HKEx and the kind of innovation we don't need
2 February 2016
China Innovation Investment Ltd (China Innovation, 1217) is a small closed-end investment company that we warned you about last year, but it paints a larger picture about HK stock market regulation. The company has an unaudited NAV at 31-Dec-2015 of HK$0.057 per share, and a share price of $0.067 (US$0.0086), making it a sub-penny stock in US terms, but according to an announcement last night (1-Feb-2016), the directors consider that the share price is too high! They propose an open offer of 2 new shares at $0.07 for every 5 held, followed by a 4:1 bonus issue (basically a 5:1 stock split) that would reduce the price to about HK$0.0136, together with a bonus warrant that would edge it down to $0.0134 if exercised.
The Stock Exchange rejects this (as it must, under Listing Rule 13.64) because it gets close to the minimum quote of $0.01 where the tick size is 10% ($0.001), so the company is appealing to the Listing Committee, which is now known to be keen on "innovations" such as listing second-class low-voting or no-voting shares, and is now supposed to consider a proposal for a third-class board for third-class companies, contained in the ballyhooed strategic plan (see index tab, slide 22) of Hong Kong Exchanges and Clearing Limited (HKEx, 0388) CEO Charles Li Xiao Jia.
Rather than create a third board, the sensible thing to do is adopt what we will call the "One Board, One Rule" approach:
- Clean up the existing 2-board mess by merging GEM with the Main Board and moving to a disclosure-based regime, eliminating the existing Main Board entry requirement of having made a certain profit in the year before listing, because that is just a target for accounting manipulation, and because after all, we don't delist companies just because they made a loss last year.
- Require all companies on the merged board to report quarterly, as GEM already does, and as dual A/H listed companies do, because the mainland requires it. For over a decade, HK has been the last major market in Asia not to require quarterly reporting.
- Scrap the requirement for a public offer tranche, because applying for IPOs is not a basic human right.
- The appointment and election of all so-called independent non-executive directors should be subject to approval by independent shareholders, or we should stop pretending that the INEDs are independent of controlling shareholders and management.
- Finally, the Listing Rules regulatory function should be moved to the SFC and combined with Takeovers Code regulation. That's the "One Rule" part.
Instead, Mr Li wants to divide the market further so that companies which can't meet HK listing standards (which already leave a lot to be desired) can still claim to be HK-listed. Has he learned nothing from last year? Perhaps he thinks that the Government is now willing to push the SFC to allow convoluted voting structures - after all, Hong Kong's Chief Executive is appointed by one. Instead, the Government should recognise Mr Li's proposal for what it is, another demonstration of the conflict of interests for HKEx as a for-profit regulator. It has been 13 years since the Government-Appointed Expert Group recommended moving the listing function out of HKEx to the SFC, which already regulates Takeovers and Mergers, but the Government has failed to act and continues to limp along with the defective "dual filing" system.
In the meantime, we seriously doubt that even the current Listing Committee would stoop so low as to find China Innovation's appeal appealing.
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