KUALA LUMPUR (Sept 14): Bursa Malaysia Securities Bhd has publicly reprimanded and imposed a fine of RM350,000 on RHB Investment Bank Bhd (RHB IB) for two breaches of the listing requirements — including failing to conduct proper due diligence — which led to the rejection of the proposed initial public offering (IPO) of an ACE Market applicant, for which it was the sponsor and principal adviser.
The second breach is over RHB IB's failure to immediately notify Bursa of "material developments concerning the applicant's business, operations, future plans and prospects after the initial submission", Bursa said in a statement.
In the due diligence breach, Bursa said RHB had failed to make reasonable enquiries or consider all relevant matters to ensure there was no misstatement or material omission in the submission and disclosures made in the initial listing application and draft prospectus, which were submitted to Bursa for the applicant.
This resulted in a material omission pertaining to the advance/financing arrangement by the applicant with its major suppliers, and the credit risk/recoverability of the advances to one major supplier that had been wound-up prior to the initial submission.
"In this respect, the advance/financing arrangement which would expose the applicant to credit risk that might have a material and adverse effect to the applicant’s business, results or operations and liquidity, clearly constituted material information but was not disclosed in the initial submission.
"Further, RHB IB had acknowledged that the severe financial issues encountered by the major supplier leading to its winding-up and the fact that there were contracts with customers that had been terminated which would result in non-payment of the advances, were material information," Bursa said.
The regulator concluded that there was "inadequate assessment by RHB IB on the applicant’s internal controls and risk management systems", particularly to manage the credit risk arising from the advance/financing arrangement. RHB IB had also provided an inaccurate confirmation about the applicant having adequate internal controls and risk management systems.
"There were also numerous key shortcomings and deficiencies in the submission and disclosures made in the draft prospectus, leading to Bursa Malaysia Securities’ rejection of the proposed listing of the applicant," Bursa said.
The regulator also highlighted that RHB IB only disclosed the material information upon being queried by Bursa on the matter, and that an enhanced credit risk policy was then put in place and provided to Bursa.
Likewise for the second breach, RHB IB only notified Bursa of the material developments and agreements concerning the applicant's business when queried by Bursa.
As the sponsor and principal adviser, Bursa said RHB IB must have a sound understanding and updated knowledge of the applicant, its business, operations, the industry it operates in, and any other issues that might affect its business and industry. Its primary duty was to oversee the due diligence process and make all due and careful enquiries and consider all relevant matters to ensure there was no misstatement, inaccuracies or material omissions.
"It was not acceptable that RHB IB had merely relied on the applicant and other advisers to highlight [the] material issues and only undertake the necessary enquiries/assessments upon being queried by Bursa Malaysia Securities," Bursa said.
"RHB IB had failed in the discharge of its duties as the sponsor and principal adviser, which was unacceptable, particularly in view of the numerous engagements and queries by Bursa Malaysia Securities, and the breaches had led to the rejection of the proposed listing of the applicant by Bursa Malaysia Securities," Bursa added.
Not the first time
This is not the first time RHB IB had breached the listing requirements, according to Bursa.
Bursa said its finding of the breaches and the imposition of the public reprimand and fine on RHB IB were made after taking into consideration all facts and circumstances of the matter, "including the materiality of the breaches, the roles and responsibilities of RHB IB as the sponsor and principal adviser, and the fact that RHB IB had previously breached the listing requirements".
Besides the fine and reprimand, RHB IB had been required to table Bursa Malaysia Securities’ decision to the board of directors of RHB IB and conduct a comprehensive review and assessment on the adequacy and effectiveness of its internal policies, processes and procedures relating to its role as an adviser/sponsor for submissions to Bursa.
It added that it views the breaches seriously, in view of the primary and crucial role played by the sponsors and advisers in the assessment of the suitability of an applicant for admission to the 'sponsor-driven' ACE Market.
"Bursa Malaysia Securities wishes to remind the sponsors and advisers to maintain the highest standards of integrity, accountability and responsibilities in discharging their role effectively and competently towards ensuring compliance of the ACE LR and be more vigilant in ensuring the quality, proper and sufficient due diligence, and a thorough review of the application and prospectus prior to submission to Bursa Malaysia Securities," the regulator added.