Third board to be considered after GEM review, SFC says

Regulator also wants to tighten controls on back door listings and major shareholders pledging shares

PUBLISHED : Tuesday, 23 February, 2016, 7:05pm
UPDATED : Tuesday, 23 February, 2016, 7:05pm

Hong Kong should only consider launching a new third board to encourage technology companies to list here after the current review of the Growth Enterprise Market (GEM), Securities and Futures Commission chairman Carlson Tong Ka-shing told a regulatory forum on Tuesday.

“We should first review and confirm the role of the GEM before we consider if we need to launch a new third board,” Tong said at the annual forum for regional regulators and participants in the financial industry hosted by the SFC.

Hong Kong Exchanges and Clearing chief executive Charles Li Xiaojia said last month that the exchange operator was weighing launching a third board, in addition to the main board and the GEM, which would be tailor-made for companies that do not have the requisite profit for the main board or operational requirements to qualify for the GEM.

The GEM, set up in 1999, was supposed to be a Hong Kong version of Nasdaq that would attract listing by hi-tech firms, but only 18 per cent of the companies on the GEM come from the information technology sector, with 29 per cent from consumer and services and 26 per cent from construction. The remainder are industrials, materials, financial services and utilities.

Tong said GEM now acted as a stepping stone for smaller firms to grow bigger in order to move to the main board. If the review decided to revamp the GEM to attract listings by new tech firms, then there would be no need to set up a new market for that purpose.

We would need to tighten the regulation to make sure all transactions in the back door listings process do not have malpractices
Carlson Tong, SFC

The SFC started a review of the GEM late last year after the share prices of some GEM companies rose or fell several times in a few days, with some companies sold to allow other firms to gain a back door listing.

“If a company lists on the main board or the GEM with the intention to sell it out later for a fee to help another company secure a back door listing, there is an honesty issue,” Tong said. “We would need to tighten the regulation to make sure all transactions in the back door listings process do not have malpractices.”

Back door listings were one of the reasons for sharp swings in share prices, as retail investors chased stocks involved in back door listing deals. SFC data shows 56 companies saw their market capitalisation increased by 1,000 per cent within a six-month period in the past two years, with 39 per cent of them loss making.

Another reason for such volatility was major shareholders pledging their shares to financial institutions as collateral for loans. When they could not repay the loan, the institutions would sell the shares, leading to sharp falls.

To address the problem, Tong said the SFC would consider tightening disclosure regulations on such pledges.

“The present rules only require major shareholders to disclose three days after they have pledged their shares to non-bank financial institutions, while they do not need to do so if they pledge the shares to banks,” he said. “We will consider if it needs to be more transparent so as to protect the interests of minority shareholders.”

Li’s three-year plan also includes launching an initial public offering (IPO) connect scheme to allow mainlanders to buy Hong Kong-listed shares in IPOs or Hongkongers to buy shares in mainland IPOs, which would help attract international companies such as Apple or Google to list here.

“The IPO connect would involve a lot of regulatory issues that need to be solved first,” Tong said. “It does not only involve the Hong Kong regulators but also those on the mainland.”

Tong said he had sent a letter to the newly appointed chairman of the China Securities Regulatory Commission, Liu Shiyu, to seek for a meeting.

“The SFC has had very close cooperation with the CSRC in the past two years and we expect we will continue that close relationship with the change of chairman,” he said.