Listing rules changes may give shell farmers reason to smile
If nothing else, tightening the controls on back-door listings will at least make manipulation of stocks more expensive
Speculators seldom grin when regulators talk about tightening controls. However, the Securities and Futures Commission’s suggestion to make mini-board listings more demanding seems to have done the trick.
And, it’s not hard to see why.
Imagine yourself controlling a handful of listed shells in the Growth Enterprise Market, which can easily be sold at no less than HK$300 million apiece nowadays.
A more stringent listing regime will only send the shell price up, given the long listing queue and high under-the-table costs in the A-share market.
This is exactly what has happened in the past two years after the watchdog tightened its grip by making the sponsor responsible for frauds and the wrongdoing of issuers.
“Shell farmers” – the nickname for a professional creator of listed shells – have chosen simple, basic and “hassle-free” businesses to secure a listing on the market.
Out are manufacturers and property developers; in are boutique trading houses; a single store wine business or a cluster of street shops.
No matter how the regulators raise listing requirements; there are ways to “satisfy” them. In the mean time, the price of a shell has almost doubled in those two years.
And let us not forget that our requirements are already very demanding when compared with our rivals.
A more difficult listing is not the right medicine if the ill is a 10-fold rise in stock price as witnessed in various newly listed GEM stocks in their first day of trading.
Investors are betting on the stocks because they know a listed shell can be easily transferred to the main board within a year and then sold at a handsome price in less than another year.
Fundamentals therefore do not matter. It is okay to bet on Creative China – a television programme production house which is supposed to be very popular – even though the name of its chairman cannot be found in any search engine up north.
It is also okay to bet on Madison Wine when it has only one store in Wan Chai selling some so-called expensive brands and receivables are on the rise.
The investors’ logic, no matter how absurd, is that the thinner the fundamental, the better the chance that it is a listed shell.
At the same time, many of these stocks are placed with the “lucky 100” under the so-called full placement arrangement.
The result is a highly manipulative secondary market where retail investors scramble for shares.
In the case of Creative China, only 2.44 per cent of its 300 million new shares changed hands on its first day of trading. It took about HK$25 million to boost its price nine times higher to produce a market capitalisation of more than HK$3 billion.
This vicious cycle can only be broken by removing the equal sign between new listing and shell selling.
It is not about barring the transfer of a shell but about making it more transparent and fair, therefore increasing the cost to the buyer.
While an acquisition of control with a general offer will take two to three years to bear fruit, most people go for the back-door route.
The buyer injects some assets at an inflated price into a listed shell in return for control. All this can be done within months.
The original owner would very often be paid off with some under-the-table deal, say a cheap sale of assets to him or her by the company.
The minority shareholders get no general offer but a hope that the share price will go up after the change in control.
Hurdles should be put up at this alley immediately. This needs no rule change because the watchdog already has a veto over this.
It is also within the regulator’s power to order the issuers to engage in a public share sale instead of a full placement.
When the GEM board first started, it was feared that retailers would have little interest in start-ups and thus the full placement was allowed. It’s no longer the case now.
Of course, the “shell farmer” will have little problem in collecting the retailers’ shares. Yet, at least everyone has a fair chance and the manipulation gets more expensive.