HKEx predicts further consultations on controversial dual-listing share structure

Another round of consultations on a new board which could permit dual-share listings will probably be needed according to the bourse operator Hong Kong Exchanges and Clearing (HKEx).

A new board proposed by HKEx is expected to be launched in the first half of next year but views on the biggest reform in Hong Kong's stock-listing system in the past 20 years are divided. Charles Li Xiaojia, chief executive of HKEx, said they may need another consultation to ensure execution details and voting rights within the new board scheme.

Hong Kong has been reviewing listing requirements after the city missed Alibaba's IPO. The first round of a public consultation process on the proposed third board, which started in June, ended on Aug 18. The third board would aim to provide a listing venue for new-economy companies.

Sally Wong, chief executive of the Hong Kong Investment Funds Association (HKIFA), said the association believed the new board - in addition to the existing main board and growth enterprise market (GEM) - would not really work. Risk factors included the definition of "new economy" being open to abuse. Over the years, despite absence of a weighted voting rights structure, many new-economy companies - including mega-sized ones - have been listed on the Hong Kong stock exchange and quite a number more are in the pipeline to debut.

Hong Kong's main-board requires companies to achieve a combined profit of HK$50 million in the three years before listing, and the second board, GEM, requires companies to have HK$20 million in annual cash flow. The new board will be restricted to attracting only firms classified as technology or new-economy firms.

The HKIFA believes the proposed "dual-class shares" designed for the new board go against the interests of investors. A "one-share, one-vote" structure protects the rights and interests of minority shareholders by ensuring management of listed companies is accountable to all shareholders.

The HKIFA thinks a weighted voting rights structure is negative as it strips investors of an extremely important tool to have sway over management of a listed company. Beneficial owners with a controlling share of voting rights may also have the incentive to divert corporate assets and exploit opportunities for personal gains.

If weighted voting rights are introduced, then HKIFA believes regulation of the new board and listing approval rights, including that for the main board, should shift from HKEx to Securities and Futures Commission.

Arthur Bacci, chairman at HKIFA and head of Principal International (Hong Kong), pointed out that he was concerned introducing dual-class shares could potentially lead to a global race to the bottom in terms of governance standards.

Despite concerns over risks generated by the new board, many experts believe Hong Kong should advance with the times.

Francis Leung Pak-to - chairman of the Chamber of Hong Kong Listed Companies and known as "father of red chips" - said he thinks Hong Kong should introduce a New Board Premium to accept companies with non-standard governance structures, including the dual-class share structure, to attract companies such as unicorns with valuations of more than $1 billion after IPO, but not limited to new-economy companies, to list in Hong Kong.

Leung does not support the establishment of a New Board Pro as the size and quality of targeted companies are too small and uncertain, which will increase risks to the market and bring in challenges for regulators. GEM could be the listing venue for small-sized companies and startups.

He also suggested companies with core business and focus on the Chinese mainland, Macao and Taiwan shouldn't be allowed to seek secondary listings in Hong Kong, as this will marginalize the Hong Kong market. Some people think secondary listings will bring giants such as Alibaba back to list in Hong Kong but Leung thinks it is not worth it.

Cheah Cheng Hye, chairman at Value Partners and an independent non-executive director of HKEx since April this year, said he welcomes the proposal for the new board because this third board would let Hong Kong attract new-economy companies in the information technology, healthcare and education sectors.

"We need to reform before it is too late," said Cheah. Without this reform, it is difficult for Hong Kong to compete with New York for new-economy IPOs. However, Cheah emphasized that regulators need to make sure there are sufficient safeguards including good transparency, strong rules and adequate regulatory protection for investors.

HKEx data shows financial and property industries represent 44 percent of market share in Hong Kong. Listed companies in the new-economy sector comprise just 3 percent of market share, while the percentage in the Nasdaq Stock Market, New York Stock Exchange and London Stock Exchange is 60 percent, 47 percent and 14 percent respectively.

Jess Cheung, chief executive at Valuable Capital, said a new board will bring fresh business models and new energy to Hong Kong's financial markets and also attract more investors to participate in the market, which will benefit brokerage business.

tingduan@chinadailyhk.com

(HK Edition 09/08/2017 page8)