Alibaba Group has chosen New York over Hong Kong for a share flotation as the latter decided to stick to its stance of “one share, one vote” principle. The stand taken by Hong Kong over the issues related to the e-commerce giant’s partnership structure seems to send a signal that local authorities are determined to protect the public’s interests even at the cost of foregoing some new jumbo listings. The Hong Kong Economic Journal’s investor diary column, however, wonders whether the local bourse has some double standards, given the way it has dealt with the ailing United Company RUSAL Plc (00486.HK).
Listed in Hong Kong in January 2010 amid a debt crisis, the Russian aluminum miner reported a loss of US$3.2 billion for 2013, its second-biggest loss after the US$6 billion red ink suffered in 2008 amid the global financial meltdown. The management has admitted that the company is on the verge of insolvency and has urged creditors to extend the debt repayment schedule.
Independent auditor KPMG LLP in its report has reminded investors of the need to pay special attention to RUSAL’s financial performance, offering solid proof that the company has not improved a bit on its debt situation four years after its listing in Hong Kong. The situation, in fact, has actually been getting worse.
Regulatory bodies have the responsibility to ensure good governance standards of prospective listing companies, while some minimum requirements have to be also met on other parameters. It is impossible for the listing authorities to control the profitability of listed companies, but they need to make a proper choice between protecting investor interests and making Hong Kong the preferred listing place.
Investors should therefore query the authorities as to how they intend to strike a balance between maintaining good corporate governance and attracting new listings, and also whether they have upheld their principles.
Looking back to 2008, when RUSAL came to list in Hong Kong, it could not have been more controversial from the start – the company suffered heavy losses and was deeply in debt following over-expansion under the leadership of its major shareholder Oleg Deripaska. The Russian firm desperately needed funds for repayments.
Hong Kong Exchanges and Clearing Ltd. (HKEx, 00388.HK) conducted three hearings, from November 2009 through January 2010, for RUSAL’s listing. After the company reached a debt restructuring agreement worth almost US$15 billion with 72 international lenders and four Russian creditors, its listing proposal was cleared.
Even though RUSAL was a debt-laden company with complicated political and business risks, the HKEx did not resist RUSAL’s listing application as the bourse was then desperately looking to reduce its reliance on the listings of mainland companies. Getting RUSAL to list in Hong Kong would help attract other mining firms from around world, authorities reckoned.
The Securities and Futures Commission (SFC) tactically raised the investment thresholds for RUSAL’s initial public offering and trades in secondary market to bar retail investors from the stock on the ground of minority shareholder protection.
Just a few months after RUSAL’s debut, HKEx amended in June 2010 the listing rules to lure more resources companies to go public in the city. The amendment allowed loss-making miners with meaningful portfolio of resources to float their shares, without complying to a minimum requirement of at least HK$50 million cumulative profits for the three years prior to the company’s listing.
The relaxed requirement did prompt more enterprises, including Sunshine Oilsands Ltd. (02012.HK), IRC Ltd. (01029.HK) and Glencore Xstrata Plc. (00805.HK), to list in Hong Kong.
According to Dealogic, miners and other resources companies raised a combined US$14.1 billion in the city from 2010 to 2012, compared to US$11.6 billion in London and US$2.3 billion in Toronto during the same period. But the trend was short-lived. Only US$63 million was raised by such firms in the first half last year.
The shares, meanwhile, have performed very poorly for the most part.
RUSAL’s case begs the question: Why didn’t Hong Kong authorities bar the listing of debt-laden candidates if protecting investor interests was their true priority?
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