Clearing system plans promise a paper chase
The days when Hong Kong could be relied upon to craft straight-forward solutions seem to be disappearing fast.
Few people would argue against plans to give small investors greater protection against crooked brokers. Thus, the proposal to extend the central stock market clearing system to the general public looks benign.
Since its introduction in 1992, the Central Clearing and Settlement System (CCASS) has been a big success.
While the London Stock Exchange laboured and failed with Taurus, Hong Kong had a functioning electronic share transfer system facilitating an explosion of market turnover impossible under the old mechanism of physical certificate delivery.
Now, the plan is to let individual shareholders keep their own accounts with CCASS, allowing them to keep tabs on their brokers. Theoretically, brokers could be barred from trading unless the shareholder punches through an access code to CCASS via a touch-tone telephone. The system would protect shareholders against crooked dealers cashing in client accounts.
At first glance, the consultation paper empowers shareholders, guaranteeing speedier access to information. Indeed the Consumer Council, which is studying the proposal, says, in principle, it is impressed.
Still, there seems to be more to the reforms. Despite the success of electronic settlement, local investors retain a deep affinity for holding share certificates and remain distrustful of CCASS and brokers.
Of the 213 billion shares held by CCASS - representing 44 per cent of issued shares available for trading - an average 39 million are withdrawn from the system every day. This amounts to one billion annually and does not come cheap.
CCASS, clearly, has a strong reason to cook up a system that dissuades shareholders from demanding physical stock.
Trouble arises because the proposal radically alters the relationship between companies and their shareholders. Under company law, firms communicate with only those shareholders 'registered' on their register.
Scrip dividend, annual reports and circulars get sent to investors who have stood up and identified themselves, or nominee account holders acting as custodians.
Under the CCASS plan, the traditional idea of a share 'registry' would be jettisoned, with CCASS taking over the role.
The effect of the clearing house as central nominee would be to reduce the number of registered shareholders. Assuming all shareholders decided to hold their shares within the central system, companies would have just one entry on their share registrar: CCASS.
Absurd? Even more ridiculous is the proposal that every CCASS account holder will receive corporate communications from the company at present reserved for registered shareholders.
It is estimated that every one shareholder on the registrar conceals 10 'underlying' owners happy to leave administrative issues to their custodian.
Hardly surprising, since most actively trading retail investors are in the market purely for short-term capital appreciation. Taken to its logical conclusion, the CCASS plan means every underlying shareholder would receive voluminous documents incomprehensible to all but a few members of the Hong Kong Law Society.
British companies go to great lengths to identify the beneficial shareholders behind nominee accounts to protect against possible takeover attempts. In Hong Kong, this is less of an issue as most firms are family controlled.
Yet the original conception of joint stock companies was vested in a relatively small group of shareholders. Popular ownership has changed that entirely, yet it seems the CCASS proposal does not account for such practicalities.
As share ownership proliferates along with the needs of shareholders, the idea of a monolithic central nominee looks unwieldy.