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Hong Kong bourse eyes new market in fight with Singapore over IPOs

Once dismissed, 'weighted voting rights' structure an option again

Chief executive of Hong Kong Exchanges & Clearing Charles Li Xiaojia

HONG KONG -- Amid fierce competition to lure technology companies to list in Hong Kong, the city's only stock exchange is considering launching a new board under a "weighted voting rights" structure, a controversial stock model that its regulator firmly vetoed in mid-2015.

The consideration, according to Hong Kong Exchanges & Clearing Chief Executive Charles Li Xiaojia, would hopefully be part of a "holistic" consultation that would also include a review of the Growth Enterprise Market board and the listing regulatory regime. Both have been under fire for providing fertile ground for shell companies' trades in Hong Kong.

Although Li emphasized that the bourse would like to make "meaningful, tangible progress" this year on issues surrounding public offerings, he did not specify when an official proposal might be launched.

Feedback about the consultation over introducing two new committees for overseeing listing policies and vetting applicants, jointly launched by the Hong Kong bourse and the Securities and Futures Commission last June, is still in the process of being studied, Li said.

Hong Kong's move follows that of rival Singapore. Loh Boon Chye, CEO of the Singapore Exchange, said last week that a public consultation on dual-class shares -- a structure allowing senior executives of a company to retain disproportionately large voting rights to their stock holdings -- is set to be launched by the end of the first quarter.

"We have given quite a bit of time for the topic to be discussed in the marketplace, so now we follow up with the public consultation," said Loh, suggesting that Singapore has moved faster than Hong Kong in reforming is listing regime. "We have broadcast our intention to offer various capital structures, dual class included."

Last year the Singapore Exchange only managed to raise $1.56 billion from five initial public offerings, representing 1.1% of the funds raised from primary issues globally, performing slightly better compared to the previous year when it hosted just one main board listing worth of $183 million, according to data from Dealogic.

Enticing global tech companies has thus become a strategic move for Singapore to lift its IPO market and close its gap with Hong Kong, which was ranked the world's No. 1 IPO hub for two consecutive years.

"While we fully understand the commercial pressures on SGX, and empathize with its predicament regarding IPOs, we do not see dual-class shares as any sort of panacea -- and it will raise both investment and regulatory risk," the Asian Corporate Governance Association wrote in a September report.

The Hong Kong bourse is likewise hoping to diversify its stock offerings on both geographical and sector bases as it increasingly positions itself as a conduit for mainland investors to invest abroad.

"Our market, from a fund-raised perspective, is still too mainland-focused. 79% of the funds raised between 2010 and 2016 is from mainland companies. It is still too sector-concentrated in financials and properties," Li told reporters last week. "Also we have very few, if any, new-economy companies that actually come to Hong Kong for listing. And that's a big problem for us."

Mixed views

Observers of Hong Kong's IPO market have mixed views toward a regime of weighted voting rights.

"The acceptance of dual-class share listings will enable the Hong Kong stock exchange to compete for premier founder-driven technology company listings," Stuart Rubin told the Nikkei Asian Review. Rubin led corporate transactions practice in Asia at London-based law firm Ashurt.

He noted that the Hong Kong bourse is "vastly underweight in technology company listings," which he identified as "an ever-increasingly important segment of the global economy."

"Successful founders within the technology sector often need to be truly visionary, anticipating or indeed creating market demand that may not exist at the time of product development," said Rubin. "For this reason, the ability to monetize their holdings and obtain equity funding to implement their vision without giving away shareholder rights that can restrict the direction of their company is a very attractive option."

Chinese tech mogul Jack Ma ditched Hong Kong for New York for Alibaba Group Holding's flotation in 2014 precisely for that reason.

Accounting consultancy PricewaterhouseCoopers believed introducing weight-voting rights into a new Third Board would be more appropriate than tweaking the rules of the GEM board -- because of potential disruption. The GEM board was established in 1999 to help high-growth companies raise capital, but was repositioned in 2008 as "a stepping stone" to the main board.

"There are so many companies listed on GEM at this point in time ... and also so many companies applying to get listed on the GEM board. If there are any fundamental changes to the listing requirement, a lot of people might get impacted," said Benson Wong, who led the entrepreneur practice at PwC Hong Kong.

Wong said tech companies have some common features that justify "tailored" listing requirements, such as huge expenses for research and development, equipment depreciation, or share option schemes, which might subject some companies to loss-making positions at the fledgling stage.

"We can have the Third Board. And at the very beginning, we just let the sophisticated, experienced or institutional investors participate," said Wong, adding that it can be gradually opened to retail investors as they become more astute.

While the Third Board will be reserved for new-economy or high-tech companies, the GEM board will likely remain secondary to the main board, said Eddie Wong, partner of capital market services at PwC Hong Kong.

Hong Kong's GEM board only raised 800 million Hong Kong dollars ($100 million) from nine tech IPOs last year, compared to the Nasdaq's HK$15.9 billion from 21 listings and Shenzhen's ChiNext's HK$7.9 billion from 23 offerings, according to data from PwC.

This is despite the Nasdaq commanding significantly higher underwriting and maintenance fees, according to PwC, which sees its advantage in offering considerable comparatives for new tech listings.

"Sometimes you look at a company and the governance structure may be not completely ideal, but the business is in such a strong position, you think maybe that's a price worth paying," said Tim Orchard, Singapore-based chief investment officer at Fidelity International.

But he emphasized that the Bermuda-headquartered asset manager is "proactive with stewardship code" and has strong interest "in defending minority shareholder interests." He added: "It's on a case-by-case basis," when asked about how weight-voting rights affect his investment interest in a company.

Nikkei staff writer Mayuko Tani in Singapore contributed to this story.

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