Big is not always best

THE Stock Exchange of Hong Kong has introduced a number of rule changes in the past couple of years to beef up its listing requirements, but its most recent proposals draw into question its overall mandate.

If approved, these proposals would double the minimum market capitalisation requirement for new listings to $400 million.

If an applicant was unable to meet this, its track record of profits over the previous three years would be used to determine whether it was worthy of a listing.

A look at the prospectuses of recent listing applicants revealed that many of those companies would fail to meet either market capitalisation or profit requirements.

Therefore, the proposal raises an important issue: should the stock exchange concentrate on attracting only high-quality large companies while leaving second-liners to venture into capital-friendly bourses such as the Vancouver Stock Exchange or NASDAQ, or should its mandate be to provide capital for both developing and large companies.

To some degree, the proposals make sense because they force managements of smaller companies to spend more time concentrating on growth rather than dealing with analysts, investors and the administrative responsibilities involved in being publicly listed.

The stock exchange has also suggested that tougher guidelines would reduce complaints from investors about new listings that eventually trade below their issue price.

These arguments ignore the fact that many small companies find a lack of capital their biggest impediment to growth, while a listing provides a vehicle to raise money, offering investors the opportunity to participate in a company's development.

Without such a vehicle it would be fair to say that multinational companies such as Microsoft or Nike would have been unable to grow from their humble beginnings.

The stock exchange must realise that its role is to facilitate capital-raising, and that it bears no responsibility for a new listing's market performance.

If a new listing fails to sparkle, investors only have themselves to blame for not having done their homework.

If the stock exchange proceeds with the proposals, officials at the Vancouver exchange and NASDAQ will probably jump for joy.

By equating bigger with better, Hong Kong's stock exchange has clearly moved in the wrong direction.