Broader review of emerging markets listings needed, not just regulators: FAIR

A review by the Ontario Securities Commission looking at Toronto-listed companies that have major operations in China and other emerging markets does not go far enough, says the head of a leading shareholder rights group.

OTTAWA — A review by the Ontario Securities Commission looking at Toronto-listed companies that have major operations in China and other emerging markets does not go far enough, says the head of a leading shareholder rights group.

Ermanno Pascutto, executive director of FAIR Canada, says there needs to be a task force that includes the exchanges, underwriters, auditors and legal community, not just the regulators.

“I think we need everyone involved,” he said.

Pascutto, who has worked in Hong Kong, said Chinese companies seeking a listing on the Toronto Stock Exchange should be treated with caution.

“You’re dealing with the highest risk of the high risk listings and I don’t think the system we have in place right now for listing these emerging market companies is adequate,” Pascutto said.

The Ontario Securities Commission launched a targeted review of companies listed on Canadian exchanges with significant operations in emerging markets in July after fraud allegations were made against Chinese timberland firm Sino-Forest Corp. (TSX:TRE), which was once the biggest forestry firm by stock market value listed on the Toronto Stock Exchange.

Trading in shares of the company has since been suspended by the OSC as it investigates the company. None of the allegations have been proven.

The provincial regulator is examining the disclosure by companies as well as the role of the auditors and underwriters in this process.

OSC chairman Howard Wetston has said that reverse takeovers, like the kind used by Sino-Forest to gain a listing in Toronto, need to be re-examined.

By using a reverse takeover to gain a listing, companies generally face less scrutiny than they would if they went through the tradition process of an initial public offering.

The Toronto Stock Exchange said it was co-operating with the Canada’s largest provincial securities regulator and would “closely consider the outcome” of its review.

“As part of our normal course of operations, we continually monitor our listings standards for appropriateness and relevance to the market and make adjustments as necessary,” TMX spokeswoman Carolyn Quick said.

Sino-Forest isn’t the only Chinese company to run into problems.

Since the review began, Silvercorp (TSX:SVM), which has operating silver mines in China and a development-stage project in northern B.C., has faced anonymous allegations that it was perpetrating a fraud.

The company has denied the accusations and pledged to track down those responsible.

Shares in the company are down nearly 20 per cent from before the anonymous allegations first surfaced.

And on Friday, the OSC suspended trading of Zungui Haixi Corp. (TSXV:ZUN), a Chinese manufacturer of sportswear and casual footwear that is listed on the TSX Venture Exchange.

The move came after Zungui said a special committee investigating issues raised by the firm’s auditor could face difficulties and may not receive the co-operation or the funding necessary to complete its work.

Pascutto called for higher standards for underwriters, better vetting of management and directors and for stock exchanges to get out of the business of listing companies.

“The only ones that have been benefiting are the stock exchange and the underwriters and the professionals that have been getting all the fees,” Pascutto said.

“Investors have lost very substantial amounts of money.”