HONG KONG: The Australian securities regulator has rapped banks for how they conduct initial public offerings of small mining companies, pointing to possible conflicts of interest and “substandard” compliance controls for promotional material.
The Australian Securities and Investments Commission published a report yesterday that looked into the sourcing, execution and trading of mining IPOs that raised less than US$20mil between October 2016 and September 2018.
The sector is one of the nation’s most prolific source of listings.
The conclusion: lead managers tend to give preference to a small subset of investors, typically in their networks, making it harder for retail investors to secure an allocation.
The “tight” share register could mean that investors are expected or even bound to behave in a certain way after the listing to prevent them from being excluded from future deals.
The mining industry accounts for a large proportion of Australian IPOs: more than 25% in 2017 and 35% in 2018, according to the report.
In the four years though 2018, mining companies conducted more listings than any other sector. And almost all of them - 97% - raised US$20mil or less.
Lead managers were found to have exerted influence over the allocation process by blacklisting investors so they would not receive allocations, closely monitoring and questioning those that sold securities shortly after the listing and expecting investors who receive stock to hold it after the deal.
The regulator also raised concerns about the mandates where lead managers may seek to include terms and conditions that give them disproportionate influence relative to their holdings in the company.
The regulator said the companies may underestimate the “complexity of remuneration structures” and not give enough consideration to the behavior that certain types of remuneration might encourage.
The report advises banks to disclose any “actual, potential or perceived conflicts of interest” and clearly set out the total remuneration to be paid for their services.
Companies should seek to understand the allocation process, and banks should only make recommendations where there is a reasonable basis.
The regulator also said it may intervene or take enforcement action where it deems that proceedings are unlawful or pose a risk of harm to investors. — Bloomberg
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