HKEX lays out proposals to accelerate delistings, curb share issuance abuses
Hong Kong Exchanges and Clearing on Friday released two separate consultation papers on proposed rules changes involving capital raisings, delisting and other issues in an effort to improve market quality.
The consultation papers have invited the public to respond by November 24.
The Shenzhen Stock Exchange had warned mainland investors about “scam shares” or “con shares” listed in Hong Kong where the local market does not have an effective delisting mechanism to remove poor quality companies.
In some instances, small investors have fallen prey to “scam shares” that used stock splits, rights issues and other offerings at a deep discount.
The Securities and Futures Commission chairman Carlson Tong Ka-shing said that he wanted to crack down on poor quality companies, adding that he head been in contact with his counterparts at the China Securities Regulatory Commission about the problem.
“After adopting a more robust delisting policy to address concerns about a number of long suspended issuers, we are proposing changes to the delisting framework to facilitate efficient and orderly exits of poor quality issuers and provide certainty to the market on the delisting process, bringing our practice more in line with other major markets,” said David Graham, HKEX’s chief regulatory officer and head of listing in the statement.
“We are considering proposals to enhance our rules on backdoor listings and our continuing listing criteria, and plan to publish consultation papers in due course to seek market views,” Graham said.
Stock markets on the mainland can delist companies that post losses for three consecutive years while in the US, authorities can delist companies trading below certain share prices.
Meanwhile, Hong Kong allows companies to suspended trade for a few years to address problems such as the size of its public float.
In the consultation paper, HKEX proposed to delist companies after a continuous suspension for a prescribed period, possibly set at 12, 18 or 24 months.
As of the end of June, there were 56 companies suspended from trade for more than three months, while 40 of these have been halted for more than a year. Among them, 25 companies did not have sufficient operations, three did not have a sufficient public float, and 28 failed to announce financial results.
In a separate consultation paper the exchange proposed measures to address issues concerning capital raisings and other share issuance transactions.
“In recent periods, the exchange and the SFC have noted market concerns about patterns of problematic behaviours related to certain share issuance transactions, including deeply discounted fundraising and share consolidations and subdivisions,” the consultation paper said.
The exchange said these “scam” shares may involve conducting frequent large scale fundraising at deeply discounted prices to dilute voting rights of small shareholders and may amount to “downward share price manipulation”.
The HKEX proposed to ban rights issues, open offers and specific mandate share placings within a rolling 12-month period if the issuance have a cumulative dilution of 25 per cent or more, unless there are exceptional circumstances involving financial difficulty.
The exchange also propose to ban subdivisions or bonus issues of shares if the theoretical share price after the adjustment for the subdivision or bonus issue is less than HK$1 or 50 HK cents. The proposal would only restrict share subdivisions and bonus issues.
The exchange also proposed restrictions on the use of general mandate for placing of warrants.
“The proposals seek to prohibit market practices that may jeopardise an orderly, fair and informed market for the trading and marketing of securities and to ensure fair and equal treatment of all shareholders,” the exchange paper said.
Joseph Tong Tang, chairman of Morton Securities, said the exchange proposal may help speed up the delisting process and reduce the temptation of companies to issue shares at deep discount.
“It cannot solve all problems. Each company is suspended for different reasons and a speedy delisting may not fit for all situations and may not always be the best outcome for small shareholders,” he said.
He said in some instances it would be better for companies to solve their problem and then resume trading.