Ever since the Hong Kong Stock Exchange (HKEx) lost Alibaba Group’s jumbo $25bn IPO to Nasdaq last September, debate has raged about whether the Asian city’s authorities made a huge mistake in letting the trade go. One reason the Chinese online company opted for the US was because listing there allowed it to have both common and voting shares — something Hong Kong doesn’t allow.
Rather than rush to change, the HKEx started a consultation on the dual class shareholding structure — which it calls weighted voting rights — in August last year. Many in the market said the authority was too little too late, having already lost the largest listing on record to the US.
For a while the debate went quiet. But market participants have seized the words of the chairman of the Securities and Futures Commission (SFC), who said last week that the regulator was open to the idea of dual-class shareholding, as long as companies met certain criteria.
Among the conditions he outlined were founders not holding a dominating stake in the firm and introducing measures to ensure investors are always protected.
The first consultation phase ended in November, but the HKEx — which will need the SFC’s go-ahead to implement any reforms — is yet to announce its findings. There is even speculation that it may conduct a second round of consultation before announcing any changes.
The pressure is certainly on the HKEx. If competing with the US exchanges was not enough, China is also trying to catch up. The China Securities Regulatory Commission plans to move its IPO process from an approval-based system to registration-based this year, while also intending to allow companies with no profit record to list onshore — a move to entice high growth potential, but loss-making tech companies.
The Singapore Exchange too announced changes to its Companies Act in October 2014, aimed at abolishing the one share, one vote rule for public companies.
Ticking all the boxes
After all, good corporate governance is always a key demand from investors, and that’s one of the reasons the US exchanges attract so much liquidity.
Unfortunately Asia still has plenty of work to do in the area of corporate governance. This is underpinned by the recent performance of two stocks. Hong Kong-listed Hanergy Thin Film Power Group and Golden Financial Holdings have put in strong rallies in the past six months of around 360% and 280% respectively.
Yet despite the surge in share price, neither company has offered the exchange any explanation. This would be unheard of in the US and is a strong argument against introducing a share structure that gives one set of investors greater power than others.
This is especially so in a market like Hong Kong, where retail investors play a big role and their protection is paramount.
Moreover, if the biggest impetus for reforms is to attract more tech stocks, it is worthwhile remembering that the tech craze might be fading. A large number of Chinese internet names that listed in the US last year are now trading below their issue price. Earnings announcements have disappointed, and has slowly dented investor confidence in the tech story.
By taking it slow, Hong Kong has got the right idea. After all, in the race between the hare and the tortoise it was the latter that emerged victorious. Hong Kong’s case may yet again prove that slow and steady wins the race.