Chapter 2

Due Diligence Guidelines –

General Principles

1. The Scope and Purpose of Due Diligence

The purpose of due diligence is to enable the sponsor to gain knowledge and understanding of the listing applicant and satisfy itself that the listing applicant complies with the Listing Rules. It is also designed to corroborate the truth, accuracy and completeness of the statements of fact and opinion contained in a listing document which are material to forming a valid and justifiable opinion of the shares and the financial condition and profitability1 of a new listing applicant. To the extent practicable, due diligence seeks to identify third party or independent confirmation of that information and opinion. Due diligence is not and cannot be a forensic process and it should be accepted from the outset that it is not expected to guarantee an absence of fraud, forgery or deliberate non-disclosure.2 This is so because due diligence procedures are not designed to, and are not likely to, reveal fraud, withholding, concealment or misrepresentation by the management of the listing applicant.3

Endnotes

1. Paragraph 17.5(a) of the Code of Conduct.

2. Paragraph 79 of the Consultation Conclusions on the Regulation of Sponsors.

3. This is the same limitation as acknowledged in respect of the work of accountants in relation to comfort letters and due diligence meetings under Hong Kong Standard on Investment Circular Reporting Engagements 400.