If the Government considers it necessary to change the IPO mechanism, I believe that it should first regulate the impact assessment and analyze the cost-effectiveness involved, including the impact on different stakeholders such as the society, business community and regulatory bodies.
As the scale of global financial markets is getting larger, operating conditions are becoming more complex. Coupled with the substantial increase in the need for emerging industries and high-tech enterprises to raise capital in the stock market in recent years, Hong Kong indeed has to explore matters relating to improving the listing mechanism in order to ensure that its regulatory decision-making process, governance structure and efficiency are able to meet the needs of the rapidly developing market. Regrettably, some of the major reform proposals in the consultation paper on listing policy are not amply justified and are also controversial.
Regulatory reform hinders SME financing
Free market principles and appropriate regulation are the cornerstones of Hong Kong’s economic success. Any hasty changes made to the listing mechanism, such as adding unnecessary obstacles, could make it difficult for SMEs to raise capital and impede their development. In the long run, it will also undermine Hong Kong’s competitiveness and its position as an international centre for business, trade and finance.
The consultation paper proposes to establish two new committees under the existing listing regulatory framework, i.e. Listing Policy Committee and Listing Regulatory Committee. The former will steer the overall listing policy, while the latter will mainly deal with the approval of complex listing applications. Depending on the complexity and suitability of the listing applications, the Listing Department of the Hong Kong Exchanges and Clearing Limited (HKEx) will determine whether to forward them to the Listing Regulatory Committee or let the original Listing Committee continue the approval process.
Adding two new committees will provoke concerns
I have four areas of concerns regarding the addition of these two committees and the related allocation of powers and responsibilities. Firstly, the consultation paper has not provided a detailed definition or specific description of what is meant by “suitability”. The new proposal has also failed to clarify how the Securities and Futures Commission (SFC) will co-operate with the Listing Department to ensure that only cases concerning suitability and having an impact on the listing policy will be referred to the Listing Regulatory Committee. This will affect approval efficiency as the Listing Department has to determine whether the applications have suitability concerns, while the SFC may become conservative in approving applications in order to reduce errors and tend to reject listing and financing applications that are seemingly complicated or unsuitable. Hence, this will affect Hong Kong’s position as a financing centre and hamper the financial sector’s long-term development.
Secondly, under the existing mechanism, all listing applications will be submitted to the HKEx’s Listing Committee for approval. The SFC only has veto power to reject listing applications. This relatively simple regulatory model offers “front and back protection” and has clear division of duties. Moreover, it provides checks and balances for the entire listing approval process. However, the new proposal divides the existing application process into two, making the listing application procedure more complicated, which will affect the efficiency of approval and slow down the decision making process. This will only lead to duplication and redundancy.
“Second line of defense” becomes approval decision-making
Thirdly, the proposed Listing Policy Committee and Listing Regulatory Committee will be composed of eight and six members, respectively, all of whom will come from the SFC and HKEx. Compared with the existing 28-member Listing Committee, the eight-member Listing Regulatory Committee clearly lacks industry representativeness and comprehensive expertise. At the same time, with the power overly concentrated in the hands of a small number of people, the committee may not be able to balance the needs and interests of different industries in the listing approval process. In addition, as half the committee members will be from the SFC, it will indirectly change the SFC, which originally “provides the second line of defense’’, from an independent regulatory body into a frontline approval decision-making department having full control of listing policy matters. This will lead us from the current disclosure-based regime back to a regulator-based one, which would be inconsistent with international practice.
Finally, as mentioned in paragraph 28 of the consultation paper, the HKEx’s Remuneration Committee will take into account the Listing Policy Committee’s evaluation when determining the relevant remuneration. In other words, the proposed Listing Policy Committee will control the performance appraisal of the Listing Department’s senior executives. If the Listing Department has to obtain the SFC’s prior approval on bonus distribution and promotion matters in the future, the department’s decision making would be subject to the SFC’s control for fear of offending it, which will indirectly allow the SFC to intervene in the HKEx’s daily operations. This will make people think that the SFC exerts pressure on the HKEx’s senior executives.
Better to focus on FinTech development
In summary, the consultation paper has failed to provide a convincing solution. It also has not explained why the recommendations put forward are more appropriate. If the Government considers it necessary to change the IPO mechanism, I believe that it should first regulate the impact assessment and analyze the cost-effectiveness involved, including the impact on different stakeholders such as the society, business community and regulatory bodies. With regard to the “stocks of shell companies” and “shadow accounts” issues that have attracted market attention, I believe that a more effective response is to formulate targeted laws for regulation, rather than change the existing listing regulatory framework, which is time-consuming and misguided. In my view, it is imperative for the Government to focus on the development of financial markets, especially in the area of financial technology, so as to provide a suitable financing platform for innovation and technology enterprises in order to attract more of them to get listed in Hong Kong, thus injecting new impetus into the Hong Kong economy.
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