White Collar
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Opinion: Strict delisting mechanism vital for success of planned Third Board

Shenzhen and Shanghai stock exchanges both expel companies that post three years of losses in a row. The new Third Board in Hong Kong should be just as tough

PUBLISHED : Monday, 15 May, 2017, 12:06pm
UPDATED : Monday, 15 May, 2017, 10:46pm

As the stock exchange prepares to consult the market over the next two weeks over the launch of a new Third Board to attract more technology and overseas companies to list, be ready for a lot of heated debate over which companies should be allowed onto the new list.

But actually, if we really want to make the new market is successful, it is probably more important to talk about tightening conditions on companies which really should be delisted from Hong Kong’s other indexes.

A lack of a delisting requirements has led to the problem of many so-called “cheat stocks” on the main Hang Seng board and the Growth Enterprise Market (GEM)– something we should avoid at all costs, with the proposed Third Board.

Hong Kong’s main board has tough entry requirement with only profitable companies that earn a combined HK$50 million (US$6.42 million) in three years leading allowed to list.

The GEM does not need companies to make a profit but they do need to have cash flow of HK$20 million.

Charles Li Xiaojia, the Hong Kong Exchanges and Clearing chief executive, last week said a consultation paper will be released by the end of this month to seek views on how to launch a third market to attract more technology firms to list here.

Among the HK$19.4 billion (US$2.49 million) in funds raised by initial public offerings in Hong Kong last year, 69 per cent of that was by financial firm, with just 3 per cent from tech companies. The potential Third Board’s target market is huge.

It plans to allow more flexible shareholder structures, such as dual shareholding, favoured strongly by technology companies including Google and Facebook.

It is also going to have a lower-entry threshold for start-ups to raise funds – but for that to happen and be successful, stricter delisting measures must be put in place.

Many studies have shown that start-ups have a failure rate of over 70 per cent. If they list and continue to lose money, they should be delisted.

Many studies have shown that start-ups have a failure rate of over 70 per cent. If they list and continue to lose money, they should be delisted

The dual-shareholding structure makes perfect sense as many technology start-ups and larger firms prefer it. If that turns out to be the case, then the new board should also make it clear when a company might face being delisted.

The US allows dual-class share structures, but it also has class actions that allow investors to sue companies easily. Hong Kong has no class action mechanism, relying instead on the regulator to delist poorly performing stocks. But it’s rare.

Strict delisting measures can have a positive impact by encouraging company managements to do a better job to enhance profitability and share price performance, if they want to maintain their listed status.

Delisting are common in other markets, including on the Shenzhen and Shanghai stock exchanges will both expel companies that post three years of losses in a row.

The Nasdaq in the United States, too, delists any company trading below US$1 for 30 days. And in Taiwan, they can be removed from the exchange if the market capitalisation falls below NT$200 million (US$6.62 million).

The new Third Board in Hong Kong should ensure it is just as tough.

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