HK regulator forced to bare teeth after wild stock swings

15-Jul-2017 Intellasia | FT | 6:00 AM Print This Post

City’s market watchdog says it will adopt a ‘front-loaded’ approach to protect venue’s reputation

Hong Kong’s watchdog is adopting a “front-loaded” approach to policing the city’s markets following a series of stock crashes and wild price swings that risk damaging the credibility of Asia’s most international capital-raising venue.

Simultaneous price crashes in a group of small-cap stocks last month erased $6bn in market capitalisation for no known reason. The episode echoed previous plunges such as that of Huishan Dairy in March, when the stock dived more than 90 per cent, erasing $3.9bn in equity value in less than an hour again for no reason known at the time.

Ashley Alder, head of the Securities and Futures Commission, used a speech on Thursday to outline a more aggressive stance that will see the regulator take on a role overseeing listed companies that has been considered the purview of the Hong Kong Exchange.

“What we are now aiming for is regulation which is far more front-loaded, to get ahead of the issues,” said Alder. “We are no longer acting behind the scenes, but instead we are increasing our direct presence when dealing with the more crucial listing matters that fall within [our] scope.”

While the tougher approach has been increasingly evident in recent months through a series of “guidance notes” and actions, Alder’s remarks were the most detailed outline of why the SFC is beefing up its presence on the front line.

This year the regulator has suspended seven stocks almost double the total of the previous three years combined and blocked at least one highly dilutive capital-raising where it considered the justification questionable. It has also objected to an initial public offering where it was concerned about the company’s business, leading to a withdrawal of the offering.

“We have seen just too many companies with inexplicably inflated valuations as a result of unusually sharp share price increases,” Alder said on Thursday, adding the SFC was concerned about stocks with sharp price declines and limited public free float, as well as the risks posed by big loans made to controlling shareholders who pledge stock as collateral.

“These conditions are also the setting for deeper concerns about misconduct,” he added.

Trading in Hong Kong stocks is overwhelmingly dominated by institutional investors dealing in the city’s biggest listed companies such as Tencent and HSBC, both of which have been instrumental in helping the blue-chip Hang Seng index this year. The index closed at a two-year high of 26,346.17 on Thursday up a fifth in 2017.

But even though Hong Kong has been the world’s largest venue for new listings in the past two years, the average size of new deals has been falling sharply as has trading volume in the new entrants.

The changes have prompted a debate in the city on how far it should reform a convoluted listings process with its roots in Hong Kong’s colonial era, as well as how the SFC and the HKEX should best split their roles.

The city’s main IPO gatekeeper is currently the Listing Committee, a group of market professionals including bankers, lawyers and investors who are overseen by the HKEX. The HKEX itself faces complaints that its for-profit status as an exchange operator conflicts with its regulatory role.

Last year the SFC and the HKEX launched a consultation on the listings process that drew a record 8,000 responses described earlier this year as “emotional” by HKEX chief executive Charles Li.

Last month the HKEX published a paper that proposed raising the bar for listings on the city’s junior Growth Enterprise Market as well as creating a new “third board” to tempt more new-economy stocks to the city.

https://www.ft.com/content/53d1107e-67a6-11e7-8526-7b38dcaef614?mhq5j=e1

 


Category: Hong Kong

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