A loophole has been discovered in the listing rules for the Growth Enterprise Market (GEM) that enables management of listed companies to sell shares before the two-year lock-up expires. The weakness in the rules emerged after the newly listed GEM candidate TS Telecom Technologies' senior executives sold most of their shares soon after the stock started trading last Thursday. Randy Hung King-kuen, TS Telecom's chief financial officer sold 9.24 million shares or 3.5 per cent of the company's issued capital at $1.50 a share, retaining only a 0.5 per cent stake. Kuong Kin-wa, the company's general manager, disposed of 1.32 million shares or 0.5 per cent of the company, his entire holding. The disposals reaped the executives $15.84 million in cash. The shares were placed with New World Development chairman Cheng Yu-tung through Chow Tai Fook Nominee, which the company said was a strategic investor in TS Telecom. The sale was an attempt to establish a 'strategic alliance with a big name' which could add synergy to the company, Mr Hung said. The share price of TS Telecom surged 56.7 per cent last week to close at $2.35 Friday, compared with its $1.50 issue price. Mr Hung and Mr Kuong were able to escape the controversial two year share lock-up rule as they did not technically fall under the definition of 'management shareholders'. Lawrence Fok Kwong-man, the senior executive director of the stock exchange said the share sales by TS Telecom's executives did not breach the GEM listing rules. 'Each of them held less than a 5 per cent stake in the company, and therefore are excluded from the management shareholders category,' he said. According to TS Telecom Technologies' initial public offering prospectus, only the Canada-listed parent company TS Telecom which controls a 64 per cent interest in the company was defined as 'initial management shareholders'. The company's executive directors were then free to sell any of their interests soon after it listed. 'Only those executive who held at least 5 per cent interest of a GEM company were bound by the lock-up rules,' said Mr Fok. 'We don't think we should lock-up those executives who control small stakes in a GEM company as their influence on the company and on the market would be very small,' he said. However, some market watchers complained the share disposal restrictions could easily be circumvented if the stake were dispersed among a group of executives. 'A GEM company's management can easily free themselves from the restrictions by simply keeping their stake below 5 per cent,' an adviser to GEM listing candidates said. A GEM listing sponsor said the disposal of shares by TS Telecom's directors had fulfilled the GEM listing rules in technical terms, but were against the spirit of the moratorium period. He said such rules were set by the exchange and Securities and Futures Commission in an effort to ensure GEM companies management's long-term commitment to the company. The rules were intended to prevent management shareholders from selling off the company soon after listing, leaving minority shareholders to get burnt, said Mr Fok. The stock exchange was unaware the lock-up rules had been abused, but would closely monitor the situation, said Mr Fok. 'If we find out there is a loophole in our rules, we will amend the rules.' Usually, the shares could only be sold with permission from the stock exchange six months after listing.