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Asia CommentGC Asia View

HKEx on the losing end in dual-class debate


The issue of weighted voting rights (WVRs) is firmly back on the agenda for Hong Kong, with the stock exchange flagging their possible implementation next year. But with thin demand for the structure and the low likelihood of another Alibaba-sized listing, these efforts may come to naught.

Hong Kong Exchanges and Clearing (HKEx) last week took another step towards making dual-class shareholding a reality in the city-state, unveiling a list of draft recommendations that will go into public consultation by the end of the year. 

The move is seen as a riposte to the sting of losing Alibaba Group’s blockbuster $25bn IPO, after the Chinese e-commerce giant famously ditched Hong Kong for the New York Stock Exchange, where WVRs are a common feature.

But the HKEx is taking it slow, insisting on a wide range of conditions to be met for WVR structures. If and when they come into being, only certain issuers in very specific circumstances, the regulator has asserted, can gain access to WVRs.

For example, WVRs will be open to new applicants only, and on top of adhering to a string of disclosure requirements they must pass a very high market capitalisation test, likely to be in the billions of dollars. Moreover, the voting activities of those holding WVRs will be closely monitored.

Of course, the argument for the introducing WVRs is not difficult to comprehend. HKEx’s move is a timely one considering the wave of US-listed Chinese companies that are going private, ostensibly to relist at home, lured by soaring valuations in the A-share market.

The stock exchange is also badly in need of some diversity. Hong Kong is dominated by banking or property names, which has led market participants to call for a more inclusive bourse, and one that might support China’s burgeoning firms in the technology, media and telecommunications (TMT) space.  

However, the absence of WVRs is not the main reason Hong Kong has been missing out on TMT listings. Any respectable tech company knows that by going to the US it will not only gain a global profile but will also tap the largest market in the world for such IPOs.

HKEx would do well to realise that supplanting this position, even for China-based issuers, is a nigh-on impossible task. Another thing it should realise: the “one share, one vote” policy is what stands Hong Kong apart from its rivals in the US, and for good reason.

That all shares carry equal weighting in Hong Kong has been a hallmark of its market, and the key to protecting the rights of shareholders. That’s why fund managers like BlackRock, Fidelity and State Street said no to changing the status quo after HKEx released a concept paper last year.

Limited pool

In practice — though not on paper — the bourse is already quasi-WVR. The ubiquity of low free-floats and high concentration of ownership in Hong Kong has the same effect as a WVR, which tips the scale quite inordinately in the favour of a small group of executives.

Couple that with the inability of minority shareholders to bring class action lawsuits in Hong Kong, unlike in the US, and it is clear that giving WVRs the green light may only serve to erode investors’ rights in a market where the controlling shareholders hold so much sway.

In addition, by putting in very strict limits on who can and can’t use WVRs, the HKEx is limiting the pool of potential issuers to the next Alibaba, which by most accounts was an outlier. Even if WVRs see the light of day, few companies are expected to jump on the bandwagon.

Chinese issuers have tapped the equity capital market with almost $30bn in new listing volumes year-to-date, a fair chunk of which has come through Hong Kong. It would be disingenuous to say that Hong Kong is not, in its present form, an attractive gateway for China.

But if TMT firms are what the HKEx is looking to entice, it is fighting a losing battle. China is in the midst of making it easier for loss-making start-ups to list onshore by doing away with profitability criteria. And just last week, it announced that foreign investors can fully own e-commerce companies.

Nobody will take issue with the fact that HKEx wants to increase its appeal as a listing destination. The regulator deserves kudos for being responsive to the loss of Alibaba, which was no doubt a big blow, and for taking proactive steps to make sure it doesn’t lose the next one.

But the truth is that there are bigger structural issues at play, and not simply the lack of WVRs. Unfortunately, opening the way to multiple classes of shares in Hong Kong will not open the floodgates.

What it might open instead is a can of worms. 

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