Time to take stock of GEM listing rules

PUBLISHED : Wednesday, 16 February, 2005, 12:00am
UPDATED : Wednesday, 16 February, 2005, 12:00am

On Hong Kong's Growth Enterprise Market, long-term suspensions are all too common.

Whenever a GEM company has run into problems over the past few years - from the disappearance of key officers to questions about the validity of publicly disclosed financial information - shareholders have been left in limbo while the shares are suspended for long periods.

By one estimate, almost one in 10 of the companies listed on our second board is under long-term suspension. This does nothing to help the GEM shed its reputation as a cobwebbed corner of an otherwise healthy and well-run stock market.

Now the government plans to issue a consultation paper on procedures for delisting ailing companies, as well as other measures meant to improve governance generally.

The announcement has caused barely a ripple in the industry and this says much about how well exchange executives have laid the groundwork for the consultation.

It also contrasts with the sudden drop in the market when new delisting rules were proposed in 2002.

This time around, generous hints have been dropped over the past few months and clearly brokers have been canvassed for their views ahead of time. The plan is to issue a paper next month.

The relaxed reception should bode well for the prospects that some meaningful change will take place. There are loopholes that need to be closed if the GEM's fading fortunes are to be revived. The number of new listings fell to 21 last year, at a time when interest in listing in Hong Kong remains robust. Average amounts raised by companies are also falling, if exceptional deals such as Tom Online's $1.5 billion offering are excluded.

One of the GEM's problems is that delistings are dealt with on an ad-hoc basis. One proposed course of action is to adopt the main board's three-stage delisting process. Anything that makes the benchmarks of governance clear to companies and provides more certainty for investors would help.

Transparency and protection of shareholders' interests in cases where company assets - and even management - are held outside Hong Kong is also a concern, as last year's AKuP International Holding scandal illustrated. The GEM-listed company's directors, staff and executives vanished virtually overnight. The mysterious end of a high-flying software company with offices across the region has never been solved.

The interest from mainland companies in listing on the GEM is expected to be strong this year, especially after dual-listing rules allow them to pursue simultaneous mainland listings. It will be interesting to see how far the delisting proposals go in tackling cross-border risks.

The original idea behind the GEM was to help promising startups tap capital markets. Tightening the listing - and delisting rules - could help it meet that aim.