Does the HKEx have what it takes to stand up to the tycoons?
Investor protection is a key mission of Hong Kong Exchanges and Clearing (HKEx). It seems to be working towards this end. Since 2006, it has launched more than 20 market consultations and made many amendments to the regulations to make Hong Kong safer for investors.
However, HKEx does not always seem to stand up for investors. It has backed down from a number of reforms, such as a proposed extension of the 'blackout period'.
This blackout period refers to a period before the announcement of a firm's results. During this period, company directors are barred from trading in shares of their company, on the view that they are privy to price-sensitive information.
HKEx proposed in January 2008 that the blackout period be extended to start from the half or full financial year-end instead of one month before the results are approved by the board or the reporting deadlines (three and four months after the half and full financial year, respectively).
This sparked a backlash from the business community, and from legislators representing their interests. Li Ka-shing, chairman of Cheung Kong (Holdings), spoke against the extension of the blackout period when it was proposed. He was joined by Bank of East Asia chairman David Li Kwok-po and more than 200 companies which published an open letter.
David Li Kwok-po, the legislator representing the banking sector, is reported to have said: 'Someone really is not using their brains. They are really stupid,' referring to the regulators on this issue.
HKEx capitulated. In the end, it lengthened the blackout period from the announcement of annual results by one month.
Another HKEx proposal to cut the volume of shares that can be sold by a firm under the general mandate (the blanket approval given to the board to sell new shares at a discount to third parties for cash without first offering them to existing shareholders) was shelved due to predictably negative responses from listed companies.
The reform was opposed by management, who wanted to retain maximum flexibility in the number of shares they could offer, and by market practitioners (bankers, lawyers and accountants), who make lucrative fees from deals, and have an interest in making sure such transactions are as large as possible.
The HKEx proposed again in 2007 to introduce mandatory quarterly financial reporting - Hong Kong is one of the few major stock markets without that requirement. The proposal went away quietly.
Last December, in what could be construed as an attempt to attract more mainland firms to list in Hong Kong, HKEx accepted mainland accounting and auditing standards for mainland companies listed here, and allowed mainland auditors to audit them. This was despite the recent spate of alleged accounting irregularities at listed mainland firms, and concerns over the perceived mediocre quality of mainland auditors.
HKEx has got many things right over the years, and the government and the exchange have built up this vital public asset over the decades.
But that's the point. The exchange - a listed company, a frontline regulator of listed firms and a key component of the city's finance industry - has a public role and has to aim for the very best practices. It's not just listed firms and investors that are affected by the exchange's ability to operate effectively, it's all Hongkongers. And judged on the very high standard of its need to serve all these parties, HKEx sometimes lets the city down.
Khor Un Hun is a former investment banker with extensive experience in advising on mergers and acquisitions and fund-raising in Asia