Hong Kong's Penny Share Report A Whitewash

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

12 September 2002

As expected, the 2-man enquiry panel into last month's 'penny share' fiasco has managed to avoid blaming anyone, let alone recommending any resignations.

When HKEx issued a consultation paper last month suggesting that low-value shares should be delisted, investors rushed to dump low-priced stocks threatened by the proposals, and the Exchange was forced to withdraw its proposals for further consultation.

The original proposals recommended delisting for shares that fell below a certain level for a given number of days, effectively condemning most penny shares to death, but was short on mechanisms for life after such death.

The panel's 181-page report says that Secretary for Financial Services and the Treasury Frederick Ma Si-hang "clearly misinformed" Financial Secretary Antony Leung Kam-chung; but Mr Ma refused to apologise yesterday, saying the panel was of the view that he had not failed in his responsibilities.

"It has criticised my performance in Legco as sub-par and noted that many citizens shared this view. I accept this criticism sincerely," he said.

The panel had been expected to suggest changes both to HKEx's delisting proposals, and also to the structure of market regulation, but its main suggestion is just that the government should review its three-tier regulatory structure, whereby the administration, the Securities and Futures Commission (SFC), and Hong Kong Exchanges and Clearing (HKEx) together oversee the functioning of Hong Kong's capital markets.

When HKEx released its consultation paper, which included 11 criteria for delisting poorly performing stocks, the stock market fell sharply. The panel said the plunge may well have been triggered by the release of the consultation paper, but other factors were involved. These included weak market sentiment, low investor confidence levels, and the volatile nature of penny stocks.

"We did not discover the serious cancer which we were led to believe existed. Instead, we uncovered some instances of errors of judgment, some perhaps even understandable under the circumstances, a few mishaps, examples of miscommunication and some systemic wrinkles here and there," the report said. "None of the shortcomings are in themselves major.

"To the regulators, investors and the economy as a whole, the penny stocks incident has been a costly lesson. We should now let the past take care of itself and move on. The government and the regulators must be on guard to avoid the reoccurrence of similar incidents in the future."

Chief Executive Tung Chee-hwa said that although Mr Ma had erred, he would be the wiser for his mistake, and did not deserve to be punished.

The closest that the report comes to actual criticism of any official is to say that HKEx chief executive Kwong Ki-chi "would have to bear responsibility on behalf of HKEx for any major policy shortcomings in the preparation and release of the consultation paper". But it said that Mr Kwong had been following strict practice.

Recommended