Shareholders should thank SFC for killing dual-share proposal

June 26, 2015 16:50
A plan by HKEx chief executive Charles Li (left) to  revive the weighted voting rights structure has hit a wall. The SFC led by Carlson Tong (rightt) has shot down the proposal. Photos: HKEJ

The Hong Kong Exchanges and Clearing Ltd. (HKEx, 00388.HK) marks the 15th anniversary of its listing this Saturday.

But the Securities and Futures Commission (SFC) has presented a not-so-happy birthday present to the bourse.

In a statement issued on Thursday, the local stock market watchdog said the board unanimously objected to the draft proposal which allows companies to issue weighted voting rights (WVR).

The proposal is expected to make Hong Kong more attractive as a listing venue for technology companies, but critics argue that it may work against the interest of minority shareholders.

The SFC's high-profile move came just a week after HKEx said it would launch a second round of consultation on the controversial issue.

Although the bourse's draft proposal hasn't been made public yet, the SFC statement is a point-by-point rebuttal of that proposal.

The SFC said the regulations suggested by HKEx on WVR applicants can only be applied subjectively and thus are vague.

“Size offers no assurance that a company would treat its shareholders fairly,” it said.

The regulator also noted that “Hong Kong’s securities markets and reputation would be harmed if WVR structures became commonplace”.

Corporate governance activist David Webb welcomed the SFC statement. 

“Hurray! This should kill it,” he exclaimed. “Now government should recognize the huge conflict of interest in HKEx being a for-profit rule-maker and regulator.”

He suggested that the bourse hand over its listing division to the SFC for better governance.

HKEx chief executive Charles Li Xiaojia has been undertaking an ambitious expansion of the bourse business.

Spurred by the Shanghai-Hong Kong Stock Connect program, the share price of HKEx hit an all-time intra-day high of HK$311.4 on May 26. The counter has risen 65 percent this year.

In another good news for the bourse, the stock connect program between Hong Kong and Shenzhen is expected to be officially launched this autumn.

Hong Kong used to allow a WVR structure, but banned it 26 years ago.

It's this ban on dual share structure that led mainland technology behemoth Alibaba to choose New York over Hong Kong for its mega listing last September.

After losing the big fish, Li made it a point to resolve the WVR issue as fast as he could. And so he kicked off the first round of consultation at the end of last year.

However, the public appeared lukewarm to the proposed change. A number of international fund managers, including Fidelity and BlackRock, have warned that the WVR structure could diminish the voting rights of individual and minority shareholders.

In fact, during the consultation, those who supported the proposal were mainly underwriters and accountants, who would benefit from a surge in listings expected to result from the return of the dual share structure.

Given the SFC’s statement, it is quite clear that the proposal is dead in the water at least for now.

Meanwhile, the A-share market appears to be keeping its momentum, despite a correction in the past week. Government policy continues to support the mainland stock market.

As a result, US-listed Chinese companies are delisting and heading home for higher valuation.

This means that mainland bourses, especially those in Shenzhen and Shanghai, will be competing with Hong Kong for IPO business.

Earlier this month, Chinese Premier Li Keqiang said the government should encourage firms adopting the so-called variable interest entity (VIE) structures to list in China. The move will further attract US-listed Chinese companies to list at home.

To put it simply, the VIE structure will allow foreign investors to invest in Chinese companies. They will not own the company's assets, but they will enjoy the economic benefits resulting from the company's operations in China.

The VIE structure has its risks. One big loophole is that the controlling shareholder could move the group’s assets around without the need to notify the shareholders. That would be a nightmare for investors.

The local watchdog might appear conservative by opposing the WVR proposal. But Hong Kong investors should be thankful that someone is defending their interests.

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EJ Insight writer