The latest proposed rehash of the Listing Committee offers little for investors. Although they own the entire free float and over half the market cap, investors would be in an 8:20 minority on the issuer-dominated committee which makes the Listing Rules of the front-line regulator. The consultation itself represents a leap backwards in transparency, and we take the unprecedented step of urging investors to boycott the process.

Listing Committee Reviewed
20 February 2005

In the kind of announcement that gets slipped out late on a Friday afternoon, the Stock Exchange of Hong Kong Ltd (SEHK), a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Ltd (HKEx, 0388), on 18-Feb-05 published ineffectual proposals to restructure the Listing Committee which currently has a stranglehold over reforms to the Listing Rules.

For disclosure, your editor is an elected independent non-executive director of HKEx, but we didn't see the consultation paper before it was finalised, because the board of HKEx (apart from the Chief Executive) are not supposed to be involved in listing matters.


One of the long-standing complaints of investors has been that despite owning the entire free float of listed companies, and over half of the market capitalisation, they have had only token representation on the Listing Committee which makes the front-line rules of the market, with investor membership capped at 4 members out of 25 (21 on the GEM), and in practice, usually only 1 or 2 members. The other members comprise mainly representatives of listed companies and the people who advise them for a living - investment bankers, accountants and lawyers.

As a result, the committee has made very slow progress on raising Hong Kong's corporate governance rules - for example, proposals to require quarterly reporting and faster reporting were not carried through, while it was only in Jan-04 after the Standing Committee on Company Law Reform proposed to make disclosure of directors' pay on a named basis mandatory that the Listing Committee finally agreed to change the rules (since the law takes precedence anyway), having originally concluded in Jan-03 that a no-names basis would suffice. Meanwhile, the Listing Committee refuses to make poll voting mandatory, or even to make it a "recommended best practice", ensuring that a veil of secrecy and manipulation shrouds shareholder votes by using the show-of-hands system in all but a few meetings, principally on connected transactions - and even that requirement was not introduced until 31-Mar-04.

The composition of the Listing Committee is itself set out in the Listing Rules - so we have a self-perpetuating system in which the vested interests of the committee can delay, dilute and veto the reform of its own composition. As the consultation paper indicates under the heading "Why Reform Now?", the Exchange has been working on this since Jul-97, so it has not exactly been in a rush. And now that the latest proposals have been published, it should be no surprise to our long-term readers that the reforms do so little to serve investor interests.

The Proposals

SEHK proposes to split the functions of the current Listing Committee between 4 new committees with overlapping membership. The committee which would still hold a veto over reform of the Listing Rules will be the Listing Policy Committee (LPC), and the proposal is to increase the number of investor representatives from a maximum 4 out of 25 to a quota of 8 out of 28. This can hardly be described as progress, and we struggle to imagine what kind of investor would be willing to serve on that committee in the knowledge that he will be in a minority of 8 against 20 issuer-side representatives on key reform issues. We speak from experience, having served as one of only two investors on the board of HKEx, where we meet resistance to pro-investor reforms at almost every turn.

Indeed, the proposal has echoes of the very structure of Hong Kong, where the majority of the people elected a minority of the Legislative Council, where independent directors should be seen and not heard, and where public shareholders should not expect representation in the family boardroom.

History, with omissions

The consultation paper begins with the recent history of this debate, including the proposals in the 8-Jul-99 Government policy paper Reinforcing Hong Kong as a Global Financial Centre. Nothing happened on that until 6-May-02, when  HKEx announced New Structures for Listing Matters. However, the tycoons were none to keen on the idea of the Listing Committee being abolished, and the implication that they would lose their control over the Listing Rules. So after a lobbying campaign, the newly-installed secretary for Financial Services and the Treasury, Fred Ma, fresh out of PCCW, announced on 24-Jul-02 the New listing package which retained the Listing Committee and its powers. For details, read our article Listing Chaos.

The current consultation paper then seems to suffer trauma-induced amnesia between paragraphs 38 and 39. We'll fill in the blanks for you. The day after Mr Ma announced the resurrection of the Listing Committee, the SEHK published what are now known as the Penny Stocks proposals, a set of delisting proposals which had been through that Listing Committee, and which immediately resulted in the mini-crash known as the Penny Stocks Incident, as investors dumped stocks in fear that they were about to lose both the marketplace and what little protection was offered them by the Listing Rules. See our article, The Delisting Fiasco. The proposals were hastily withdrawn, and Government appointed the Panel of Inquiry into the Penny Stocks Incident, which issued the PIPSI Report on 15-Sep-02, and recommended the regulatory structure be reviewed. This in turn led to the Government appointment of the Expert Group, which recommended moving all regulation to the SFC and establishing a Listing Panel to advise the SFC, replacing the Listing Committee. For just a couple of weeks in the spring of 2003, that was exactly what the Government was going to do, until the tycoons persuaded the Government to execute a U-turn.

