn't one of them.
The problem over the next 10 days for Chow and Wheatley, and their
organizations, is that in sections 270 to 296 of the ordinance there are clear
prohibitions of what are called "insider dealing", "stock market manipulation",
"false trading", and "price rigging". The press leak version of the role of the
Russian government and its two banks, along with the commercial underwriters,
the secret Rusal prospectus, and the reported restriction on sharebuying, may
add up to violations of these provisions. Wheatley was asked to say why the
actions he and the commission had taken or were still contemplating might not
infringe these sections of Hong Kong law. Wheatley and his staff declined to
answer.
Just how clear and explicit the HKEx is about equal and open disclosure of
company share-listing applications to all investors in the market is revealed
by the warning notice attached to the latest company the exchange has approved
for share sale last week - China Corn Oil. Upfront, its WIPP declares: "This
WIPP is only for the purpose of facilitating equal dissemination of information
to investors in Hong Kong." An identical statement appears in the warning
notice attached to the WIPP posted by the exchange last week for Shengli Oil
and Gas Pipe Holdings Ltd. In fact, all HKEx listed companies are obliged to
issue the same statement.
According to Sapp, companies approved for listing in Hong Kong must file such
open reports. "All new applicants proposing to list by way of a public offer
need to post a web proof information pack (WPIP) on the HKEx website
(www.hkex.com.hk) after receiving the listing committee's approval of their
listing application," Sapp has told Asia Times Online.
Rusal, according to the leaks published by Bloomberg and the Financial Times,
appears to have arranged for the appearance of an approval from the Securities
and Futures Commission without the substance from the HKEx.
Chow, through spokesman Sapp, denies that the press leaks represent any form of
approval of the share sale by the exchange. Sapp told Asia Times Online:
"Announcements of listings prospectuses, etc are posted on the HKExnews website
by the companies concerned and they decide the timing of such postings, subject
to HKEx rules and regulations. Listing schedules and listing destinations are
business decisions of companies. Potential listing candidates normally seek to
increase the market awareness of their listing plans after they have obtained
listing approval from the Stock Exchange. The Stock Exchange does not make
announcement on behalf of companies regarding their listing plans and
schedules."
What inducement, of commercial or political or other nature, could have
provoked this split between the exchange and the regulator in Hong Kong, and
the refusal of the SFC to defend its actions in relation to its own statute?
The advantage for the underwriting banks is plain - they stand to gain cash
from a share sale to offset Rusal's debts, even if they must then lend
themselves this money in a bookkeeper's switch from Rusal debt as a liability
to Rusal shares as an asset.
It is also clear in Moscow that the highest government officials in the land
have voted to spend billions of dollars of public money on buying these shares
of Rusal, if no one else will, and if Rusal cannot or will not disclose
publicly who really owns the company's shares right now. The Hong Kong exchange
and the regulator can hardly be blamed for wriggling in discomfort at such a
display of non-transparency by the Russian state.
John Helmer has been a Moscow-based correspondent since 1989,
specializing in the coverage of Russian business.
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