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Enoch Yiu

Jimmy Cheung

An inquiry panel has found no government officials or market regulators should be blamed, nor should they be called on to resign, over the recent controversy triggered by a proposal to delist so-called 'penny stocks' from the Hong Kong stock exchange.

The 181-page report, delivered yesterday by the two-member investigative panel appointed by the financial secretary, failed, however, to satisfy legislators across the political spectrum, with some calling the case the first test of the newly introduced 'accountability' system.

Much of their criticism has been levelled at Secretary for Financial Services and the Treasury Frederick Ma Si-hang. Even though he was not held responsible, the report said he had 'clearly misinformed' Financial Secretary Antony Leung Kam-chung.

Mr Ma refused to apologise yesterday, saying the panel was of the view that he had not failed in his responsibilities.

'It has criticised my performance in Legco as sub-par and noted that many citizens shared this view. I accept this criticism sincerely,' he said.

Legislators will get their chance to grill Mr Ma's superior today, as the financial secretary is to address a special legislative meeting on the report.

The most far-reaching recommendation given by the panel, comprising barrister Robert Kotewall and accountant Gordon Kwong Chi-keung, is that the government review its three-tier regulatory structure, whereby the administration, the Securities and Futures Commission (SFC), and Hong Kong Exchanges and Clearing (HKEx) together oversee the functioning of Hong Kong's capital markets.

Pressure has been mounting in the wake of the controversy to shift to the SFC the stock exchange's role as regulator of listed companies.

The panel was appointed by Mr Leung after investors dumped more than 200 stocks on July 26, including 62 penny stocks that dropped by more than 20 per cent on average. The market's capitalisation fell by HK$10.91 billion.

The plunge came a day after the HKEx released a consultation paper with 11 criteria for delisting poorly performing stocks, including a suggestion that those traded below 50 cents for 30 consecutive days be targeted.

The panel said the plunge may well have been triggered by the release of the consultation paper, but other factors were involved. These included weak market sentiment, low investor confidence levels, and the volatile nature of penny stocks.

In a statement that prompted dismayed reaction among politicians and members of the business community, the panel said the 'inquiry should not be taken as a fault-finding exercise,' and that its report would not hold any officials to blame.

'We did not discover the serious cancer which we were led to believe existed. Instead, we uncovered some instances of errors of judgment, some perhaps even understandable under the circumstances, a few mishaps, examples of miscommunication and some systemic wrinkles here and there,' the report said. 'None of the shortcomings are in themselves major.

'To the regulators, investors and the economy as a whole, the penny stocks incident has been a costly lesson. We should now let the past take care of itself and move on. The government and the regulators must be on guard to avoid the reoccurrence of similar incidents in the future.'

Chief Executive Tung Chee-hwa rejected suggestions that the findings would fail to satisfy the public. 'The government has all along been pro-active in shouldering responsibility for the incident. It shows the accountability system is functioning,' he said.

He would not be drawn on whether Mr Ma would be punished.

'After the lesson, one's wisdom grows. Mr Ma has pledged that he will accept the criticisms in a humble manner and make improvements.

'Many people have raised the issue of punishment to me. I remember we had demerits for wrongdoings when we were at school. But the question is that accountability is still at an early stage. The mechanism will improve in due course.

'The most important point is to look at how Mr Ma has erred. Actually, he only erred because he lacked experience in Legco and he has promised to learn his lesson,' Mr Tung said.

Senior officials did not, however, escape all criticism. The report said HKEx chief executive Kwong Ki-chi 'would have to bear responsibility on behalf of the HKEx for any major policy shortcomings in the preparation and release of the consultation paper'. But it stopped short of blaming Mr Kwong for the incident, as it said he had been following strict practice.

SFC chairman Andrew Sheng came under scrutiny for his claim that the SFC had not known about the proposal for 50 cents to be used as the delisting threshold, although it was later discovered that the SFC was indeed involved in making the decision. But the panel said Mr Sheng's Cantonese was 'less than adequate' to explain technical matters. 'We do not consider that Mr Sheng meant to mislead . . . taking everything he said in context, there should not have been confusion.'

Mr Sheng said: 'I am very pleased that the panel found that I did not lie.'

The financial secretary has, meanwhile, pledged to Mr Tung that he will act on the panel's suggestion that a review be conducted of the functions and powers of the SFC and HKEx. 'The report has pointed out that a review is needed. We will consider how this review could be best carried out,' he said.

When asked about suggestions that officials had been contradicting each other, Mr Leung brushed aside insinuation that the key players in the saga had integrity problems, saying he was confident that the parties concerned would learn their lessons.

The panel's report said the three-tier system adopted 12 years ago is still sound in principle but could do with refinement, particularly on the issue of who should be the primary regulator of listed companies.

The three-tier system was implemented after the 1987 market crash, when the government defined its role as purely a policy-making one. It set up the SFC in 1989 to supervise the exchange, which was to act as the frontline regulator of the stock market and listed companies.

The report said the government should also review the exchange listing committee's function and role. The committee decides which companies can be listed or delisted. A proposal had been put forward to move the committee out of the structure of the exchange and to place it under the umbrella of the SFC.



Penny-stocks report puts officials in harsh light - but blames no one