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SFC and regulation in the Hong Kong market

Tuesday 22 May 2018


Brian Ho, Executive Director at the Securities and Futures Commission (SFC), wants market participants to know that regulation is not meant to be a roadblock but rather a tool to help create a better market.

At the Sixth Annual Institute on Corporate and Securities Law in Hong Kong 2018, Ho looked at some of the historical regulatory developments intended to improve conduct in Hong Kong’s markets.

“Good regulation should provide an appropriate framework within which companies conduct their business, whilst at the same time catering for public interests. That is the reason why regulation must keep up with market developments and business needs,” Ho said.

Ho captured range of topics in his address, from corporate conduct to back-door listings and shell companies.


Market listing and licensing
Ho addressed the new rules to allow weighted voting rights (WVR) structures—a significant development, since as a result Hong Kong will be the first country to sculpt their regulations around WVR.

Last year, Angus Young and Raymond Chan co-authored an article entitled, The Hong Kong Stock Exchange’s Proposal for a Third Board: Quirky Idea or a Way Forward? Published in the 2017 final quarterly edition of the GRC Professional, the article addressed HKEX lost-listing opportunities because of their de-facto on companies with WVR structures.

Young and Chan wrote: “However, in 2014, the HKEX failed in its attempt to convince the island’s regulator—the Securities and Futures Commission (SFC)—which expressed concern about the impact of the proposal on the quality of companies listed on the two boards (Main Board and GEM).”
While the SFC has since changed its stance on the WVR, it’s not without its guard rails.

“Given that WVR represents a dilution of One Share One Vote, it is important to come up with a set of ring-fencing measures so that WVR does not become commonplace in our market,” explained Ho. “In other words, WVR should be the exception rather than the norm. To achieve this, the new regime includes filters such as a minimum market cap, a requirement that the issuer must be innovative in nature and that only founders who are able to demonstrate indispensable contribution are entitled to WVR.”

Ho cites this as an example of moving in the direction of sustainable regulation as it pertains to innovation.

These proactive efforts relate to the work the SFC did with the Hong Kong Stock Exchange to publicise the volatility in the Growth Market Enterprise (GEM) companies early last year.

Young and Chan addressed the fact that many companies found the GEM listing rules too onerous and the requirements could not be met.
Ho’s statement does not reference the tough restrictions involved in getting listed in this space; however, allowing the WVR—albeit in a limited sense—will provide an opportunity to list co-major companies such as those that missed out, like Alibaba, that has WVR structure.

Ho also addressed the recent implementation in relation to observations made in the consultation paper, Capital Raising by Issuers, which, Ho said, tackled highly-dilutive voting rights issues.

These issues, according to Ho, are what might have prompted the subsequent review and consultation process, concluded in December of last year.

Prevention and investigation
Ho mentioned (Stock Market Listing) Rules, (SMLR) which allow those involved in the Initial Public Offering (IPO) process to be investigated at the application stage.

“In 2017, the number of cases involving the potential or actual exercise of SMLR powers increased substantially to around 40 from only two or three cases per year in the past. The use of our statutory powers is combined with investigation and other enforcement tools.”

In light of the current regulatory environment, it can only be hoped that complex regulatory frameworks will prove to be a boon to business in Hong Kong.