It should surprise nobody that the rich are getting richer. But many will be startled to learn just how much money Hong Kong's tycoons are making as cornerstone investors in initial public offerings - a practice one member of the stock exchange's listing committee argues is unfair.
Last year, eight companies listing on the Hong Kong stock market signed up cornerstone investors: privileged individuals or companies who are guaranteed large allocations of shares in return for holding on to them for a fixed period.
The original idea behind cornerstone investors was to bolster the credibility of the listing company with retail investors who had probably never heard its name. If a couple of Hong Kong's more prominent tycoons were induced to buy a sizable portion of the offering, ran the reasoning, then retail investors would take their presence as an endorsement of the listing company's governance and business prospects and buy the shares in droves.
Whether the practice is still necessary, or even justifiable, is open to question. According to a study by stock exchange listing committee member Low Chee Keong, who is also an associate professor in corporate law at the Chinese University of Hong Kong, the retail tranches of the eight deals in which cornerstone investors participated last year were on average 308 times oversubscribed.
Of course, it could be argued that such high demand was a testimony to the success of the idea. On the other hand, it seems unlikely that Industrial and Commercial Bank of China's IPO - the biggest ever - needed the extra publicity drummed up by guaranteeing hefty allocations to the likes of Lee Shau-kee, Peter Woo Kwong-ching, Sun Hung Kai Properties and Cheung Kong.
If anything, the effect of making large fixed allocations was to squeeze ordinary funds out of the offerings. Professor Low says cornerstone investors took on average 28 per cent of the international tranches of the deals in which they were involved. In one offering - for China BlueChemical - just four cornerstone investors took 48.5 per cent of the international tranche, despite the deal's popularity.
