SFC, HKEX crack down on rights issues seen as unfair to minority shareholders
Regulators step up enforcement efforts in light of new cross-border trading scheme between Shenzhen and Hong Kong
Hong Kong’s securities regulators have tightened their scrutiny of rights issues by listed companies, rejecting two recent applications they deemed unfair to minority shareholders.
Brokers welcomed the move as they believe it will enhance protection for investors, which is seen as vital in attracting mainlanders to trade in the Hong Kong market via the new stock connect link with Shenzhen.
The Securities and Futures Commission and Hong Kong Exchanges and Clearing on Friday evening jointly announced that they have recently rejected two rights issues applications from listed companies, on the grounds that the terms of the deals would seriously dilute the interests of minority shareholders who do not subscribe to the new shares.
The announcement was made just a day after the SFC executive director of enforcement, Thomas Atkinson, said in a newsletter that he would focus on cracking down on corporate fraud and misfeasance, as well as money laundering.
And it comes five days after the launch of the Shenzhen-Hong Kong Stock Connect which allows international investors to buy and sell 881 Shenzhen-listed stocks, and mainlanders to trade in 417 Hong Kong stocks.
Christopher Cheung Wah-fung, lawmaker for the financial services sector, said the regulators’ decision to step up its enforcement of rules around rights offerings was much-needed.
“There are some companies seen as ‘cheat stocks’, frequently conducting rights issues, share consolidation and restructuring. Some of these transactions benefit the major shareholders and their related parties but are unfair to smaller investors. These malpractices should be stopped,” Cheung said.
“With the launch of the Shenzhen and Hong Kong stock connect, we can expect to see more mainlanders trading Hong Kong stocks. If some of them are trading into these stocks which have a lot of rights issues and it leads to these investors suffering a loss, that would be very bad for the reputation of the Hong Kong stock market.”
However, he warned against taking the restrictions too far.
“The regulators should also beware not to overregulate and should not ban all rights issues. Some rights issues are properly made and these activities are needed for the listed companies to raise funds,” he added.
The SFC and the HKEX said in a joint statement that some rights offerings do not have commercial rationale, which “casts doubt on whether the directors of the listed companies have complied with the requirement to act in the best interests of shareholders.”
The two regulators have been closely vetting current deals and would review whether it is necessary to change any listing rules, they said.
Brian Ho, the SFC’s executive director of corporate finance, said: “Listed companies are expected to observe and fully comply with their obligations under the listing rules and other regulations, including the importance of treating shareholders fairly and equally. We will continue to closely monitor these transactions to protect the interests of shareholders and uphold the quality of our markets.”