Keeping up with the Times to Improve the Listing System

An op-ed written by Prof. Kalok Chan, Dean of CUHK Business School and Wei Lun Professor of Finance at The Chinese University of Hong Kong (CUHK) was published in Hong Kong Economic Journal on 8 September 2016. In the article, Dean Chan shared his views on the controversial proposals of changing the process of new listings jointly initiated by the Securities and Futures Commission (SFC) and Hong Kong Exchanges and Clearing Limited (HKEX).

The original article is in Chinese and here is a recap of the article in English:

On 17 June 2016, SFC and HKEX jointly issued a consultation to collect views of the market on the proposed enhancements to The Stock Exchange of Hong Kong Limited’s (Exchange) decision-making and governance structure for listing regulation. The consultation deadline has been recently extended to 18 November 2016.

Under the proposals (PDF), the Listing Committee will continue to decide a large majority of IPO applications and post-IPO matters. However, two new Exchange committees will be established – the Listing Policy Committee and the Listing Regulatory Committee. These two committees, on which the SFC and the Exchange are equally represented, will decide listing policy and policy-related listing matters with advice from the Listing Committee. The Listing Policy Committee will initiate, steer and decide listing policy with participation by representatives of the HKEX Board and the Takeovers and Mergers Panel, and the Listing Regulatory Committee will decide on IPO and post-IPO matters that have suitability concerns or broader policy implications.

The Listing Policy Committee comprises representatives from the SFC’s senior management and the Chairperson and the two Deputy Chairpersons of the Listing Committee as well as the Chief Executive of HKEX and the Chairperson of the Takeovers and Mergers Panel, while the Listing Regulatory Committee comprises representatives from the SFC’s senior management as well as the Chairperson and the two Deputy Chairpersons of the Listing Committee.

The Hong Kong listing market has experienced significant growth. Over the past decade, the market has evolved from one that primarily served local companies and businesses in the early 1990s into a premier capital formation center for Mainland and overseas companies. Notably, in recent years, there has been rapid growth in the number of Mainland private enterprises listing in Hong Kong. The proposed reforms come after the quality of some new listings in recent years were called into serious question, especially some on the Growth Enterprise Market, whose shares were the target of speculative trading shortly after listing.

As the listing process involves numerous parties, the proposed reforms have drawn strong reactions from stakeholders in the local stock market. There is diverse reaction in the market supporting and worrying about the reforms. For people who worry about the changes, they think that the two proposed committees on top of the Listing Committee would make it more cumbersome and stymie market development.

Dean Chan indicated that for complicated new listing applications that would raise serious concerns in the market, the Listing Committee, which is made up of 28 representatives of listed companies, investors, accountants and lawyers, would not be able to make sound and timely decisions as it will be hard for the committee members who work on a part-time basis to get together for discussion and draw consistent conclusions. He supported that for complicated new listing applications, providing the Listing Regulatory Committee with earlier and more direct input on listing policy matters and listing regulation could help “decide on those day-to-day listing matters concerning individual new listing applicants or listed issuers that have suitability concerns or broader policy implications and ensure that important listing decisions are aligned with the overall policy direction set by the Listing Policy Committee. (Point 15 in the consultation paper)”. Dean Chan thought that from the perspective of efficiency enhancement, the setup of Listing Regulatory Committee could help streamline the new listings approval process and increase the transparency of information to the market.

The proposals evidently seek to substantially increase the SFC’s regulatory powers, prompting market concern that letting the SFC over-regulate may risk restraining market development. Another concern is that the proposed changes will thrust the SFC to the front line of the approval process of public offering applications. SFC regulators may not have thorough understanding of the market who would probably strangle the development of Hong Kong’s IPO market. Dean Chan pointed out that SFC’s main functions not only include setting and enforcing market regulations as well as supervising market operators, but is also responsible for promoting Hong Kong’s securities and futures markets. If the Hong Kong market remains stagnant, SFC will also be under fire and hardly absolve itself from the blame. He went on to state that SFC has in fact hired many staff with rich frontline market experiences and the market should not have worried about it. Once investors’ benefit is affected or breaches of rules and market misconduct appear, SFC needs to spend much effort and time on investigation and may not be able to take timely disciplinary actions against the problems. In addition, the prohibition of class-action lawsuits in Hong Kong may lead to the situation that numerous suits would be filed at the same time by shareholders against a company to pursue claims for damages, and investors’ confidence on Hong Kong’s financial market may be shaken. In this regards, it is important for SFC to play a more proactive role in forestalling financial crime and misconduct in view of better maintaining the reputation and orderliness of the securities and futures industry.

All in all, Dean Chan thought that the proposals do not aim for making big changes to the existing listing processes but instead further streamline the processes for making important or difficult listing decisions, while establish clearer accountability for decision-making within the Exchange and enhance oversight of the administration of the Listing Rules. He believes these changes could be positive to the development of Hong Kong’s stock market.

Lastly, Dean Chan spotted that the only fly in the ointment in point 28 in the consultation paper:

“Under the Proposals, the Listing Policy Committee will replace the Listing Committee as the body responsible for oversight of the listing function and the Listing Department’s performance within the Exchange. The Listing Department will remain within the Exchange and will remain responsible for the day-to-day administration of the Listing Rules but, going forward, will report to the Listing Policy Committee on its work. To reinforce this oversight role, and establish clear accountability, the Listing Policy Committee will have primary responsibility for appraising senior executives of the Listing Department in the performance of their regulatory responsibilities. HKEX’s Remuneration Committee, which is responsible for determining the overall compensation of the Listing Department and its senior executives, will take into account the assessment of the Listing Policy Committee when determining such compensation.”

The new Listing Policy Committee will assess the performance of the senior executives from HKEX’s Listing Department. This gives the market an impression that SFC regulators will judge HKEX senior executives’ performance. HKEX’s Remuneration Committee will also take into account the assessment of the Listing Policy Committee when determining the overall compensation of the Listing Department and its senior executives. This has resulted in a misunderstanding that SFC regulations put pressure on HKEX’s senior executives.

Please click here or the image below to read the original Chinese story published in Hong Kong Economic Journal.

Source: Hong Kong Economic Journal
Date published: 8 September, 2016

Photo: HKEX