Bourse operator Hong Kong Exchanges and Clearing has tightened the regulation of so-called back-door listings with the introduction of rules that go into effect from October 1, according to the conclusion of a public consultation released on Friday. In a back-door listing, a company that has gone public sells its major assets or shareholding, enabling a new buyer to secure listing status without going through the application process. New buyers usually inject their businesses into the existing entity, which has in some cases compromised the quality of listings. The new rules ban listed companies from selling major assets or shareholding within three years after change in ownership. If a company sells its major shareholding to another firm, the stock exchange will monitor its acquisitions over the next 36 months. Should the listed company keep selling its existing business or assets, and keep buying new businesses or assets from its new shareholders within the three-year period, the exchange will view this activity as an attempt by the new buyers to secure listing status by circumventing the new listing requirements. If the exchange considers this a back-door listing, it will review the new buyer’s fitness against all listing criteria. The change in rules is aimed at cleaning up problematic corporate behaviour at the Hong Kong bourse, Asia’s second-largest stock market, and enhancing market quality and investor protection. “The rule changes are a positive step forward for the whole market, and will not restrict legitimate business activities, business expansion or diversification of listed issuers,” said David Graham, HKEX's head of listing. The two-month public consultation, held in June and July 2018, received 121 responses, with some expressing concern that the new rules were too tough. HKEX has, as a result, relaxed some requirements. In a major revision, the bourse operator no longer requires enlarged companies to meet profit requirements of HK$50 million (US$6.4 million) in total during the three years leading up to a takeover. Mike Wong Ming-wai, chief executive of the industry body Chamber of Hong Kong Listed Companies, welcomed the amendment. “The removal of the profit requirement is important to allow white knights to rescue listed companies in financial difficulty. It is good to see the exchange has made the change to address the concerns of the market,” Wong said. Hong Kong sees six trading debuts as city tries to claw back IPO crown Ashley Alder, chief executive of Hong Kong’s Securities and Futures Commission, said: “These listing policy changes are a big step forward in restricting undesirable back-door listings and shell activities under the listing rules regime.” The commission will work with HKEX to implement the new rules and will take action on any problematic back-door listings. “This combined approach by the SFC and the exchange, deploying different regulatory tools available to us, strengthens significantly our ability to eliminate serious problems that have been caused by deliberate attempts to game the tests that need to be passed by all other businesses wishing to access public investors' money through a listing,” Alder said.