Hong Kong Exchange Attacked Over De-Listing Criteria

by Mary Swire, Tax-News.com, Hong Kong

30 July 2002

After Hong Kong's stock market regulator, Hong Kong Exchanges and Clearing, issued a consultation paper on Thursday listing proposed criteria for de-listing stocks which would scythe down hundreds of 'penny' shares, investors with such holdings rushed to dump their stocks and HKEx was accused of being irresponsible and irrational by brokers inundated with panicking investors.

The eleven de-listing criteria proposed by HKEx included trading below 50 HK cents for 30 consecutive days and, for a company with negative shareholder equity, reporting three consecutive years of losses.

Almost all the 380 shares traded below 50 HK cents faced selling pressure, with falls for penny shares (stocks traded below 10 cents) ranging between 20% and 90%.

David Wong Kwok-on, president of the Hong Kong Securities and Futures Industry Staff Union, told the South China Morning Post: "The investors are so panicked and so frightened that they requested their brokers sell out their penny stock holdings at any price. The HKEx is irresponsible to give out de-listing proposals but not provide a mechanism for investors to trade the de-listed stocks. Investors were so worried they would be trapped that they preferred to have an early exodus from the market."

Taken aback by the reaction to HKEx's proposals, the Securities and Futures Commission rushed out a statement, insisting that "an effective de-listing mechanism is good for the market as a whole and for the reputation of Hong Kong as an international financial centre". The SFC said there wasn't high volume in low-priced stocks yesterday - the turnover of the top 30 losers was HK$84.3 million, about 1 per cent of market turnover.

It seems obvious that if stocks are to be de-listed without any provision for a replacement trading mechanism (over-the-counter trading for instance as in London) then the de-listing criteria become self-fulfilling prophecies, and any stock falling below 50 cents would get sucked into a black hole cunningly created by HKEx.

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