No birthday cheers as gridlock on scrip reform about to turn 20

PUBLISHED : Tuesday, 09 December, 2008, 12:00am
UPDATED : Tuesday, 09 December, 2008, 12:00am

Twenty years is long enough for a baby to grow up and enter the university, but not long enough for Hong Kong to launch a scripless market.

That is why Hong Kong Exchanges and Clearing chief executive Paul Chow Man-yiu said last week that the exchange next year would work with the Securities and Futures Commission to push for just that.

Hong Kong still uses scrip, or physical stock certificates, as proof of ownership of a stock while most advanced markets have gone scripless to help make for more efficient settlements and prevent counterfeit scrip.

The idea, said Mr Chow, was top of the government's market reform agenda when he first joined the exchange in 1989. This shows the snail's pace with which the government pushes market reform.

White Collar would also like to push two other items gathering dust on the waiting list.

Top on the agenda should be adding statutory sanctions, or backing, to listing rules. This was first mulled in 2004, but nothing has happened almost five years on.

The problem with the listing rules is that they have no teeth. No matter how serious the disclosure breach, omission or malpractice of the listed companies or directors, the maximum penalty is only a public censure from the exchange.

A classic example is a disciplinary action announced by the stock exchange listing committee last week. The exchange, after a lengthy investigation, publicly censured Northeast Electric Development and 17 former and current directors, including chairman Su Weiguo, for failing to disclose five connected transactions.

This was not the first time the company was censured for disclosure problems either. It was pulled up for breaching listing rules in 2002 for a delay in disclosing transactions with its subsidiaries.

But even though the company is a repeat offender, and the directors have been named and shamed, there is no fine, no jail term, no prosecution.

What was different this time was that the exchange ordered the company to appoint an adviser to improve its internal controls. The six directors who were censured will have to undergo 10 hours of corporate governance training a year for the next three years.

That's no pain! But how can the regulator prevent those who attend the class from reading magazines or falling asleep! That is why we need statutory backing in the listing rules. The Securities and Futures Commission should have the right to prosecute wrongdoers, and have offenders face jail time or fines.

This is how we can encourage companies and directors to respect listing rules. But since a consultation paper came out almost five years ago, not much has happened.

Another long-awaited reform is quarterly reporting.

Growth Enterprise Market companies have reported their results every three months since the second board was set up in 1999. The mainland adopted quarterly reporting in 2004. We have not followed suit.

The plan was first proposed in 2002 but was shelved a year later because of opposition from blue chips such as HSBC Holdings. The stock exchange's listing committee in April decided to seek the Securities and Futures Commission's approval to introduce the British style of quarterly reporting starting as early as next year. Companies would need to give only a broad outline of how they are doing during the quarter.

Let's hope the SFC does not need 20 years to make a decision.



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