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SCMP Reporter

REGULATORS appear to be in something of a quandary when it comes to dealing with back-door listings on the stock exchange by mainland interests.

  The practice is a focus of investor attention at the moment. If it is not handled correctly, then it could store up some major, credibility damaging problems for the stock exchange in the future.

  A back-door listing occurs when an unlisted company buys control of a listed firm and then injects assets from the acquiring company into the listed vehicle.

  In this way, say the regulators, the acquiring company can in effect become listed, without going through the same vetting process prescribed for new listings by the exchange authorities.

  It is unlikely that in every case the stock exchange and the Securities and Futures Commission (SFC) will carry out their threat, issued in a joint statement on Tuesday, to treat these transactions as new listings.

  The regulators do not want to be seen as penalising mainland interests attempting to gain exposure to a Western-style capital market - where they can raise capital.

  They stress, as regulators, that they do not want to be seen interfering in what is essentially a commercial transaction. And of course, there are also political considerations.

  After all, these stock market entrants could be future Swires and Hutchison Whampoas, with large tentacles of business interests spanning the globe.

  With the correct corporate behaviour, these companies could enhance the credibility and importance of the Hongkong stock exchange.

  However, one or two of these listings might also blow up, producing a deluge of worthless, fraudulent paper.

  Above and beyond ensuring that all shareholders are treated equally in these types of transactions, and on the assumption that back-door listings are not to be banned in a blanket imposition of the new listing rules, the stock market wants at least two things from the regulators.

  Investors would like to see consistency in the regulatory handling of back-door listings. Both the SFC and the exchange should walk the same path, so that all participants in these transactions know where they stand.

  And probably investors' most important demand is increased disclosure. They want to know who the interests are behind these listings.

  It is not good for buyers in back-door listing statements to describe what they are and what they do in a few sentences, as is the case now.

  Fuller disclosure in terms of the financial circumstances of the buyer, the names of the people who will sit on the new board of directors and information about their background would be extremely helpful in aiding further market transparency.

  Also, where an injection of assets is being considered, it is crucial that some form of certification system be put in place to ensure that whatever is being proposed has the tacit approval of the mainland authorities.

   Furthermore, investors in Hongkong should be certain that the assets being injected into the listing are actually the mainland party's assets to inject.



Back-door listings need consistent regulation