History looks to be repeating itself.
The 2002 ‘penny stocks incident’, in which HK$10 billion ($1.28 billion) was wiped off the value of several companies, cast an unflattering light on Hong Kong’s listing regime. The conclusion drawn by the subsequent Expert Group appointed in March 2003 by the Financial Secretary was that HKEx, Hong Kong Exchanges and Clearing, should lose its listing function to a new division of the Securities and Futures Commission to be known as the Hong Kong Listing Authority.
In the end, that idea never got off the ground amid fierce opposition from the bourse operator and powerful local tycoons.
Fast-forward more than a decade and the SFC – once sued by an investor over the Penny Stocks Incident – again sought a more active role overseeing the city’s public floatations, in line with former Financial Secretary John Tsang’s 2016/17 budget speech and with the support of former SFC chairman Robert Owen.
A public consultation kicked off in June last year. And the approach, widely viewed as a compromise, was to create two new committees to rule on listing approvals and policy development, with the SFC and HKEx equally represented. Some fund managers view it as a “first step” toward moving the regulatory function out of HKEx, itself a profit-seeking listed company.
But that won’t happen now.
Instead, there will be only a new “Listing Policy Panel”, which will function as “an advisory, consultative and steering body” outside the SFC and HKEx to “initiate and centralise discussion of listing policies with broader regulatory or market implications,” according to a conclusion released on Friday.
“SFC and HKEx have received a tremendous amount of feedback and taken into serious consideration different opinions in the market over the past few months…and this conclusion, we believe, will fit the market interest and properly address the main consultation proposals,” SFC chairman Carlson Tong told a press conference late on Friday.
A total of 8,793 submissions were received from a range of respondents including corporates, investment managers, accounting firms, law firms, political parties, academics and individuals. Some 94% of the respondents came out against the proposals, according to the South Morning China Post.
The diluted outcome should not come as a total surprise – the proposals have drawn criticism from a number of powerful parties since they were first made public, including HKEx director Vincent Lee and Lo Ka-shui, vice-chairman of the Chamber of Hong Kong Listed Companies, who argued the proposed new regulatory regime would kill Hong Kong’s IPO market.
Against investors
It is not what investors wanted though. As the SFC and HKEx disclosed, “the vast majority” of investment managers of mutual and pension funds, hedge funds, and private equity houses expressed support for the proposals, with the proviso that they did “not go far enough”.
“Ideally, in the best interests of investors and to provide clarity and certainty about accountability, the task of vetting IPOs should be vested with the SFC. This will ensure that investor interests will prevail over commercial or other considerations,” said Sally Wong, chief executive of the Hong Kong Investment Funds Association.
“Having the regulatory structure and process right up front is imperative and much more effective than taking remedial actions afterwards – robust gate-keeping is paramount,” she told FinanceAsia.
Nevertheless, Wong welcomed the establishment of the new listing policy panel. “It is a positive development to have a dedicated platform to focus on long-term policy development issues.”
And Wong also welcomed the fact the SFC had taken a more proactive role in IPO approvals of late. In July, it objected to the listing on the Growth Enterprise Market of Alpha Era International, a manufacturer of inflatable products. The company was not listed, despite completing book-building.
Realistically, the failure of the regulator committee idea shows the market lacks any appetite to have the SFC take on the role of approving IPO applications, Wong added.
The SFC has also been looking into problematic IPO activities with stronger enforcement actions of late, including threatening IPO sponsors with sanctions. In recent months it has also cracked down on market malpractices, issuing penalties and trading suspensions.
Jamie Allen, secretary general of Asian Corporate Governance Association, added: “We are disappointed with the result of the consultation. Once again, Hong Kong’s financial regulators have failed to address the inefficiencies and conflicts of interest inherent in our listing regime."
However, Allen welcomed the SFC's pledge to take a more direct role in intervening in problematic IPOs and other listings issues in "real time", a move he said acknowledged the need for a more effective securities regime in the city.
‘Talking shop’? No, ‘co-ordinator’
Others are less generous.
“The conclusions represent a huge climbdown by the SFC, leaving the rule-making powers with the Stock Exchange and its Listing Committee, rather than the proposed Listing Policy Committee, which has been watered down to nothing more than a pointless talk shop – the Listing Policy Panel,” high-profile local investor activist David Webb told FinanceAsia in an email exchange on Friday.
The Listing Policy Committee had been put forward to oversee listing policy developments, while the Listing Regulatory Commission, which will be entirely abandoned now, was to focus on IPO approvals and post-IPO matters.
Tong and SFC chief executive Ashley Alder dismissed the claim of a “climbdown” at the press briefing, adding it should not be read as a “compromise” and that it’s about “how the SFC and HKEx – with their respective roles and powers – can co-ordinate to improve Hong Kong’s status as an International financial centre".
Hong Kong faces fierce competition from other major capital-raising venues, having lost the crown it held last year as the world’s top IPO destination and slipped behind New York and Shanghai. In response, HKEx is lobbying for a third board – on top of its main and GEM boards – to host dual-class shareholding structures, of the type favoured by technology companies such as Facebook and Alibaba but often frowned upon by investor groups.
“I think the conclusion we have today is the best result,” Tong said at the conference.
HKEx chief executive Charles Li added it was clear from the consultation that the current structure did not block work for market quality improvement. “The original guns and cannons are still there… [there’s] not much newly arisen need to largely adjust our tools and weapons. Rather, it’s about how we use these tools,” Li said.
But Webb hit back: “The SFC and HKEx already talk to each other, so that was never the issue – it was about taking the first step to move the regulatory function out of HKEx to a 50:50 committee, and this has now been abandoned. It leaves HK with a second-class system for a second-class market.”
“In the UK and US, there is a clear division of functions,” he added. “Competing exchanges run their exchange businesses, while regulators regulate. In HK, we have a conflicted, for-profit regulator making the Listing Rules and the SFC running the Takeovers Code. There are long-overdue corporate governance reforms that will not see the light of day under the current listing rule-making process.”
At present, the listing department of HKEx gives preliminary listing approvals and can submit its suggestions on rule changes to a 28-member listing committee – made of lawyers, accountants, listed firms’ management and fund managers – for final clearance. The SFC is not directly involved in the process but has the power to reject any listing applications or policies.
In an earlier submission to the HKEx over the new board, Webb argued that “ultimately Hong Kong and Chinese companies would be more competitive globally if they were governed to higher standards, both internally and externally through laws and regulations.”
The discussion on dual-class shareholding structures is one of the areas that the new panel would be able to contribute to, according to SFC's Tong and HKEx's Li.
But they stressed the new panel would have no legal power on decision making or enforcement.
Additional reporting by Jolie Ho
This article has been updated that Alpha Era International did not list
