China Sky reshuffles board committee following special audit deadline

SINGAPORE -  The Singapore Exchange (SGX) has given a final deadline for China Sky Chemical Fiber to appoint a special auditor as requested to look into some of its transactions.

China Sky did not say whether it will comply with directive, but announced a reconstitution of its board committees on Saturday. Starting from Jan 1, 2012, the audit committee of the company's board will be chaired by Er Kwong Wah, an independent director who has said earlier that the company should comply with the directive.

The Singapore Exchange gave the latest deadline in a letter that "orders the company to cease all non-compliance" by Jan 5, and appoint a special auditor "acceptable to the exchange on an immediate basis and without further delay," the company said in a filing on Friday.

The Monetary Authority of Singapore (MAS) has thrown its weight behind the directive, too, by saying that China Sky should comply with the directive.

Shares of the company have remained suspended since Nov 17, following a directive issued by SGX ordering the company to appoint a special auditor to investigate some of its transactions. The company sought for a rationale for the directive and responded by saying that it was "shocked" at the the directive, which was " unjustifiable."

SGX wanted China Sky to investigate a repair and maintenance costs of 72 million yuan ($11.3 million) in the first quarter of 2009.

The special auditor would also have to look into the circumstances surrounding the firm's aborted acquisition and development of a plot of land in China's Fujian province, as well as the interested person transactions its independent director Lai Seng Kwoon, who had chaired the audit committee.

The exchange further issued a public reprimand to the company for failing to comply with the directive. When China Sky asked to lift the trading suspension on Dec 21, it refused.

China Sky has also made announcement to explain the dealings in question, and alleged that a senior officer of SGX threatened Huang Zhongxuan, chief executive officer of the company, with punishments.

China Sky missed the first deadline given by SGX for appointing a special auditor by Dec 8.

The exchange said in the latest letter that it was "prepared to grant an extension of time to the company to comply with its financial reporting obligations under the listing manual in order to facilitate the special audit."

It also added in the letter that it had consulted the Monetary Authority on the matter.

The authority said all listed companies must comply with their obligations under SGX's listing rules, including any directive issued by SGX in good faith pursuant to the listing rules.

"China Sky and its directors should act promptly to comply with their listing obligations, in the interests of all shareholders," it said.

It is the first time the authority has put its weight behind the directive, having previously said that "as a matter of policy, MAS does not comment on matters concerning specific entities."

China Sky mainly produces high-end nylon fibers used in sportswear and other consumer products from its factories in China.

Local newspaper Straits Times quoted lawyers as saying that if China Sky refuses to comply with the final deadline, a situation could arise where the company might be interpreted as having failed to provide the SGX with material information that the exchange requires.

Under a section of the Securities and Futures Act, failure to disclose required information to the exchange could constitute an offence. The SGX website states that the disciplinary action taken against breaches of SGX rules may include expulsion.