So now you have the proper context. Back to the present day...

4 committees and an Adjudicator

Under the proposals, another two committees, being subsets of the LPC, will be a Listing Decisions Panel (LDP) which would approve new IPOs and listing cancellations and may grant specific rule waivers, and the Listing Review Panel (LRP) would hear appeals of decisions of the LDP or of the staff of the Listing Division. These committees would have smaller quorums of 5 and 3 respectively, drawn from the LPC membership. To keep them "clean" for appeals, the Chairman and the two Deputy Chairmen of the LPC would not sit on the LDP. All the members of the LPC (apart from the CEO of HKEx) would be eligible to be selected for a hearing of the LRP. Despite the alphabet soup and rearrangement of the deck chairs, this structure is very similar to the current situation in which the Listing Committee tends to run in two halves for routine business on alternating Thursday afternoons, and those who don't attend one hearing can sit in the review hearing under the title of "Listing (Review) Committee".

However, one good thing about the proposed LRP, which would act as the final level of appeal of non-disciplinary decisions, is that it finally removes the Chairman and directors of HKEx from their current roles as Chairman and members of the Listing Appeals Committee. It has always been incredible of HKEx to claim that its board has no involvement in listing matters when the Chairman, and two directors selected by him, formed the final level of appeal of listing decisions, both for disciplinary and listing decisions. This meant that despite the appearance of outside checks and balances, the process ultimately ended up back in-house.

The Adjudicator, on a day off

For disciplinary matters, SEHK proposes yet another committee, the Disciplinary Review Panel (DRP), which would hear appeals of the initial disciplinary decisions of an internal staff member of SEHK, to be quaintly named the Adjudicator (seen right, in casual attire). The DRP would be drawn on each occasion from a pool of at least 20 members, including 7 investor representatives and 4 legally qualified persons who may be appointed as Chairman of the panel hearing. The quorum for the DRP would be just 3, so if they are randomly drawn, the 16 non-lawyer members will only see action on about 1 in 8 hearings. The membership of the LPC and DRP Pool can overlap, so some of the 28 members of the LPC may be in the DRP Pool.

The DRP may in time become seldom used, because the bulk of the disciplinary cases in the past have involved disclosure-related offences (such as late reporting of results or failure to disclose connected transactions), and the handling of those is about to change. The Government has proposed amendments to the Securities and Futures Ordinance to give statutory backing to the disclosure-related listing requirements, which will then be included in the statutory Stock Market Listing Rules administered by the SFC. This will leave SEHK with the non-disclosure-related listing rules, including the rules on listing criteria and corporate governance, such as rules on board composition, the qualifications and elections of independent directors, non-pre-emptive share issues, and the conduct of shareholder meetings. While the content of these rules is important, compliance is generally dealt with in advance rather than by enforcement - for example, if your track record doesn't meet the listing criteria, you don't get listed.

There is no proposed change to the appointment system for all these committees:- a Listing Nominating Committee, consisting of 2 directors of HKEx, the Chief Executive of SEHK and 3 from the SFC (including its Chairman) recommends new appointments, which means that HKEx holds a veto over new appointments through the 3:3 deadlock.

A return to opacity

This may be a consultation on small steps of reform, but the exercise is itself a giant leap backwards in transparency and accessibility.

In the 4 major consultations launched since May-03, HKEx has published all the responses online, which allows any interested party to judge whether the Exchange has fairly summarised the responses, and also to see the responses in the context of the people who made them, and assess whether they have a vested interest and whether they are inter-related (such as submissions from several listed companies under common control). However, this time, they are only making responses "available for public inspection" at their offices, for 14 days after the conclusions are published. Even if you happen to live in Hong Kong (let's remember, many of the largest investors don't), and have the time to visit during working hours, you won't be able to take copies of responses away with you, and you might even find it difficult to take notes. Obviously this reduces the transparency and fairness of the whole process. You will have to rely on what the Exchange says the responses say, rather than reading them yourself.

Furthermore, for the first time in the last 5 years of HKEx public consultations, the consultation paper does not provide an e-mail address for submissions, only a fax number and mailing address. Nor is there any online questionnaire. This is probably designed to deter the investing public from responding. In the last consultation on minimum trading spreads, investors (other than brokerage staff and clients on broker forms) made 296 submissions, of which 294 came by e-mail via a submission form on How many do they expect this time, without e-mail? The barrier has deliberately been raised.

We're not going to bother responding. Implicitly, from its methodology and proposals, the SEHK and its Listing Committee want to hear from as few investors as possible. So for the first time in six years of advocacy, we are taking the step of urging investors to boycott this consultation. We don't do this lightly, because we always prefer to engage and debate, even when the odds are against us, as they usually are. But we refuse to participate in a sham. If the Exchange ever comes up with a serious proposal to give investors at least equal weighting in the Listing Committee (or whichever committee makes the rules), then we will happily respond.

©, 2005

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