Hong Kong Exchanges & Clearing has unveiled a new listing committee.
It’s widely believed that the move will pave the way to raise the entry threshold for initial public offerings.
Also, Hong Kong’s Securities and Futures Commission has launched a consultation to overhaul rules to improve the quality of new listings.
Its consultation paper has outlined proposals such as extending the lock-up period for major shareholders, higher profit requirement and more stringent threshold for professional investors, among other measures.
The Growth Enterprise Market has become the factory of shell stocks in recent years. Many companies seek public listing in order to make profit from selling the shell company later.
Rampant speculation of shell companies has caught the attention of many market participants.
Also, many mainland companies have opted for a backdoor listing in Hong Kong in order to save time.
That’s why asset-light companies on the main board or GEM have become highly sought-after. The price tag could reach several hundred millions of dollars.
A total of 34 companies listed on GEM last year, up 78 percent from 19 in 2014.
The bourse operator has reviewed all new listings on the main board and GEM between 2012 and 2014 as well as new listings last year.
It has outlined seven characteristics of shell companies.
Most of them have small market capitalization and only marginally meet the listing eligibility requirements.
They usually involve fund raising disproportionate to listing expenses, which means a high proportion of the listing proceeds were used to pay listing expenses.
These companies involve a pure trading business with a high concentration of customers.
They are also asset-light businesses where a majority of the assets are liquid and/or current assets.
They involve a superficial delineation of business from the parent whereby the applicants’ business is artificially delineated from the parent, by geographical area, product mix or different stages of development.
They have little or no external funding at the pre-listing stage.
As a result, some speculators have taken the advantage and invested in these shell companies for the aim of short-term profit from selling it in secondary market.
It’s been reported that controlling shareholders have reduced or sold out their shares after the lock-up period ends. The practice has sparked concerns of market manipulation and volatility.
Frankly speaking, asset consolidation is quite common. If used properly, it could channel capital into the real economy and improve corporate governance.
If not, shell companies could become tools for speculators, and create a chain of businesses for speculation in shell companies and reverse takeover.
Short-sighted investors will harm economic growth.
The equity market will have to rely on bank loans with mismatch maturities to support growth. In the end, it would hurt the real economy and erode Hong Kong’s competitiveness as a key financial hub.
The financial market should provide financing support for real-economy companies; it’s a vital venue for allocating financial resources.
The key is to establish a mechanism of “survival of the fittest” to let resources move in and out freely.
However, rampant speculation in shell companies would affect normal fund-raising activities of good companies or even jeopardize the operations of the financial sector.
The SFC and Exchange have moved in the right direction in overhauling listing rules. After all, Hong Kong has been rated as the world’s freest economy for 22 straight years.
The city’s prudent economic policy, high openness, transparent and stable legal system, stringent fiscal discipline and protection of property rights have made it the world’s financial center.
Apart from its geographical advantage, world-class business infrastructure and huge talent pools, Hong Kong has a set of open, transparent and constantly evolving market rules.
This article, published in the Hong Kong Economic Journal on July 27, was contributed by Qi Haiying, Interim Chairman and Deputy CEO of Guotai Junan International Holdings Ltd.
Translation by Julie Zhu
[Chinese version 中文版]
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