Money Matters

When you can’t stop them killing with a revolver just give them an assault rifle

A third board with lower entry to Hong Kong’s market is the wrong medicine

PUBLISHED : Friday, 04 March, 2016, 10:19pm
UPDATED : Friday, 04 March, 2016, 11:09pm

“A Third Board, if successfully launched and smoothly operated over time, may eventually create market pressure on our other boards, leading to further improvements in those markets as well.”

Charles Li, Chief Executive, Hong Kong Exchanges & Clearing

How low can we get from here? A decade ago, when fraudulent listing shocked the market, our regulators beefed up investors’ protection with a revamp of the Listing Committee; establishment of the Financial Reporting Council; and the dual filing system.

Now, amidst public outcry on rampant frauds and manipulation, the prescription from our key regulator is a third board with a lower entry threshold.

What is more appalling than the proposal is his argument which was detailed in his column on Tuesday.

No regulator will try to learn from the mainland stock market where the wall is high but porous with corruption

First, “instead of focusing on the entrance criteria, we should be focusing on the exit instead.” His reasoning is a higher wall cannot keep out bad companies as one can see from the experience of China.

True. No criteria can be fool proof. Yet, no regulator will try to learn from the mainland stock market where the wall is high but porous with corruption.

And when the HKEx has been approving the listing of companies that couldn’t even get through the porous gate up north, what wall is he talking about.

Disclose that you have applied for a listing in Shanghai; received loads of question from the mainland regulators; and pledge that none of the doubts are valid, you get to list.

Li went on to say that “a more robust post-listing regulatory regime and a more efficient delisting process” is needed.

However, there are a lot of entrenched interests which make regulatory change difficult, he added.

Among them are “shell companies” on which he did not elaborate. But presumably these include those individuals that cooked up a business for listing to create a shell to sell in the back-door listing market.

The reality is what our regulators lack is not teeth but will.

One, most of the back door listings could not have happened without their approval. Two, as in the case of China Metal Recycling, the exchange can delist a company in two months for dishonesty.

Instead, they have approved the back-door listing of Hanergy by injecting contracts that never paid up.

Meanwhile, controlling shareholders of companies like China Foods fled north after cooking up the numbers and then the listing status of the shell was sold for hundreds of millions of dollars.

Then, Li asked: “So if we are not able or don’t want to touch the existing regime but still want to do something, what are the alternatives?”

His answer is a third board that has a lower entry threshold to allow in more emerging companies; more aggressive continuous listing obligations to protect investors; and more efficient delisting procedure to “flush out” bad companies quickly to protect our reputation.

Déjàvu to those who remember the launch of the GEM board years ago. The ills over there hardly need any elaboration.

Li knew what it means. He said if regulators are concerned with the risk, they could consider limiting participation to the professionals.

Of course, giving up HKEx’s power to approve listing authority to a non-profit entity is a more comforting alternative, but Li stopped short of that.

One perhaps should not be too harsh on Li. After all, he is an ex-investment banker who received HK$20 million of his HK$45 million compensation at HKEx for 2015 in the form of share options. Profit and new ideas drive price.

Imagine a third board that would do without the “same vote, same right” that is said to be barring internet giants like Alibaba and Baidu Group from listing in Hong Kong.

One should not expect him to remember that HKEx has a statutory obligation “to ensure that the interest of the public prevails where it conflicts with the interest of the exchange.”

But some have to. They are the six directors appointed by the government to guard the rabbit from eating the lettuce.

They include Chow Chung-kong, Timothy Freshwater, Anita Fung, Rafael Gil-Tienda, John Harrison, and Margaret Leung. Collectively they were paid HK$7 million last year for their work at HKEx.

While endorsing the three-year strategic plan that includes the proposal of a third board, do they share the logic of Li’s argument?

That is a gun seller saying this: “I can’t stop villains from shooting with revolvers. Give them machine guns, licenses and bibles. If they kill, I will remove the guns. If I can stop them from killing, those with a revolver may turn into nuns.”