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Samsung Biologics under scrutiny again over 2016 IPO

Korea Exchange suspected of loosening regulations to help listing

Samsung BioLogics, the biotechnology arm of South Korean conglomerate Samsung, faces a criminal investigation over its $2 billion IPO in November 2016.   © AP

SEOUL -- Samsung Biologics is once again under scrutiny over its 2016 initial public offering as prosecutors raided the office of the Korea Exchange in Seoul on Friday.

The investigation, which follows an earlier probe into Samsung BioLogic's accounting practices ahead of the listing, is a blow for the Samsung group, which has been hoping to turn biotech into a new pillar of growth.

Authorities suspect the stock market operator eased regulations to allow the Samsung Biologics -- the world's third-largest contract drugmaker by market share -- to list on the country's top-tier stock market. Investigators collected documents and computer hard drives, looking for information related to the IPO, the Korea Exchange said. The company listed on the Kospi in November 2016.

The prosecution also raided Samsung C&T, a major shareholder in Samsung Biologics, and the group’s data center at Samsung SDS, on Thursday.

This is not the first investigation related to the IPO. Last year, financial regulators accused Samsung Biologics of committing a $4 billion accounting fraud in 2015. In July, the Financial Services Commission ruled that the company had violated accounting rules by intentionally omitting crucial information that could have affected its valuation ahead of its listing. The Securities and Futures Commission recommended Samsung Biologics dismiss its CEO Kim Tae-Han, but the company successfully fought that move in court. The SFC also suspended trading of the company's shares, but the suspension was later lifted by the Korean Exchange.

News of the latest probe hit Samsung Biologics shares. Its stock price tumbled 4.21% to 341,000 won on Friday, while the benchmark Kospi rose 0.95% to 2,176.11.

While last year's investigation focused on what Samsung Biologics did, critics say the prosecution is now widening its investigation to look into whether the company was given special treatment for the listing.

"Samsung Biologics had made losses continuously since its establishment before the listing," said Kim Eun-Jeong, a manager at People's Solidarity for Participatory Democracy, South Korea's biggest activist group for economic justice. "It could be listed only after the Korean Exchange changed its regulation which bans loss-making companies from listing."

Samsung Biologics posted a 203.6 billion won ($202.7 million) operating loss in 2015, followed by a 30.4 billion won operating loss in 2016. Its first operating profit came in 2017 and came to 66 billion won.

The drugmaker is an important part of the Samsung group's growth strategy. The group announced last August that it will invest 25 trillion won in artificial intelligence, 5G and biotech over the next three years.

Moreover, the investigation into the 2016 IPO could affect sentiment around other Samsung companies, including Samsung Electronics, the group's main listed business.

Kim said that the prosecution can also investigate whether the stock market operator’s decision to resume trading of Samsung Biologics in December was legitimate. The Korea Exchange lifted the trading suspension of the company’s shares, saying there were no worries over its sustainability and financial stability. It conceded that the company's management had some problems with transparency, but concluded that these were not serious enough to maintain the suspension.

Samsung Biologics said that prosecutors seem to be looking into allegations surrounding the company’s listing process, but declined to comment further because the case is pending at an administrative court.

Authorities elsewhere in Asia have also been taking a hard look at past listings. The Securities and Futures Commission of Hong Kong on Thursday punished four international financial groups for failings in their roles as IPO sponsors, with fines totaling 786.7 million Hong Kong dollars ($100 million).

UBS, along with UBS Securities, was fined $375 million over its conduct regarding three IPOs -- China Forestry Holdings in 2009, Tianhe Chemicals Group in 2014 and another unnamed company. The SFC said the Swiss firm "failed to make reasonable due diligence enquiries" into China Forestry and "failed to follow the specific guidelines on due diligence interviews" for Tianhe.

UBS Securities Hong Kong's license to advise on corporate finance was partially suspended for a year, while the license of former executive Cen Tian was suspended for two years.

Morgan Stanley and Merrill Lynch were censured for their involvement in the IPO process of Tianhe, while Standard Chartered was a joint global sponsor for China Forestry's IPO. They were fined HK$224 million, HK$128 million, and HK$59.7 million, respectively.

China Forestry delisted in 2017 as the company was wound up, while trading of Tianhe shares has been suspended since March 2015.

Nikkei Asian Review chief business news correspondent Kenji Kawase in Hong Kong contributed to this story.

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