Hong Kong Regulator Wants a Tighter Grip on IPOs in Blow to HKExby and
Listing Committee was not consulted on proposal, HKEx says
Plan would see balance of power over IPOs shift to city’s SFC
Hong Kong’s securities regulator is moving to tighten its grip on the approval process for initial public offerings in one of the world’s biggest markets for new listings.
While the Securities and Futures Commission and Hong Kong Exchanges & Clearing Ltd. have stated publicly that they’re working together on a new regime to approve IPOs, brokers and lawmakers say the proposal would shift power toward the regulator. The Listing Committee, an exchange-appointed panel responsible for screening IPOs, wasn’t consulted on the plan, according to HKEx. The push for change has been almost entirely driven by the SFC, said a person close to the Listing Committee, who asked not to be named because the matter is private.
Tensions between the bourse and regulator last flared in 2014 after the exchange’s unsuccessful attempt to lure Alibaba Group Holding Ltd. to the city in the face of SFC opposition. Since then, a low-level conflict between the two has seen HKEx, a for-profit corporation that makes money from hosting public companies, fail in its attempts to change Hong Kong’s listings rules.
The latest plan echoes the regulator’s effort to absorb the exchange’s listings operation in 2003, a proposal that was blocked after last-minute lobbying dissuaded the government from approving it. This time, the SFC doesn’t need a legislative amendment to implement its ideas. And the government appears to be supporting the regulator, said shareholder activist David Webb.
“It’s happening now because the government has switched sides” to the public interest, said Webb, who quit as an independent director of the bourse in 2008 because of what he said was poor governance. “The SFC now has the political backing.”
The new structure, if it goes ahead after a three-month consultation, will also make it easier for the SFC to tackle longstanding issues, including greater disclosure and shareholder rights, Webb said. Ashley Alder, the regulator’s chief executive officer, told a Hong Kong Securities and Investment Institute audience on June 2 that he’s “not really convinced” Hong Kong has evolved its regulatory system effectively.
“Both the SFC and HKEx contribute equally to the content of the joint consultation,” SFC spokesman Jonathan Li said. “The joint consultation will give the SFC no more power than it has at present.”
Under the existing system, the exchange administers IPOs, with the Listing Committee, which is staffed by finance and legal professionals, reviewing them for approval. The SFC helps vet applicants and has a veto over listings. The plan would see some of the Listing Committee’s responsibilities transferred to a new six-person Listing Regulatory Committee, three of whom would be appointed by the SFC and three chosen by a nomination group that itself would be half-staffed by SFC representatives.
The new structure would give the regulator defacto control over all appointees and alter the power balance between the SFC and exchange, said Lo Ka-shui, chairman of Great Eagle Holdings Ltd., a Hong Kong developer. He was chairman of the Listing Committee in the 1990s, and resigned from HKEx’s board in 2003 in protest against the attempt by the regulator to take control of listings.
The exchange’s directors were informed about the proposed consultation all along, said Lorraine Chan, an HKEx spokeswoman. The Listing Committee, which is technically independent of the bourse, was made aware of it shortly before its release on June 17, she said by e-mail.
Alibaba, China’s biggest e-commerce company, listed in the U.S. after failing to convince the SFC to approve its proposed governance structure. The loss of the biggest IPO in history showed the need for change, HKEx CEO Charles Li said at the time.
Last year, the exchange ended its bid to allow dual-class listings and loosen shareholder voting rights to attract Alibaba-type companies after opposition from the regulator. In February, SFC Chairman Carlson Tong poured cold water on HKEx’s plan for a third stock exchange, and insisted on a review of the Growth Enterprise Market, the bourse’s smaller equity venue.
The market would “change substantially” if the exchange and Listing Committee are no longer the front line for approving applicants, said Jack Chow Siu-lui, managing director of VMS Investment Group and a former Listing Committee member. The SFC and government are pushing for change amid concerns about the quality of the companies applying for IPOs, said Chow, who expects the new rules will make the listing process more complex and costly.
K.C. Chan, the city’s secretary for Financial Services and the Treasury, supports the plan, seeing it as a fine-tuning that will provide a more accountable system, according to his spokeswoman.
The exchange isn’t happy with the proposed structure because it wants to keep its power, lawmaker Sin Chung-kai said in an interview, noting that HKEx is itself a publicly-traded business.
“They do have a role of conflict by being a regulator and being a profit maker,” said Sin, who headed the legislative committee that overhauled the city’s securities laws in 2003.