Hong Kong's Exchange Wants To Rank Listed Companies

by Mary Swire, Investors Offshore, Hong Kong

03 February 2003

Hong Kong Exchanges and Clearing (HKEx) revealed last week that it plans to classify the more than 800 companies listed on the main Exchange into different tiers, based on their risk profiles, in an effort to improve the transparency of quotations for investors. A recent attempt in more or less the same direction resulted in the 'penny-share' scandal last year when investors in stocks threatened with delisting panicked and rushed for the exit, losing much of their investments.

"The existence of a significant number of poorly performing companies is a genuine problem, not least as a matter of perception, which HKEx is seeking to resolve. Hong Kong's main board currently covers a huge range of companies, from global concerns to small local enterprises. There is, thus, a reasonable case for greater segmentation" said HKEx. The classification may take the form of prefixes to stock designations indicating level of reliability.

Hong Kong Society of Accountants president David Sun Tak-kei told the South China Morning Post that it would be difficult to classify firms into different grades. "Should they be classified on their size, profit, share price or corporate governance standards?" Mr Sun asked. "The exchange will face a lot of disputes as those put at the bottom will challenge it."

The Exchange's proposal also raises major liability issues. If HKEx labels one stock solid, and another feeble, it is opening itself to possible legal action by both sets of shareholders, not to mention the companies themselves.

"HKEx does not underestimate the difficulty of gaining market acceptance of the criteria for differentiating between tiers in the market nor the possible extent of resistance from companies that might feel they were being relegated," said HKEx.

The initiative from HKEX no doubt owes something to moves to hand over its responsibility for market supervision to the Securities and Futures Commission, whose role in relation to listed securities has not yet been fully defined.

HKEx is also saying that law should be changed to strengthen disclosure requirements to ensure accuracy of financial reporting, and plans to consult the market in the next two months on tougher rules for investment bank sponsors, financial advisers, reporting accountants, legal advisers and valuers.

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