New | Hong Kong share suspension rule abuse to stave off price falls under scrutiny after first half surge
Early last Friday before Hong Kong’s stock market opened for business the shares in two listed companies connected to then missing mainland tycoon Guo Guangchang were suspended from trading. The reason given by the firms: pending the release of an announcement containing inside information.
It's a catch all phrase and the frequency with which it is used has long been a bone of contention between the regulator and certain investors.
Supporters of the current listing rules argue that allowing companies to suspend shares, sometimes for days at a time, ensures parity in a historically retail dominated market giving all investors a chance to prepare for materially important news before a company’s ticker trades again.
Others argue trading should continue regardless and the suspension rules are being abused. It now looks like the regulator shares some of the latter group’s concerns.
One executive believes the market should be allowed to continue trading positions on a stock regardless of good or bad news
“Under the rules, trading in securities should be halted only if it is necessary for the protection of investors or the maintenance of an orderly market,” wrote David Graham, Chief Regulatory Officer and Head of Listing at stock exchange operator Hong Kong Exchanges and Clearing (HKEx) in a guidance notice published last Friday.
Listed companies were reminded to follow good practises when it comes to trading halts, with HKEx noting a significant increase in the number of suspensions at 522 in the first half of 2015 compared to 309 in the same period last year. The number of trading halts between July and November this year went down to 305, the same level as 2014, the letter said.
“Issuers should use their best efforts to plan their affairs to avoid trading halts. Any trading halt should be kept to a period that is absolutely necessary to ensure investors are not denied reasonable access to the market,” Graham said.
It's an increase that has been noticed by brokers.
“There has been abuse so the exchange reminds listing companies to play by the rules,” otherwise they might tighten the rules, says Ivan Li, equities analyst at Tung Shing Securities. Companies skirting the rules are often trying to avoid a sudden share price drop Li said.
Such companies fall into two camps: firms targeted by short sellers and firms where directors and controlling shareholders have pledged their stocks for loans.
In June when mainland and Hong Kong markets started crashing there was a rush of suspensions in both markets in part, says Li and other analysts, because margin calls were being made.
“The tricky part if trading is suspended is the broker will wait or negotiate with the company owner,” over any margin loans, Li said. “In a long term suspension the broker can probably do nothing.”
In the case of Guo’s two companies, Fosun International and Fosun Pharma, trading did resume Monday after the two companies announced via a second exchange filing that their chairman
“is currently assisting in certain investigations carried out by Mainland judiciary authorities.”
The shares promptly plunged.
Even in this instance however, the strictures of Hong Kong’s rules stood out as trading in Fosun International’s US and European listed shares continued unabated last week even as Hong Kong shares were suspended, with investors overseas taking bearish positions amid speculation that one of China’s most ambitious entrepreneurs had been ensnared in an anticorruption probe.
Brian Gilchrist, a partner at law firm Clifford Chance says supporters of the current rules argue it is fairer to everyone and that companies risk censure if they don’t suspend ahead of a potentially important corporate announcement.
“Most of the time (a trading halt) is a reaction to caution. It is easier to take the decision to suspend then to run the risk of later being argued that you didn’t and either people trading with inside information or trading to their detriment because of information that would have been of relevance but wasn’t in the public domain,” Gilchrist said.
The real bugbear for some critics is the length of time companies can halt trading. Some listed firms have been frozen for years.
A senior executive at an institutional investor in now suspended Tianhe Chemicals Group, speaking on condition his firm not be named as he also has to deal with the HKEx, said no one benefited from extended suspensions and that international investors were genuinely surprised to learn about Hong Kong’s rules.
“Shares that suspend for any length of time always fall when (they) resume trading. The argument is would it have fallen so much if trading was allowed?” the investor said.
The executive believes the market should be allowed to continue trading positions on a stock regardless of good or bad news. If there had to be a suspension for some reason it should only be allowed for very short periods, he said. Tianhe shares have been suspended in March after an anonymous short seller accused the firm of fraud.
By comparison, beleaguered commodities giant Noble Group has continued to trade on Singapore’s stock exchange despite coming under repeated attacks from short sellers who accused the firm of misstating its accounts.
