Hong Kong Exchanges and Clearing (HKEx) recently released a consultation paper on potential change of listing rules that can help attract more innovative companies to the local bourse.
The paper contains proposals to attract two types of listing. The first is bio-tech companies that have not established a track record of revenues and profits, which is currently required by the exchange’s financial eligibility rules. The second is high-growth innovative companies with weighted voting rights structures – dual-class share structures that enable the founder of a company to retain control after a public offering. The aim is to attract a wider range of companies to raise capital here, including secondary listings for mainland companies.
Many commentators mention the listing of Alibaba Group on the New York Stock Exchange in 2014 as the starting point of these proposals. It was the world’s biggest ever IPO, at US$25 billion. The Group chose New York rather than Hong Kong because its founders wanted more control – such as over composition of the board.
The loss of the Alibaba IPO listing meant that Hong Kong missed out on a lot of business. Our local financial and professional services could have made hundreds of millions from such a huge deal.
But it not simply about one lucrative high-profile IPO. It is about the competitiveness of Hong Kong as a financial services center. This is in many ways the jewel of our services based economy. Tourism and logistics are important, but the largest proportion of our high-value, skills-intensive activities rely on financial services. It is a growth sector, and few if any cities in Asia can match us in it.
Having said that, there are possible drawbacks. Critics are concerned that a more relaxed listings regime could damage investors’ interests – and in the long run this would undermine Hong Kong’s reputation and competitiveness. Historically, the local stock market has seen abuses of minority shareholders and other problems, so this needs to be taken seriously.
The HKEx consultation paper includes detailed proposals designed to prevent abuse of relaxed listing rules and to protect investors. For example, biotech companies will have to prove that they have core patented products in the pipeline, and innovative companies with weighted voting rights will have to show a record of high growth. There will be safeguards to ensure that companies cannot switch to a different business after listing, and the special status of the companies will be clearly identified in the stock name.
The key question comes down to what is in Hong Kong’s overall long-term interests.
There are obvious reasons why we should be cautious about relaxing listings rules. Any threat to the quality of corporate governance could backfire on the reputation of our market and on the competitiveness of our financial services.
But there are possible dangers in not reforming. If Hong Kong turns listings away, other exchanges in New York, London, Singapore and Shanghai will be waiting for the business. IPOs hit the headlines for a few days, but they generate months of work for bankers, lawyers and other professionals, and in turn boost other parts of the economy – even sectors like restaurants. And the growth as a fundraising center and in the clusters of human skills we have in Hong Kong will bolster our regional dominance and international position in financial services.
One other potential benefit is a wider range of opportunities for local investors to participate in the success of new-economy companies.
Should we decide to stick with our existing strict approach, or relax the regime? The easiest course of action is the bureaucratic one – play safe and put off making a decision for a few years more. That way, no-one will get blamed for anything. We see that risk-averse behavior too often in Hong Kong. But now, the good thing about the HKEx consultation is that it is about making a firm choice one way or another, so we can move ahead.
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