The debate over whether Hong Kong should allow companies to list with dual-class structures has flared up again, as a local investment industry body yesterday voiced its opposition to the idea.

This comes as the stock exchange on Friday (August 18) ended its consultation on setting up a New Board with less stringent listing requirements than the main board, in order to lure “new economy” companies (see box).

Not all investors are against the proposals, but the Hong Kong Investment Funds Association (HKIFA) has made its position clear. Sally Wong, HKIFA's chief executive, told AsianInvestor that investor protection should not be compromised in order to provide more investing opportunities.

 

THE NEW BOARD PROPOSALS

Hong Kong Exchanges and Clearing (HKEx) sparked fierce debate in 2014 when it adhered to its 'one share, one-vote' principle and did not change its listing rules for China's Alibaba. The e-commerce giant proceeded instead to list in New York, raising $25 billion in what is still the world's biggest initial public offering.

The exchange was widely praised for sticking to its principles in the interest of investor protection, but some argued that it should have changed tack to secure the Alibaba listing.

Today, HKEx, which approves IPO applications and is itself a profit-making listed company, is touting the concept of a new board with more flexible rules to accommodate companies such as Alibaba.

HKEx issued a concept paper seeking market feedback on the establishment of a New Board “to broaden capital markets access in Hong Kong by opening up to a more diverse range of issuers”.

At present, Hong Kong has a main board and the Growth Enterprise Market (GEM) for companies that do not meet the criteria of the main board.

The diverse range of issuers include pre-profit companies, companies with non-standard governance features and Chinese companies that want a secondary listing in Hong Kong, says the concept paper.

The New Board will have two categories: New Board Pro and New Board Premium, with the former aimed at earlier-stage companies that do not satisfy the criteria for even the GEM, while the latter is for firms with non-standard governance structures, including dual-class.

While companies with dual-class structures are allowed to list in the US, investors are better protected there as they can easily file class actions, Wong said, but Hong Kong does not have such a culture.

Moreover, the debate should be over the merits and demerits of 'one share, one vote', she argued, and not those of a new board.

The 'one share, one vote' principle is an important mechanism to protect the rights and interests of minority shareholders, as it accords equal treatment to all shareholders, HKIFA said in a statement yesterday. The association added that it hears mixed views on ths subject in the investment community.

Lack of opportunities?

For instance, Jimmy Weng, a Hong Kong-based portfolio manager at ICBC Credit Suisse Asset Management, supports the New Board plan because he said investors wanted to see more listings, especially by technology companies.

He noted that there was only one big tech firm trading in Hong Kong: Tencent. Its share price continues to hit record highs because investors in the city have no other choice, he told AsianInvestor.

Most IPOs launched in Hong Kong come from 'old economy' industries, such as financial services or state-owned sectors, added Weng, which have little appeal to investors.

Financial firms accounted for 69% of funds raised through IPOs in Hong Kong last year, while the figure was a mere 3% for tech companies, according to consulting firm PwC.

Potential confusion

However, the Hong Kong-based head of investment at a Chinese securities firm, said that updating the existing Growth Enterprise Market (GEM) board process would be a better option. Another board would confuse the market, he argued, and dilute trading liquidity.

He suggested the bourse could approve companies, including those with dual-class structures, for listing on the GEM on a case-by-case basis.

What's more, said the unnamed executive, a new board would not necessarily lure more tech companies to Hong Kong, as they can obtain higher valuations in the US and attract more liquidity and a larger pool of tech-savvy investors overseas.