Hong Kong Proposes New Listings Committees to Oversee IPOs

  • City’s market consultation will last until mid-September
  • A 2003 plan to change rules failed after exchange opposition

Hong Kong’s financial regulator and the operator of the city’s stock exchange have proposed the creation of two new listings committees that they said would enhance supervision of the market.

The Securities and Futures Commission and Hong Kong Exchanges & Clearing Ltd. on Friday put forward a plan for the committees, which would be equally represented by officials from the two bodies. The new structure would give the regulator more power to supervise initial public offering applications, they said in a joint statement.

“These enhancements mean that the SFC, working closely with the exchange through two newly-established committees, will concentrate on those listing policies and decisions which are important for market quality,” the Commission’s Chief Executive Officer Ashley Alder said in the statement.

Hong Kong’s authorities are enhancing regulation to preserve the quality of the market and review policies concerning listings issues, such as reverse takeovers, also called backdoor listings, and prolonged stock trading halts, Alder said June 2.

Hong Kong’s exchange has been modifying its listings criteria to curb backdoor listings, when an investor takes control of a listed company by either injecting cash or transferring assets into it with a plan to change the acquired company’s business.

“It’s positive for the SFC to have some input on the listings decisions as well as listings policy earlier on,” said Timothy Loh, a Hong Kong-based lawyer. “It’s an incremental step keeping the current structure, but making some enhancements.”

Separate Consultations

Hong Kong’s Financial Secretary John Tsang in February announced the consultation plan to change the existing supervision structure, which has been in place for more than two decades. Friday’s plan will be put out for a three-month market consultation.

Listings rule changes to HKEx’s second exchange, called GEM, reverse takeovers, de-listings, and suspensions will require separate consultations, said David Graham, chief regulatory officer at HKEx.

“The system is not broken, does not need radical surgery,” he said at a press conference after the announcement. “What it needs are enhancements.”

Efforts to introduce new rules in 2003 failed even as an expert group identified five inefficiencies in Hong Kong’s listings regulation, including the conflict of interest inherent in HKEx being a for-profit company as well as a regulator for IPOs that checks the quality of companies and approves applications.

Exchange Opposition

The plan was opposed by the exchange company and wasn’t implemented, according to Francis Lun, CEO at Geo Securities Ltd. in Hong Kong. Today the exchange continues to approve IPOs, while the SFC, which regulates listed companies, can raise objections. 

“It’s not a perfect arrangement,” Lun said.

The exchange and SFC sometimes have conflicting views on standards. HKEx last year halted a plan to introduce different classes of shares after the financial regulator opposed the initiative on concerns about the fair treatment of shareholders by a company.

“The heart of the problem with the existing SFC-HKEx regulatory oversight model is the potential conflict of interest for HKEx,” which generates revenue from listings, said Jeffrey Chan, a founding partner at Oriental Patron Financial Group in Hong Kong. The “system currently adopted as a check and balance measure is a duplication of resources, costly and caused market inefficiency.”

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