Why changing GEM's listing rules may not attract giants like Alibaba

Established companies may be reluctant to rub shoulders with small second board firms

PUBLISHED : Monday, 10 February, 2014, 11:03am
UPDATED : Tuesday, 11 February, 2014, 1:59am

Brokers have called for the Hong Kong stock exchange to consider changing the listing rules on its Growth Enterprise Market to accommodate the special requirements of mainland companies such as e-commerce giant Alibaba.

It is a creative proposal, but it may not be the solution that some firms - those which want dual share structures that allow founders and other minority shareholders to retain control - are looking for.

Lawmaker Christopher Cheung Wah-fung told White Collar last week that some brokers thought Hong Kong Exchanges and Clearing should consider changing the GEM's listing rules to allow Alibaba to list with a special structure.

This has put the GEM, which had almost fallen into oblivion owing to its low turnover and relative dearth of listings over the past decade, back in the spotlight.

Few may remember that when the second board was set up in 1999, its mission was to be the Hong Kong version of the Nasdaq board in the United States for newly created firms to raise funds to develop their business.

In any event, the second board has not attracted many listings. Companies prefer the main board because it gives investors more confidence in them, bankers said.

The 22 listings on the GEM last year raised HK$3.15 billion, less than 3 per cent of the total HK$122.65 billion raised by the 74 initial public offerings on the main board.

Only 193 companies are listed on the GEM, compared with 1,438 on the main board. Total market capitalisation of GEM firms was about HK$132 billion at the end of last year, only about 0.5 per cent of the HK$23.62 trillion market cap on the main board.

So, even if HKEx went to the trouble of changing the listing rules to tailor them to the needs of Alibaba or other firms, those firms may be reluctant to rub shoulders with the minnows on the second board.

The Securities and Futures Commission and institutional investors might also oppose such a change. The main board and GEM both ban dual share structures, in which holders of one group of shares have more rights than the others.

This is why HKEx lost Alibaba's potential US$15 billion listing last year. The company is understood to have wanted to list under a structure that allowed its founder and senior executives to nominate most of the board members, despite their holding minority stakes.

While it is true that exchanges in the US allow dual share structures, don't forget that the US has a class action system that allows investors to easily sue companies or directors to protect their interests.

Hong Kong has no such system, and that is why our regulator is taking a different approach on investor protection. In fact, the GEM listing rules require quarterly reporting, which is more demanding than the rules for the main board, which require companies to announce their results only twice a year.

This all goes to show that regulators are keen to maintain high standards for the GEM.