People
&Markets
HKEx reviews dilution, delistings
Exchange expands regulatory role in latest rule change
HONG KONG EXCHANGES AND CLEARING has
proposed tougher rules governing capital
raisings and delistings in an effort to
bolster safeguards for investors and clamp
down on market abuse.
The dual consultation papers, launched
on September 22, seek to limit highly
dilutive equity raisings and speed up
delistings when a company’s stock has been
suspended for too long.
The proposals follow a review of the
relationship between the HKEx and Hong
Kong’s securities watchdog, and point to
a stricter regulatory approach from the
exchange operator.
“Clearly there is a regulatory initiative
to clamp down on behaviours that occur
in certain transactions to the detriment
of minority shareholders,” said Matthew
Emsley, partner at Herbert Smith Freehills.
“Underpinning this is that the regulators
recognise the importance of maintaining
(ONGû+ONGSûSTATUSûASûAûLEADINGûlNANCIALû
centre. There is a concern that some of
these practices may undermine investors’
CONlDENCEûANDûTHEûWAYûTHEû(ONGû+ONGû
market is perceived.”
5NDERûTHEûlRSTûSETûOFûPROPOSALS û(+%Xû
said it would ban rights issues or open
offers that result in a dilution of 25% or
more with a few exceptions, such as if the
ISSUERûWASûFACINGûlNANCIALûDIFlCULTIES
HKEx calculates value dilution in reference
to both the offer ratio and price discount.
The 25% threshold would be calculated over
a 12-month period to prevent issuers from
circumventing the new rules.
Other proposals include requiring
minority shareholder approval for all open
offers except those issued under an existing
general mandate, barring unlicensed
institutions from acting as underwriters
and removing the use of general mandates
for warrants.
“It’s ultimately about protecting minority
investors from being squeezed out but
there’s always a balance to strike,” said one
member of HKEx’s listing committee.
“Let’s say it’s 2008 and the banking
SYSTEMûISûHAVINGûAûDIFlCULTûTIMEû7OULDûYOUû
allow a deal at 40% off-market for a bank to
recapitalise? Yeah, you probably would.”
“The exchange doesn’t want to have a
situation where real companies doing real
things for real reasons get trapped by this. Arule that’s a bit tighter on the cowboys that
go around and dilute people out is different.”TOUGHER STANCE
Last December, HKEx and the Securities
and Futures Commission issued a joint
statement stating that they were keeping a
closer eye on rights issues and open offers
that substantially dilute the interests of
non-subscribing minority shareholders.
According to HKEx, highly dilutive offers
represented 3% of all funds raised between
2013 and 2016 with a cumulative value of
around HK$48bn (US$6.15bn).The exchange has been knocking back
issuer proposals with increasing regularity
in the last few months, according to market
sources.
In the past month, CHINA AGRI-PRODUCTS
EXCHANGE , a producer of agricultural products
listed on the main board, said that the
exchange had rejected its proposed rights
issue and placing of convertible notes.
$AVIDû7EBB ûANûACTIVISTûINVESTORûANDû
former HKEx director, expressed concerns
THATûTHEûREFORMSûWEREûINSUFlCIENT ûHOWEVER
“There are some good proposals
in the capital raising paper, but they
don’t go far enough, and they don’t
address the continued infringement
of shareholders’ pre-emptive rights by
allowing a 20% placement at a 20% discount
without offering the shares to existing
shareholders,” he said.
Under the current rules, companies
are allowed to issue warrants for up to
20% of the issued shares, subject to a 20%
discount limit. The proposals limit the use
OFûWARRANTSûTOûSPECIlCûMANDATES ûBUTûDOûNOTûban such steep discounts outright.
The stock exchange operator also wants
to be able to initiate a delisting process
for companies listed on the main board
after a continuous suspension of a certain
duration. That period could be 12, 18 or 24
months, depending on the outcome of the
consultation.
Once the period has elapsed, HKEx
would be allowed to publish a delisting
notice and give the company a period of
time to address any relevant issues to avoid
delisting, or in some cases, delist the issuer
immediately.
For the Growth Enterprise Market, HKEx
has proposed a shorter suspension period
of six to 12 months before delisting would
kick in.
Under the current rules on the main board,
COMPANIESûWITHûINSUFlCIENTûOPERATIONSûORû
assets face a three-stage delisting process with
each stage lasting six months.
At the end of each stage, the exchange
has to assess whether it is appropriate
to proceed to the next stage, and market
observers view it as unnecessarily
convoluted.
“At present, the delisting process is
painful, to put it mildly,” said the member
of HKEx’s listing committee.
“The rules basically have an 18-month
period for delisting, but it’s not 18 months
because at each phase the company can
appeal. If you really try, you can probably
stretch it out to three or four years quite
happily.”
According to HKEx, as of June 30, the
securities of 56 issuers had been suspended
for three months or more. Of those, 40 had
been suspended for over a year.
The proposals come after a number of
corporate governance scandals, including a
penny stock crash in June, blamed in part
on backdoor listings.
In the past month, the HKEx and
SFC backed down over plans for a new
committee to approve listings, which
some market observers had hoped would
improve market standards.
Responses are due on both consultations
by November 24.
HKEx has said it will issue further
consultation papers on backdoor listing and
continuing listing criteria.
THOMAS BLOTTTOP STORY REGULATION“At present, the delisting
process is painful, to put it
mildly. The rules basically
have an 18-month period for
delisting, but it’s not 18 months
because at each phase the
company can appeal. If you
really try, you can probably
stretch it out to three or four
years quite happily.”