‘One share, one vote’ U-turn by Hong Kong regulator is welcome
City risked losing out on the lucrative market for IPOs by persisting with the sacred principle and new pilot scheme should boost its fortunes
When a long-held principle no longer reflects the investment reality of new-economy companies, regulators may be forgiven to want to loosen the rules. Companies with different classes of shares may be allowed to list on the main board of the Hong Kong stock exchange by the middle of next year under a new pilot scheme. The Securities and Futures Commission has had a change of heart about the sacred principle of “one share, one vote”, established as a cardinal rule of share ownership in Hong Kong since at least the 1980s.
A consensus has also emerged among the commission, the government and the stock exchange that it is not necessary to create a new board for listing such companies. Hong Kong has been facing intense competition from rival bourses in such places as New York, Singapore and Shanghai, which have long allowed listed companies to hold dual-class share ownerships. Such share structures enable company founders and/or the management to exercise strategic control even if they don’t own a majority stake. Many new-economy and bio-tech companies favour such arrangements.
If Hong Kong still insists on “one share, one vote”, it will be in danger of losing out on the highly lucrative market for initial public offerings. It has lost its crown as the world’s favoured destination for IPOs this year, having fallen behind New York and Shanghai.
In the first half of the year, the city’s stock market raised just US$5.8 billion worth of IPOs, down 19.5 per cent from the US$7.3 billion it raised during the same period last year, when it was ranked as the world’s top market for new listings. Indeed, it is still smarting over the IPO of Alibaba Group Holding, the world’s largest online shopping platform and owner of the South China Morning Post, which skipped the Hong Kong bourse in favour of staging its record US$25 billion flotation in New York in 2014.
Under the new scheme, some start-ups that have reached valuations of over US$1 billion will be allowed to raise capital on the main board. But there will be protection provisions that may include a sunset clause forcing such companies to set an expiry time, or conditions, for the different classes in their shareholding structure.
They will also list with a special code to distinguish them from more traditional companies, to help investors identify potential risks. The scheme may expand if enough high-quality companies are attracted to list in Hong Kong without regulatory issues.
The commission’s U-turn is welcome. People ought to be able to invest in promising companies with dual shares, provided they know what they are getting into. Transparency is key.