Good morning, ladies and gentlemen. I am honoured to have this opportunity to talk to you here today. Following the financial scandals in the United States earlier this year, the market everywhere has shown intensified interests in the quality of the market. The quality of the market is crucial for investor confidence and, in our case, for maintaining Hong Kong's leading position as the Asian hub in the global financial markets. We believe that the quality of the market is dependent on the interaction of various key components of the market: issuers, investors, intermediaries, infrastructure and information. These so-called "5-I" components are inter-linked and reinforce each another, and together they contribute to the quality of the market.
Role of the Exchange
As the market operator, Hong Kong Exchanges and Clearing Limited (HKEx) aims at balancing and optimising the various objectives of the different market components by imposing minimum requirements and standards on issuers, building investor confidence and stimulating market activities. HKEx, working together with the Securities and Futures Commission and the Government under the "three tiered regulatory structure", develops and implements the relevant policies, systems and products that meet broader market needs and facilitate the achievement by the various market players of their objectives.
As the first tier regulator of listed companies, we are responsible for maintaining a fair, orderly, efficient and transparent market through, inter alia, our implementation of the Listing Rules. The Listing Rules set out mandatory requirements regulating corporate processes and actions of listed companies to ensure the protection of shareholder rights and the proper disclosure of information to the public. The Listing Rules also contain a set of guidelines and minimum standards for listed companies on corporate governance.
HKEx reviews the Listing Rules from time to time to ensure that they are in line with the best current market practices and international standards. We also take into account the particular circumstances in Hong Kong so as to achieve an appropriate balance between the protection of shareholder rights and commercial practicality.
The performance of listed companies is one of the key elements contributing to the quality of the market. We believe that performance can be measured by a company's standard of corporate governance and financial performance.
Standard of corporate governance
Good corporate governance practices help to ensure that directors, controllers and managers of companies are held properly accountable to their shareholders. In particular, they enhance the effectiveness of the board and improve the transparency of an issuer's business and operations, thereby increasing protection of shareholder rights.
In order to enhance the corporate governance standards of listed companies, we published a consultation paper in January this year to seek market views on proposed amendments to the Listing Rules on corporate governance issues. The proposals in the paper focused on three main areas: protection of shareholder rights; directors and board practices; and financial reporting and disclosure of information.
The consultation period ended on 24 May 2002. We have received many responses and constructive comments from the market. No doubt, many of them have come from you. While most of our proposals have received general support from the market, we have received diverse views on a number of the more contentious proposals, such as:
- Issue of shares under general mandates;
- Transactions between connected persons and associated companies; and
- Quarterly reporting.
Quality of market
As part of our on-going effort to improve the quality of the market, we published a consultation paper in July this year to seek market views on proposals relating to initial listing criteria, continuing listing criteria and procedures for the cancellation of listing. Following the release of that consultation paper, there were public concerns over the proposals relating to continuing listing criteria. In response to these concerns, we withdrew Part C of the consultation paper that dealt with those criteria and announced our intention to issue a new consultation paper on the relevant issues towards the end of October.
Since then, we have held many meetings with representatives from different market sectors, including broker associations, listed companies and professional bodies, to seek their views on continuing listing eligibility criteria and low-priced stocks. This sounding out process has taken longer than originally expected; and the views of the various parties are diverse. So we are now aiming to issue the consultation paper next month. This consultation paper (the New Consultation Paper) is intended to seek market views on options for setting continuing listing eligibility criteria and whether additional regulatory requirements should be imposed on companies whose share prices are low.
Let me now briefly outline the main issues to be raised in the New Consultation Paper. They fall into 3 main areas: possible options for minimum standards for continued listing, various issues relating to low-priced securities, and alternative treatment of securities delisted from the Main Board.
In our sounding out exercise, some have expressed a view that a listing status is a privilege and not a right, and the performance of a listed company is not a one-off question at the time of initial listing. Therefore, these commentators consider that listed companies should be required to maintain a minimum level of performance on a continuing basis after listing. Under the current Listing Rules, a listed company must carry out a sufficient level of operations or have assets of sufficient value to warrant its continued listing. Apart from this general descriptive requirement, the Listing Rules contain no quantitative continuing listing standards. Some commentators consider that, in order to maintain the level of performance of listed companies, it is necessary to introduce certain minimum standards for maintenance of their listing status. Such minimum standards should be based on objective, clear and transparent quantitative and qualitative criteria, such as whether a listed company continues to achieve certain minimum financial criteria and investor acceptance.
