Bourse operator moves to protect small investors as backdoor listings gain prominence

Hong Kong's bourse operator is to intensify its crackdown on the speculative practice of creating shell companies in a move to protect the interests of small and medium investors, and improve the quality of listed companies.

Charles Li Xiaojia, chief executive of Hong Kong Exchanges and Clearing Ltd (HKEx), said on Wednesday stricter rules are in the pipeline to regulate reverse takeovers and backdoor listings - a fast track for firms that intend to go public by injecting assets into a shell company acquired.

He said HKEx will get tough with locally-listed enterprises that operate without any specific business and cash in on firms which plan to pay big money to secure a listing through them.

Li urged enterprises with real business to float through the traditional initial public offering procedures, rather than via shell companies.

The shell company business has long been seen as a thorny issue for the Securities and Futures Commission (SFC), and the exchange's Growth Enterprise Market (GEM) is believed to have been hard hit.

HKEx published revised rules in 2014 and 2015 to make it harder for companies to find an easy way to list through local shell companies with large asset or cash injections.

According to HKEx data, up to 12 companies had got themselves listed on the GEM in the first five months of this year, compared with 22 in the second half of 2015, and 34 for the whole of last year.

The strong demand for shell companies is reflected in the highly volatile local share prices, as speculators bet on listed firms to be sold as shell companies at a high premium, said GEO Securities Chief Executive Francis Lun Sheung-nim.

A cluster of locally listed companies have seen their stock prices ride the roller coaster, including Lap Kei Engineering (Holdings), which saw its share price plunge by a staggering 94.9 percent in a single-day trading session after having soared a whopping 1,900 percent on the first day of its listing.

According to Lun, GEM listing fees basically stand at HK$20 million, and listed companies could expect to raise funds of up to HK$50 million on average. However, the prices of shell companies on the GEM can reach HK$300 million.

HKEx had introduced revised guidelines to deal with speculative shell business in the past two years. In March this year, it revealed five shell companies-related transactions that had failed to obtain the green light.

The stock exchange also issued new rules late last year to ban the listings of cash companies, whose assets consist wholly, or substantially, of cash. The new regulations followed a surge in listed companies proposing large-scale fundraising efforts, triggering suspicious cash injections into these companies.

Hannah Li Wai-han, a strategist at UOB Kay Hian (Hong Kong), said HKEx's attempt to curb shell companies are a part of a broad review of the city's listing rules.

"Cracking down on unregulated speculative activities and upgrading the quality of listed companies are aimed at attracting more companies to float in Hong Kong and offering easier access to companies seeking to raise funds. This is where the SFC and HKEx should try to strike a balance," she said.

sophia@chinadailyhk.com

A view of Exchange Square in Central. The Hong Kong stock exchange is edging into a more stringent listing regime by intensifying its crackdown on the speculative practice of creating shell companies. Parker Zheng / China Daily

(HK Edition 06/02/2016 page9)