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China International reveals lapse in internal controls over share buybacks

WATER services company China International on Thursday said that there has "regrettably" been a lapse in internal controls in conducting its various share buybacks from Dec 21, 2017 to Oct 16, 2018, which led the company to inadvertently breach listing rules of the Singapore Exchange (SGX).

The board has since conducted a review of its internal control policies and taken rectification measures to ensure that similar breaches will not occur again, it said.

On Nov 29 last year, the board had received an email from the SGX informing it that the company had conducted the share buybacks via market acquisitions at prices that were more than 105 per cent of the average closing market price approved by shareholders. SGX then requested that the board and audit committees immediately investigate the matter.

The board discovered that the company's executive director Zhu Jun had instructed the company's broker, UOB Kay Hian (HK), to purchase the company's shares on various occasions. The board only became aware of the share buybacks when it received the email from SGX. The company immediately announced the previously undisclosed share buybacks on Dec 1, 2018.

Besides the fact that the shares were bought back at a higher price than approved, investigations also showed that the company had failed to notify SGX of the share buybacks by 9am the following market day, and did not disclose and account for the share buybacks in its previous quarterly financial results announcements.

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"This was an honest mistake by Mr Zhu Jun as he was under a genuine, but mistaken, belief that it was not necessary to inform the company, and the listing rules did not apply as only a total of 3,600 shares, representing only 0.0051 per cent of the total issued share capital of the company, were bought back by the company during the relevant period," China International said.

"Considering the above breaches, the company acknowledges that...there is a need to improve its internal control policies in relation to share buybacks. In this regard...the company has adopted an updated policy and guidelines for dealing in securities and an additional operational manual on regulatory compliance setting out the regulations and required procedures relating to share buybacks, which were prepared by its legal advisers and internal control auditors respectively."

The manual stipulates, among other things, that the company shall complete a prescribed checklist and obtain the prior approval of the audit committee or the board before conducting any share buybacks. 

The company has since also released replacement announcements for its recent quarterly financial results to correct the information relating to the buybacks. But given the insignificant number of shares and amounts involved, there is no material impact on the earnings and net tangible asset per share, it said.

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