However, there are also views suggesting that there is no need to introduce such minimum standards, and that judgement of the performance of listed companies should be left to market forces. This means that we should allow the market to automatically regulate itself in such a way that under-performing companies which are likely to face difficulties in raising funds or have to pay a high premium to raise funds, would eventually exit from the market through market forces.
In the New Consultation Paper, we will seek views on whether there should be any continuing listing eligibility criteria. We will also put forward a number of possible options of minimum continuing listing standards for market consideration. The options are predicated on the belief that the performance of listed companies may be measured by reference to their achievement, both quantitatively and qualitatively. Financial standards, such as profit, market capitalisation and shareholders' equity, may help investors assess the financial performance and level of investor acceptance of a listed company after listing. It will therefore be appropriate to consider whether a listed company should be required to take remedial action if it has failed to meet certain minimum financial standards.
Other than specific financial standards relating to the performance of a listed company, the feedback from the market in the past couple of months suggests that it will be appropriate to consider whether a listed company should be required to take remedial action where any of its net assets, total assets, operations, turnover or after tax profits have been or are to be substantially reduced or depleted as a result of a corporate action, so that its remaining business will be unable to meet all the initial listing eligibility criteria. We will therefore be consulting the market on this as well.
In addition to meeting the financial standards, it is of course crucial that listed companies comply strictly with the Listing Rules. Hence, in the New Consultation Paper, we will propose for consideration that the Exchange may, at its discretion, subject those companies that have persistently failed to comply with the Listing Rules to the cancellation of listing procedures. In this connection, the frequency and nature of the breaches will be taken into account. What I have just outlined are only a few examples of the options on the possible standards that will be discussed in the New Consultation Paper. We propose that the continuing listing criteria, if supported by the market and implemented, should only serve as a trigger point for a listed company to take appropriate action to remedy the breach(es) in order to maintain its listing status. Only if the listed company has failed to take appropriate remedial action to restore itself to long-term, sustained compliance with the continuing listing standards would it be subject to the procedures for cancellation of its listing. All such cancellation would have to be approved by the Listing Committee and is subject to natural justice. Furthermore, we will consult the market on what would be the appropriate transitional arrangements before the new rules become effective.
Various issues relating to low-priced securities
I now turn to the more controversial question of low-priced securities. There have been market criticisms and investor complaints about certain corporate practices of some listed companies that have resulted in a substantial dilution of their minority shareholders' interest or a drop in their share prices. These commentators tend to associate their concerns over such corporate practices with low-priced securities in the market.
Dilution through placing under general mandate
In Hong Kong, it is common for listed companies to raise capital by the placing of shares under a general mandate or by a rights issue. The current Listing Rules allow a listed company's existing issued share capital to be increased by up to 20% through the issue of securities under a general mandate. There are no restrictions on the number of times a general mandate may be "refreshed" or on the price at which securities may be issued under the general mandate. There are views that some controlling shareholders have abused the use of general mandates and placed shares at a substantial discount to the market price. This has resulted in a substantial drop in the share price of the company concerned and a massive dilution of minority shareholders' interests.
Dilution through rights issues
For a rights issue, the listed company issues securities to its existing shareholders on a pro-rata basis. If the existing shareholders decide not to take up all their entitlement for whatever reason, their interests will be diluted after the rights issue. Some commentators consider that certain listed companies have undertaken repeated rights issues which have resulted in the unfair dilution of the interests of those minority shareholders who have decided not to exercise their rights.
We recognize these concerns and have consulted the market through our Corporate Governance Paper issued in January this year. Specifically, we have asked the market whether there should be any restrictions on refreshment of general mandates and placing of shares at a substantial discount and whether the existing independent shareholders' approval requirement should be retained for any rights issue that increases the issued share capital or market capitalisation of the issuer by more than 50%. In the light of the market response, we are inclined towards stipulating additional requirements to address the concerns expressed.
