Regulators crack whip on unruly market

Reforms on main board and the Growth Enterprise Market create place for third listing platform

Emphasizing its willingness to embark on reform, Hong Kong's market watchdog, the Securities and Futures Commission (SFC), halted five Initial Public Offerings (IPOs) on the Growth Enterprise Market (GEM) in just one month.

Observers said this reflected the regulator's intention to bring about quick changes to listing rules in the city's securities market.

The reform may contain three main components - first to have two committees draft the specific change plans; second, to tighten IPO rules; and third, to set up a new listing board.

Of the five GEM candidates that delayed IPOs, the SFC queried three for "not ensuring the conditions for an open market" as well as "orderly, informed and fair trading" in the relevant securities at the time of listing.

The three companies later announced they would let their GEM listing plans lapse.

A fourth firm, Xiangxing International, is a Xiamen- based intra-port service and logistics service provider. It announced postponement of its IPO, which the SFC saw as being "not in the public interest".

Engineering subcontractor GME Group Holdings was successfully listed, but trading was suspended on its Feb 22 debut because of wild price swings.

The company surged 542 percent in morning trade from its IPO price of HK$0.54 per share to HK$3.47 per share on turnover of HK$69.47 million, leading the regulator to think "that there may not be an open market in the trading of the shares", GME said in its statement released after the suspension.

Price volatility is common for GEM stocks. Investors say they have seen newly listed small-cap stocks skyrocket before they blow up into a spectacular fireworks-like bust.

Such speculative betting on penny stocks had put the market regulator under heavy pressure. It had "caused damage to Hong Kong's reputation" as an international financial center, Hong Kong Exchanges & Clearing Ltd Chief Executive Charles Li Xiaojia said last month.

He said HKEx supported the SFC's recent action against the rigging on the city's small-cap shares.

The problem has speculation on listed "shell companies" at its root. "Some companies just want to go public to get a public trading status, waiting to be sold via a reverse merger, as they don't have profitable business operations," said Edward Au, co-leader of National Public Offering Group from Deloitte China. "The regulator must determine whether a listing applicant truly wants to raise funds or not," he said.

Shell companies can be sold to firms which, otherwise, would not be able to raise funds on the open market, many from the Chinese mainland.

Market sources said the price for a GEM shell company was HK$350 million, and HK$600 million on the main board.

GEM board listing requirements let these shell companies with highly concentrated share holdings and a small shareholder base list. As a result, their share prices can be manipulated easily.

"Generally, 80 to 90 percent of the issued shares of a newly listed company on the GEM are concentrated in the hands of five biggest investors," Au said, "making its share price easy to manipulate".

Statistics show that first-day returns of IPOs on the GEM board were 118 percent in 2013, 144 percent in 2014, and an astonishing 739 percent in 2015.

In response, the SFC and HKEx jointly proposed regulatory reform in June last year, resulting in, as the first step, the setting up of a committee on listing policy and another on listing rules.

This was followed by a three-month public consultation that ended in September last year. The two committees are still digesting the reform suggestions they have gathered.

The SFC is expected to raise IPO requirements by lifting the minimum operating cash flow from HK$20 million to HK$30 million, and requiring at least 10 percent of the issued shares to be open subscription, according to local media.

Higher requirements would ease share-price volatility which would, in turn, benefit the listed company itself. Companies would find it difficult to conduct market operations during wild swings of their share prices, Au pointed out.

It is still too early to see any specific changes but Au said "when they come, they will give an overall facelift" to Hong Kong's financial market.

If requirements were raised in both the GEM and main board, the change would create a need for a new listing board.

HKEx had already outlined its ideas for a third exchange this year to possibly target institutional investors and adopt more innovative listing standards. But the specific set-up time has yet to be disclosed.

The SAR government's 2017/18 Budget also stressed the need to improve the quality of Hong Kong's securities market.

cherrylin@chinadailyhk.com