20 February 2019
HKEx is trying to prevent speculation in companies that hold mostly cash among their assets. Photo: HKEJ
HKEx is trying to prevent speculation in companies that hold mostly cash among their assets. Photo: HKEJ

HKEx issues directive cracking down on backdoor listings

Hong Kong Exchanges and Clearing Ltd. (00388.HK) has issued a directive aimed at cracking down on inappropriate backdoor listings, the Hong Kong Economic Journal reported Tuesday.

Under the listing rules, a cash company — a firm of which the assets consist wholly or substantially of cash — is not suitable for listing on the exchange.

However, in the rules for defining a cash company, no prescribed threshold is set for the proportion of cash assets.

In its directive, the stock exchange now clarifies that, in general, firms with less than half of their assets in cash after completion of fundraising will not be treated as cash companies.

Nonetheless, the bourse said it retains its authority to bar any transaction deemed as an attempt to bypass regulations for a backdoor listing of businesses that are not suitable as listed companies.

“The guidance letter reflects the exchange’s approach in applying the ‘cash company’ part of the listing rules to fundraising activities, which has been endorsed by the listing committee,” said David Graham, HKEx’s chief regulatory officer and head of listing.

When assessing a listing candidate, HKEx said, it considers not only the issuer’s cash level but also the background facts and circumstances of the issuer’s business, operations and financial position.

Once an issuer is considered to be a cash company, its application for resumption of trading would be treated as if it were a new application for listing, it said.

“The purpose of the listing rules on cash companies is to enable the exchange to maintain market quality and avoid speculative trading in the securities of cash companies,” Graham said.

“They have the effect of preventing listed issuers which become cash companies from starting new businesses that are not suitable for listing.” 

The bourse has rejected high-profile attempts at backdoor listings including a proposed investment in Meike International Holdings Ltd. (00953.HK) by China Media Capital chairman Li Ruigang, Television Broadcasts Ltd. (00511.HK) chairman Charles Chan Kwok-keung and Tencent Holdings Ltd. (00700.HK), as well as the acquisition of Far East Holdings International Ltd. (00036.HK) by action movie star Jet Li Lianjie and his wife.

[Chinese version中文版]

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