White Collar

Hong Kong bourse needs to look again at delisting mechanism

Forget the penny stock fiasco of 2002 – it is time to talk about delisting to protect investors from failed start-ups

PUBLISHED : Monday, 03 October, 2016, 3:24pm
UPDATED : Monday, 03 October, 2016, 9:37pm

It’s been 14 years since Hong Kong’s penny stock fiasco, and time for the local bourse to put the nightmare behind it and look again at introducing a delisting mechanism.

The absence of a clear delisting mechanism in the city was one of the risks raised by the Shenzhen Stock Exchange on Friday ahead of the soon-to-be launched stock connect with Hong Kong Exchanges and Clearing.

The second cross-border scheme, expected to be launched in November, will allow international investors to trade in 880 Shenzhen-listed companies while mainlanders can trade 417 Hong Kong stocks. The Hong Kong and Shanghai stock connect was the first cross-border trading scheme, allowing mainlanders to trade 318 Hong Kong stocks and international investors to trade 568 Shanghai-listed stocks.

The Shenzhen bourse last Friday released more detailed information about the scheme, including a warning for mainland investors to understand the risks arising from the differences between Hong Kong and mainland listings and trading rules.

Unlike mainland China and many western markets which will delist companies that trade below a certain share price or if they don’t meet certain financial requirements, Hong Kong doesn’t have a delisting mechanism to remove poorly performing stocks. As a result, there are hundreds of penny stocks which have volatile share price movements.

Any company listed in Shanghai or Shenzhen that posts a loss for three consecutive years is delisted from the bourse and demoted to the over-the-counter market. Companies that are guilty of major illegal activities, or that have failed to meet financial and trading standards, face mandatary delisting.

Nasdaq requires companies to be delisted if the bid price falls below US$1 for 30 days in a row.

n 2002, Hong Kong Exchanges and Clearing considered introducing its own delisting rules but it only ended up as the nightmare of the “penny stock fiasco”.

In July 2002, the exchange launched a consultation paper looking at whether penny stocks – those companies trading below 50 cents for 30 days – should be delisted.

Investors rushed to dump more than 300 penny stocks, causing the local market’s capitalisation to fall by HK$10 billion in a single day

A day after the paper was issued, investors rushed to dump more than 300 penny stocks, causing the local market’s capitalisation to fall by HK$10 billion in a single day.

In an embarrassing move, the stock exchange scrapped the consultation exercise four days later.

The fiasco saw many casualties – besides the many retail investors who lost money. The then Secretary for Financial Services and the Treasury Frederick Ma Si-hang publicly apologised, while while HKEX chief executive Kwong Ki-chi lost his HK$7.95 million a year job after resigning for “personal reasons” in November 2002.

The fallout may explain why the topic of a delisting mechanism hasn’t been on the agenda again.

But it might be time to discuss the issue again as there is now talk of revamping the Growth Enterprise Market and the possibility of launching a third board for start-ups.

If the revamped GEM and proposed third board will focus on start-ups wanting to raise funds, they need to have a clear exit mechanism to let the poorly performing ones go since many start-ups have high failure rates.

This could provide better protection to investors and the reputation of the Hong Kong market. Otherwise, this potential third board may end up stacked with many poorly performing start-ups which would hurt the reputation of the Hong Kong stock market.