Wednesday, October 14, 2015
Concern expressed by Securities and Futures Commission chairman Carlson Tong Ka-shing over abnormal cases in the Growth Enterprise Market cannot be more timely.
The concern's not about volatility, which is normal for an open market like Hong Kong.
Rather, read Tong's lips: companies without actual businesses shouldn't apply for listings in the bourse if they come here only for shell sales, referring to the sales of controlling stake to outsiders.
In other words, Tong is of the view - although he does not say it out loud - that a number of firms recently listed on GEM are here not due to normal business needs, but for the listing status.
His expression of concern is a wake- up call.
Market participants know a shell company can be sold for top dollar. In 2008, a shell company on GEM fetched HK$100 million. Now, the price has more than doubled to HK$250 million.
Although it isn't as lucrative as its big brother in the main board - where a shell company can command HK$500 million - the return is nevertheless attractive.
Compared to the main board, it's a lot easier to get listed on GEM. If a company is able to maintain a positive cash flow of HK$20 million under the same management for two years, along with having a music-to-the-ears story to share, it can apply for a listing.
The procedure is simple. In most cases, the green light from the exchange listing department is all that's needed.
Tong now says complicated applications will have to be scrutinized by the higher authority of the Listing Committee.
SFC chief executive Ashley Alder's comment that the SFC will take the issue seriously amounts to something that must be reckoned with.
Using shell companies to list is part of market operations.
It becomes a problem when the system is abused, for it can endanger our market reputation.
While Tong may appear to have targeted GEM in the face of criticisms that it has degenerated into becoming a shell-making mill, very likely it's also a warning shot for the main board too.
So far this year, GEM has recorded the highest number of new listings in 12 years.
While it's unfair to say all of them are shell companies for sale, there is no question the market price of a shell company is soaring - more so after Beijing suspended new listings in the mainland to bail out the A-share market.
Buyers aren't concerned about the business model or management of a shell company. They simply look for a Hong Kong-listed vehicle to hold their business and wealth. A clean shell, meaning one having very little debt and legal liabilities, is valuable.
As has been said before, a back-door listing can be a problem by compromising market quality. It's necessary for the SFC to act to prevent this.
That the stock exchange is being asked to pass complicated cases to the Listing Committee shows the SFC is already acting.
Policing won't stamp out the thieves as long as there are valuables to steal.
However, it's always better to act than not to act. Otherwise, our market will be undermined.
http://www.thestandard.com.hk/news_detail.asp?pp_cat=15&art_id=162185&sid=45366948&con_type=1&d_str=20151014
