Stock exchange and regulator must find common ground

A proposed reform of Hong Kong’s rules for fundraising and stock market listing now looks dead in the water. About 94 per cent of the 8,500 respondents who represent the city’s listed companies, brokers and lawyers have rejected the proposals in a consultation, preferring instead to maintain the status quo. Given the fierce resistance, it’s unlikely the Securities and Futures Commission, the industry’s main regulator, would succeed in pushing ahead. Under the proposals, the SFC would be involved in the early stages of stock listing. These include creating two listing committees – one for policy and one for regulatory issues – on top of the existing listing committee. Representatives from both the SFC and Hong Kong Exchanges and Clearing would sit on each.

Hong Kong’s listing reform survey draws a resounding ‘nay’ for change

This would effectively upend HKEX’s current listing division, which gives preliminary approval to a listing and can suggest listing rule changes, after which its recommendations are submitted to the 28-member listing committee. Currently, the SFC is not directly involved in the listing process, though it has the power to reject any applicants or listing policies.

Opponents argue that the new proposals would create excessive regulation as the SFC would be put in the driver’s seat in determining prospective companies seeking a listing. But the need for listing reform goes beyond the simplistic claim that the SFC is just seeking more powers for itself. It must be to attract more start-ups, technology and internet companies to raise capital here. This goal will, hopefully, be furthered by a separate upcoming consultation on creating a third board with more relaxed listing rules than the main board and the Growth Enterprise Market to cater to “new economy” firms.

Nevertheless, HKEX is a for-profit listed company, yet serves as a quasi-regulator. Given the fact that initial public offerings – a market that makes Hong Kong a global financial hub – make up a large chunk of HKEX’s revenue, the conflict of interest is obvious.

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There is a pressing need to find a balance that would eliminate or at least lessen the existing conflict of interest without burdening the market with excessive regulation. One suggestion, simple yet effective, would be to reassign a significant number of seats in the current listing committee to SFC officials. This would enable the watchdog to play a much more effective role without having to completely overhaul the current structure.

The proposed reform is being seen as a tug of war between the SFC and HKEX. The two sides need to work together. But, how ever the reform turns out, the paramount concern must be that listing rules catch up with the needs of the new information economy to maintain our status as Asia’s premier financial centre.