Hong Kong may lose more technology firms seeking a listing to other markets such as Singapore unless it relaxes its rules to accommodate companies with multiple ownership structure, US accounting and advisory firm Grant Thornton LLP said.
After losing Alibaba Group’s (BABA.US) mega deal earlier this year, Hong Kong is slowly moving to reform its regulatory mechanism, but the Singapore Exchange Ltd. (SGX) appears to have stolen a march on its market rival by scrapping its “one share, one vote” policy for listing companies.
“There won’t be any impact in the short term, but if Hong Kong doesn’t catch up with the practice like the rest of the world, Hong Kong might be less competitive in the long term,” advisory partner Barry Tong told EJ Insight in an interview.
“Bigger-sized [initial public offerings] such as Alibaba will choose the United States as the Singapore equity market is not liquid enough at this stage, but small and medium ones might opt for Singapore as it accepts dual-class ownership structure,” Tong said.
Public companies in Singapore will soon be able to offer shares with multiple voting rights, after the parliament approved a bill in early October providing the largest number of reforms to the Companies Act since its enactment, according to a Business Times report.
The Companies (Amendment) Bill will give listed firms greater flexibility in raising capital and provide investors with a wider range of investment opportunities.
“The change will not affect listed companies for now, as the Monetary Authority of Singapore and SGX are still deliberating on the issue. Rather, it is the 800 or so non-listed public companies that can take immediate advantage of the liberalization,” the report quoted Senior Minister of State for Finance and Transport Josephine Teo as saying in parliament.
Alibaba abandoned plans to list in Hong Kong early this year because the city’s stock exchange rules don’t allow a dual shareholding structure that would let senior management retain control of the company’s board.
“Singapore also wants to get ahead of Hong Kong in the equity market, they don’t want to always be the follower of Hong Kong regionally,” Tong said.
On Aug. 29 the Hong Kong Exchange and Clearing Ltd. (HKEx, 00388.HK) unveiled a concept paper on new shareholding structures after in-depth consultations with finance industry executives and the Securities and Futures Commission.
The exchange has sought comments from market participants on allowing weighted voting rights for listed companies. Potential changes to listing rules would be put to public consultation only later, if the move finds favor among market participants, it said.
Change of exit plan
Selling stakes in the equity market has always been the most popular exit plan for private equity firms as this route generally offers better return than trade sales and secondary exits.
However, many PE firms have been turning away from IPOs because of several issues.
“Unlike two or three years ago, many Hong Kong-based PE firms now choose to exit their investment through trade sales as the return will not be lower than an IPO when they make trade sales these days,” Tong said. Also, trade sales takes less time than an IPO.
“We have also noticed a rising number of private equity firms choosing to exit their investment through secondary exits,” he added.
The IPO route appears less attractive because PE firms worry the listing plan may be affected by legal, taxation and financial arrangements for the listing company.
As a result, they bundle their portfolios and make a secondary exit by selling them to other PE firms, he said.
Regulatory hurdles and market sentiment are also part of the reason.
Funds raised in the primary market reached HK$165.8 billion (US$21.3 billion) last year, compared with US$259 billion in 2011 when it ranked number one among global exchanges, according to data from the HKEx.
In the first three quarters this year, Hong Kong IPOs raised HK$131.3 billion, lagging funds raised on the New York Stock Exchange, the venue of Alibaba’s record-shattering US$25 billion offering, as well as the London Stock Exchange and NASDAQ, according to Deloitte Touche Tohmatsu.
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