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By John Helmer in Moscow

Hong Kong Exchange executives and the Hong Kong stock market regulator appear to be cracking and splitting under the strain of a phantom share listing and sale for United Company Rusal, Russia’s aluminium monopoly and one of the world’s leading producers of bauxite, alumina and primary aluminium. Although anonymous sources insist in press leaks that Rusal’s listing application has been approved, the exchange and the Securities and Futures Commission of Hong Kong refuse 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 $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 Securities and Futures Commission (SFC) approve the application and the prospectus. The non-Russian underwriters – Credit Suisse and BNP Paribas – who are also 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 regulator 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 have 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 has 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 (WPIP), 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, the HKEx has not posted any announcement relating to Rusal, and there is no disclosure of the WIPP Rusal should have drafted to meet the exchange rule. The Financial Times, which is close to Deripaska, 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 to say if he believes the Securities and Futures Ordinance (SFO) makes unlawful, and disallows a public listing of company shares, according to which different classes of shareholders are accorded differential or preferential treatment. He was also asked to say what is 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 allows the secret (non-public) listing and sale of an applicant company’s share.

Chow’s spokesman Sapp avoided the 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 lawfirm of the UK, acting for Michael Cherney (Mikhail Chernoy) , the founding partner of Deripaska in the creation of the Russian aluminium concern more than 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 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 Commission 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 if 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 disclosures from the 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 studied silence on Chow’s part – and for the blitz of press leaks from the side of the applicant and its promoters.

But time is running out for Chow and Martin Wheatley, the head of the SFC, to explain publicly how their conduct of the Rusal review meets Section 2 of the listing rules. This says that the rules “reflect currently acceptable standards in the market place and are designed to ensure that investors have and can maintain confidence in the market.” In particular, this section requires “the issue and marketing of securities is conducted in a fair and orderly manner and that potential investors are given sufficient information to enable them to make a properly informed assessment of an issuer” and that “all holders of listed securities are treated fairly and equally.”

Bloomberg, where sources acknowledge they have been pitted by Rusal against Reuters for the favour of press leaks, 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 ($129,000), the [anonymous source] people said.”

Wheatley was asked to explain how the SFC believes it can proceed lawfully, if this condition violates the listing rules. He initially refused to respond to an email. His secretary, identifying her name as Chiu, then refused to put calls through to him, but agreed to relay messages.

According to the Securities and Futures Ordinance (SFO), 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 ten 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 how 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 whether the actions he and the Commission have taken, or are still contemplating, may infringe these sections of the Hong Kong law. Wheatley and his staff refuse 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 approved for share sale last week – China Corn Oil. Upfront, its disclosure, known as a Web Proof Information Pack (WPIP), declares: “this WPIP 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 WPIP posted by the exchange last week for the Shengli Oil and Gas Pipe Holdings Limited. 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 said.

Rusal, according to the leaks published by Bloomberg and the Financial Times, appears to have arranged for the appearance of an approval from the SFC without the substance from the HKEx.

Chow is discreetly putting distance between himself and Wheatley of the SFC, and through spokesman Sapp, he denies that the press leaks represent any form of approval of the share sale by the exchange. Sapp said yesterday: “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 substantiate 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 lend themselves some of 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 the shares of Rusal, if noone 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 – the only shareholder whose clout and favour apparently count at the moment.

Note: on December 20 the author of this report received the following message from the Consular Emergency Centre of the Australian Ministry of Foreign Affairs in Canberra: “we have received information suggesting that your personal security in Russia could be threatened. In light of this possibility, we recommend that you carefully consider your personal security arrangements.”

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