Regulators backed on governance stance
Despite the cost, fund managers and brokers say the stock exchange and SFC were justified in sticking to the rule book in Alibaba case
Hong Kong-based fund managers and brokers support the decision by local regulators to refuse mainland e-commerce giant Alibaba's request for a waiving of listing rules, even though it may have cost the city a HK$100 billion initial public offering.
However, they are also calling for the listing rules to be reviewed soon with a view to attracting technology firms in the future.
Nick Ronalds, head of equities at the Asia Securities Industry & Financial Markets Association, which represents 60 financial institutions, said local regulators should not grant a waiver or change the rules for any one deal, no matter how big it is.
"Good governance means abiding by existing laws and regulations, unless or until they are changed, and any change should be based on a careful weighing of costs, benefits and consequences," Ronalds said.
Alibaba said on Sunday it would list in the United States instead of Hong Kong after local regulators' October rejection of its request to list here with a shareholder structure that would allow its founder and certain senior executives to nominate a majority of the board despite holding only minority stakes. The Securities and Futures Commission considered the request violated the "one share, one vote" principle. The city's listing rules ban dual-share structures while US markets allow them.
Christopher Cheung Wah-fung, the legislator representing the financial services sector, said the regulators had been right not to back down.
"Any companies that want to list in Hong Kong should respect the local regulations and should not ask for special treatment," he said. "Hong Kong is as an international finance centre because our regulators put investor protection as our priority and we have a regulatory system that offers a level playing field to everyone. If one exemption is given, other companies will follow and this will destroy the system."
Cheung said Hong Kong should review its listing rules to attract more new listings but he was opposed to following US practice. "The US legal system allows class actions, where investors sue for compensation from companies or individuals who have hurt their interests," he said. "Hong Kong does not allow class actions and our regulators need to have a different approach."
Cheung reiterated his call for the rules governing the Growth Enterprise Market - the city's second board - to be changed to make them more flexible.
Hong Kong Exchanges and Clearing chief executive Charles Li Xiaojia said he wanted consultation but gave no timetable for its completion. "We have to consider possible changes where they might be necessary, with everything according to our due process," Li said after Alibaba announced its listing in the US. "The listing committee's work on shareholding structures didn't start because of Alibaba and will not end now because of Alibaba."
Mark Konyn, chief executive of Cathay Conning Asset Management, said the regulators' decision maintained market integrity - at a cost.
"The irony may well be that while most institutional investors will applaud the SFC's position and principles, there are many who are likely to invest in Alibaba via the US listing," Konyn said.
"The SFC has put a higher value on maintaining the integrity of Hong Kong's governance requirements for listed companies compared to the immediate and measurable financial rewards of what is likely to be a very popular listing."
Konyn said he did not think anyone should be blamed for rejecting Alibaba's request because the local regulators had only been carrying out their duty.
Jeffrey Mak, a partner at DLA Piper, said local regulators had to be careful about the implications of changing rules or granting waivers to meet the demands of a particular company and he did not think the city would lose much over just one deal.
"What goes away today may come back in future," he said. "The market is dynamic. Hong Kong's regulators will continue to improve our market platform and play to its strengths so that more successful businesses will see Hong Kong as the place to float and grow. Each market has its own historical and demographic backgrounds, sometimes making one city's meat another's poison."