How China, Hong Kong regulators are cracking down on shell companies
George the “shell planter” is packing for Machu Picchu.
Regulators’ recent tightening has frozen his juicy business of listing petite businesses for future sale. The billionaire decided it’s time for his long-awaited break.
However excited, he was still angry at the mention of starlet Priscilla Wong. She made headlines for the 11-time price hike of her father’s construction business on the first day of listing.
Record price of listing shells and the speculative bets on penny stocks have put regulators under heavy pressure That was the last straw, George lamented.
Face-saving or not, regulators are examining listing applications with magnifying glasses nowadays.
A local investment bank was blocked because the court has called one of its board members “an untrustworthy witness” more than a decade ago. Two of its peers faced similar challenges.
That was a great disappointment to the shell planters who have been trying to copy the success for listing constructors.
Both investment banks and builders have simple businesses and minimum assets. They are supposed to be perfect props. Not anymore.
Those who survive the examination are drilled with some basic questions at the final stage: What is the purpose of your listing? You are raising only HK$20 million. Why don’t you loan it from banks? How to justify that against the disclosure of commercial secret as a listed company? Do you plan to sell your listing status after a year?
By April, 26 applications have lapsed. That is 55 per cent of the 47 tally last year. Thirty-eight applications, or 25 of the 151 tally in 2015, have been approved this year.
For a long-term fix, the regulator is understood to be looking at the lifting of various listing criteria and therefore the cost of shell planting.
Among the ideas toyed are the doubling of minimum market capitalisation and the number of shareholders to over HK$400 million and 200 respectively.
Another option is to set some prerequisites for GEM issuers to sell shares by placement, pushing more to go for public offering, instead.
In the meantime, Beijing is also clamping down on back-door listing in an attempt to stem capital exodus and corruption.
The result is not hard to imagine.
Face-saving or not, regulators are examining listing applications with magnifying glasses nowadays
As investors bet on a higher shell price, the public offering of shell-designate Hang Sang (Siu Po) was oversubscribed by 2,182 times last week, making it the third most popular IPO.
The price tag printer was loved for its market capitalisation of only HK$200 million. Its share price doubled on the first trading day. It is a display of hunger for speculation.
That hunger may not be totally unfounded.
Speculation on a jump in shell prices is not unfounded. Two shells on the GEM were sold at above HK$380 million to smartphone manufacturer Foxconn Group and mainland asset management company Hayan Capital. The price is 10 to 15 per cent above the norm. That was a month before Beijing narrowed the gate to back-door listing.
The reward will be scrumptious enough to keep most players in the game. After all, people like George are sitting on a ridiculous amount of fat and number of shells to survive the winter. To them, the drop in market turnover and IPO is not so painful as compared with the regulators.
They are betting that spring will come once the regulators have a successful consultation and lifted the listing requirement.
Yes, the cost will be higher but it means a higher entry barrier to new rivals and good news to the old boys. “See you later,” said George.
