The Hong Kong Exchange has tightened up its rules on new listings for agricultural companies, following a battle of words between Singapore-listed Olam International and US research firm Muddy Waters.
Olam, a commodities company listed in Hong Kong's rival financial centre Singapore, has been criticised by Muddy Waters for the way it accounts for assumed future increases in the value of its crops and other so-called biological assets.
In a guidance note, the bourse said agricultural companies could not rely on "unrealised fair value gains on valuation of biological assets" to demonstrate a trading and profitability track record, as required for approval to list shares on the exchange.
A cattle farmer, for example, who buys young calves at a certain price cannot make an assumption on how much their value will increase as they mature but must wait until they are actually sold before booking a profit.
The guidance does not, however, apply to companies already listed on the exchange which count on assumed gains in biological assets in their reported profits.
According to the bourse, biological assets are subject to inherent risks and their valuation is usually subject to higher uncertainty due to complex and not easily verifiable assumptions adopted.
"Allowing an applicant engaging in agricultural activities to use unrealised fair value gains on valuation of biological assets to fulfil the trading record and profit requirements is contrary to the principles of the Listing Rules."
To be listed in Hong Kong, companies must be able to turn in a profit and show a track-record of at least 3 years.