HKEX tightens backdoor listing rules value of Chapter 21 firms rises
The Hong Kong Exchanges and Clearing Limited (HKEX) has kept on tightening rules and regulations to curb backdoor listings and shell activities. However, the value of companies under Chapter 21, which could be used as shell companies, has been rising as the HKEX finds it hard to delist those companies.
These policies include amending the continuing listing criteria and delisting companies after an 18 continuous months of trading suspension.
Shell companies may be affected by the new rules
Daily turnover of shell companies has decreased after the HKEX tightened listing rules last year, said Francis, Kwok Sze Chi, CEO of Emperio Securities and Assets Management Limited.
“In the past, some market makers might acquire shell companies if they had excess capital because the price of shell companies increased continuously,” Kwok said.
Legislative councillor (Financial Services), Christopher Cheung Wah-fung said that the HKEX approved the listing of companies easily, especially for companies seeking a listing on the Growth Enterprise Market (GEM). Some companies are listed by introduction or placing while public offering is not required so it would be easy for their shares to be concentrated. Therefore, market makers can control those shell companies, and sell them at a higher price later when shell companies are in demand.
“Restricting the listing rules can halt the behaviours of controlling the market and decrease the number of shell companies,” Mr Cheung said.
However, financial columnist Cheung Hiu Fung said the impact of tightening the listing rules is not obvious, because of the large number of shell companies in the market.
“Restricting the listing rules has made it harder to produce shell companies. But if market makers want to acquire shell companies, they still have many choices. The transaction of shell companies decreased due to the US-China trade war as many Chinese would like to repatriate their capital back from Hong Kong,” Cheung Hiu Fung said.
The value of companies under Chapter 21 increased
Companies listed on the Main Board under Chapter 21 of the Stock Exchange's Listing Rules are investment vehicles whose primary purpose is to invest in listed or unlisted securities, including warrants, money market instruments, commodities, options and futures contracts.
Companies such as China Merchants (00133), CH Innovation (01217) and China INV Fund (00612) are under Chapter 21.
“The companies under Chapter 21 are different from other companies. Their initial public offerings are opened for professional investors only. After the HKEX restricted the listing rules, the value of these companies may increase, because it is harder to list as a Chapter 21 company,” Kwok said.
Stanley Wong, financial columnist and former executive director of EJE HOLDINGS（08101） said that companies under Chapter 21 are shell companies that should not be delisted.
However, the companies under Chapter 21 are funds. According to the Listing Rules, they cannot hold more than 30% of the ownership of certain companies. Therefore, they should not have any main operations. Without the main operation, It is difficult for HKEX to delist them from the market,” Wong added.
Wong said that the value of companies under Chapter 21 has increased. Yet, compared with the past, the transaction of companies under Chapter 21 remains unchanged.
“In the past, companies under Chapter 21 can issue new shares easily. In addition, they always use stock consolidation and the rights issues at a large scale with big discounts. At the same time, the companies under Chapter 21 can acquire shares from market-makers, who is related to the companies,” Wong stated.
“The previous transaction of listed companies under Chapter 21 was EAGLERIDE INV (00901),” Wong added.
Cheung Hiu Fung said that the impact of restricting the listing rules on the companies under Chapter 21 was insignificant, because the latest company listed under Chapter 21 was Cnewecon Fun (00080) in 2011.
“The shell value of the companies under Chapter 21 would not increase. However, the shell value of the whole market decreased. For example, the price of a shell company under the main board is around HK$400 million to HK$500 million recently. The shell value of the companies under Chapter 21 is lower than those under the main board,” Cheung Hiu Fung said.
“Companies under Chapter 21 should not be treated as shell companies. Market makers buy shell companies, to change the main operations of those companies, but the main operations of the companies under Chapter 21 must be an investment,” Cheung Hiu Fung added.
He mentioned that the stock price of China INV Fund had increased continuously in recent years. “The price of China INV Fund increases, because of cornering a market.”
Owners and investment managers benefit the most.
Kwok and Wong agreed that shareholders should benefit the most when the value of companies under Chapter 21 increases. Besides, the existence of investment managers is required for the operation of the company under Chapter 21. Therefore, investment managers should also benefit.
Cheung Hiu Fung does not agree that the value of companies under Chapter 21 will increase, because companies under Chapter 21 may not be benefited from tightening the listing rules.
《The Young Financial Post 新報人財經》
Debt default to rise amid China's deleveraging drive