Combination of consolidation, sub-division of shares and rights issue
Share consolidation and sub-division is another major area of concern in the market. Listed companies may undertake consolidation or sub-division of shares for specific reasons. In some cases, listed companies are required to undertake share consolidation in order to comply with the Listing Rules or the relevant regulations in their place of incorporation. Some commentators consider that repeated share consolidation undertaken by a listed company may have a spiraling down effect on its share price. This would result in a diminution of the value of shares held by shareholders. The situation may get worse if a share consolidation is immediately followed by a rights issue, which will put further pressure on the share price of the listed company. Therefore, there are views from the market suggesting the need for new restrictions on listed companies undertaking certain corporate actions such as share consolidation and share subdivision.
We believe that the share price of a listed company should reflect its fundamentals and underlying value. We also recognize that there is no necessary relationship between the share price of a listed company and its standard of corporate governance. Moreover, at least in theory, share consolidation or sub-division should not affect the aggregate share value of a listed company and shareholders' proportionate interests in that company, unless there are other external factors that have a negative impact on the adjusted share price. Any significant change in the adjusted share price that is a result of market manipulation should be subject to the applicable rules and regulations. Nevertheless, given the wide spread market concern, in the New Consultation Paper, we will seek views from the public as to whether a listed company should be subjected to any additional requirements or restrictions on its corporate actions, if its share price is low.
Fair and orderly market
There are views that a preponderance of low-priced securities would be detrimental to the maintenance of a fair and orderly market in Hong Kong and therefore the quality of the market as a whole. A key issue is the lack of transparency in the trading of low-priced securities. This is because trading of securities at prices below one cent can only be executed on the Semi-automatic Matching system of the Exchange. Unlike the Automatic Order Matching and Execution System (AMS/3), the Semi-automatic Matching system is only accessible by Exchange Participants and it does not provide real-time bid or ask information to the market. This lack of transparency does not enable investors to make informed investment decisions. There are also views that low-priced securities may lead to misconception by less sophisticated investors. Without verifying the fundamentals of an individual listed company, they may be led to believe that low-priced securities are "cheap" and "worth buying" in the sense of being good value for money, by virtue of the fact that the minimum investments involved would also be low. As a result, they may have taken on risks which they have not fully understood when investing in these low-priced securities.
Notwithstanding the foregoing concerns, there are contrary views that a large percentage of retail investors and low-priced securities is a feature of the Hong Kong market, and we should take into account these local characteristics and needs in developing the regulatory regime. Some commentators consider that our market should provide a wide variety of investment choices to investors with different risk profiles and trading objectives. They consider that trading of low-priced securities should not be restricted as long as there is transparency of trading and investors are fully aware of the risks involved in investing in those securities. Therefore, the solution should be to improve the current trading system to promote transparency and to undertake investor education to increase investor sophistication. In the New Consultation Paper, we will ask the market for views on whether or not a listed company should be required to undertake any appropriate remedial action if its share price falls below a certain benchmark and if so what that benchmark should be. We will also ask what the market considers to be appropriate remedial actions in such circumstances.
Alternative treatment of securities delisted from Main Board
In the feed back from the market, significant concern has been expressed on whether there will be any exit mechanism for shareholders holding shares of companies that have failed to meet the proposed continuing listing standards and are faced with possible delisting. In the New Consultation Paper, we will discuss various alternative treatments of securities delisted from the Main Board, using experience in other overseas markets as reference. They include establishing a third board, establishing alternative over-the-counter type of trading arrangement, requiring compulsory buy-back by controlling shareholders and compulsory winding-up of the company. We will seek market views on these alternatives. Depending on the alternative, a whole range of complex regulatory and operational issues may need to be resolved before it could be implemented. Subject to the market views to be collected from the consultation exercise, we may issue a separate consultation paper on the preferred option.
Closing remarks
We understand that issues relating to continuing listing standards and low-priced securities are controversial in nature and have raised many market commentaries of late. I would like to emphasise that the proposals and options set out in the New Consultation Paper are intended to encourage consideration and debate by the market. We remain open-minded as to what would be the best way forward for Hong Kong and would welcome views and suggestions of alternatives. Given the importance of the issues involved, I urge you all to give us your detailed responses, including explanations for your views on the areas covered in the new consultation paper.
As the front-line market regulator, HKEx has a major responsibility for the quality of the market. However, development of a quality market place depends on the joint efforts of listed companies, investors, regulators and market practitioners. With your support, I am confident that we will be able to develop our regulatory regime in such a way as to further enhance the quality of our market and reinforce our status as an international financial centre.
Thank you.
