Hong Kong doesn't need sequels to the GEM flop
Unlike London, new boards tailor-made for diverse investors and firms may not work in city
A top government think tank has suggested Hong Kong follow London in introducing new boards for companies with different shareholding structures.
However, a similar idea has not worked in the past. The experience with the 15-year-old Growth Enterprise Market should warn us not to make the same mistake twice.
The Financial Services Development Council recently recommended Hong Kong introduce boards tailor-made for the needs of diverse investors and firms, which would help attract listings by companies of the likes of mainland e-commerce giant Alibaba and British conglomerate Jardine Matheson.
The idea is that if Britain can do it, so can Hong Kong.
But one should note that only professional investors may trade on the London Stock Exchange's AIM submarket and they know how to protect themselves.
Hong Kong has a tradition of allowing retail investors to trade everything from gold to stocks and warrants. It would be hard to introduce a board from which they would be excluded.
Not many companies require a special shareholding structure. Any "special shareholding board" would likely have only a few firms listed on it.
Most importantly, investors may be prejudiced against companies wishing to list on the special board, believing it is only because they are not qualified to list on the main board or they are attempting to circumvent normal regulations.
Investors would shun a board where the firms listed could be considered second-class citizens. This is exactly what happened with the GEM.
In the late 1990s, complaints arose about the main board's rules being not flexible enough for newly set-up firms to list.
The exchange introduced the GEM in 1999 for new firms that had yet to make a profit, while the main board continued to require candidates to have a combined profit of at least HK$50 million in the three years before listing.
Fifteen years on, the verdict is out. The GEM has failed to become Hong Kong's version of the Nasdaq in the United States.
The 22 listings on the GEM last year raised HK$3.15 billion, less than 3 per cent of the total raised by the 74 flotations on the main board. Only 194 firms are listed on the GEM, compared with 1,495 on the main board.
Introducing new boards with different themes is only going to create sequels to the flop that the GEM has turned out to be.