Why GEM has got its fists up: KS Lo, Asiamoney, June 2000

WHY GEM HAS GOT ITS FISTS UP

 Hong Kong’s Growth Enterprise Market is barely six months old, but it’s already attracting stinging criticism of its erratic waivers and regulation. KS Lo, who heads the listing committee, believes the media and the SFC are missing the point: there shouldn’t even be any listing rules. He thumps home the reasons to Chris Wright.

 Lo Ka Shui is being confrontational. It’s hardly surprising. Lo, whose day job is deputy chairman and managing director of Great Eagle Holdings, has become better known in recent months as chairman of the controversial listings committee of Hong Kong’s Growth Enterprise Market. And he intends to fight his corner with vigour.

Statistically, he has a lot on his side. By late May GEM’s 23 listings had raised HK$10.4 billion ($1.3 billion) in funds, with the market capitalization of the exchange standing at HK$63 billion. Another 38 applications are on hand, with anything between 60 and 100 others wanting to join. GEM companies command PEs between 10 and 15 times at listing, considerably higher than the main board. (It also has its share of berserk valuations: Timeless, launched in November on GEM, did so at a PE of 122).

Those numbers stand happy comparison with regional competitors: over $1 billion of new funds were raised on GEM in the first three months of the year, compared with $100 million on Kosdaq and $25 million on Sesdaq over the same period. Lo insists that GEM has attracted many listings that might well have gone to Nasdaq instead, and says secondary market trading levels are far higher than they would be for a Hong Kong company listing in the US.

But waivers to listing rules have brought allegations of favouritism (not least for companies with powerful backing, particularly Li Ka-Shing’s Tom.com) and inadequate investor protection. In March, the SEHK and SFC cut the track record a company must have before listing from two years to one, and allowed initial management to start selling their shares after six months (it used to be two years). This, in effect, means the management of a company that has existed for just 18 months can start dumping its stock. Put these criticisms to Lo, and you’ll be bombarded by a defensive volley that is by turns refreshingly earnest and somewhat intimidating . . .

Tom.com is the most controversial listing so far. You defended its waivers by saying that without them Tom would have gone to Nasdaq.

Not just for Tom, for quite a few. Tom was highlighted because it is controlled by the most powerful person in Asia. But it’s quite unfair. Waivers have been granted for four companies already, from before Tom, from November onwards, on a level basis.

But some say that Tom.com got more waivers than others . . .

No, that’s what the newspapers wrote. They did not bother to read the true details.

Well, let me give you the opportunity to respond then. It has been written that Next Media, for example, was not given the waiver to issue shares within six months after its listing, whereas Tom.com was.

Tom.com never received a waiver to issue shares. HongKong.com recently tried to issue shares but was also turned down. I don’t think they should have been, but they were.

Has anybody been allowed to issue shares within six months of listing?

Nobody.

Okay. But the other two waivers for Tom.com were allowing stock options of up to 50% of the issued share capital instead of 10% . . . [the other, which Asiamoney never got to ask about, was a waiver of the lock-up rules].

Yes, and it was not the only one.

Hongkong.com was the other?

Hongkong.com, three others – and a company that never got listed.

Since then, you have issued a document talking about changing the rule to 30%.

Yes.

So what happens to those who had already been granted the right for 50%?

Well, they are still allowed. They are grandfathered. But it is not important really. You should read the details. Every time they want to go up by 10%, the shareholders have to vote.

But which shareholders? Independent shareholders?

Yes. The ones who are being issued the shares, the major shareholders who want to issue shares, cannot vote. But actually that is a very restrictive mechanism. People confuse things, and maybe you can set things right. All these issues are actually marketing issues. That’s why Nasdaq doesn’t bother with restrictions like these. As long as the shareholders who own the company are allowed to vote yes or no, they don’t bother. Why should we as the stock exchange or regulator put restrictions on things that don’t belong to us but belong to the company’s shareholders?

But there is also an argument that investors need protection and . . .

But you miss the point. The investors are the shareholders. We are saying: ‘You vote. You decide among yourselves. It’s your company, you own this share, you can do whatever you want with it.’ It has nothing to do with the stock exchange or the SFC. Don’t you see that point?

I do see your point, but are you arguing against financial supervision?

They’ve got it all confused! Everyone has got it confused, the SFC has it confused. All these are just marketing issues clouding the real issue. That’s why Nasdaq is very smart. It says: ‘This is not our problem, it is the shareholders’ problem.’ What the SFC and us regulators should be doing is to make sure you disclose the right things, to make sure you are not lying.

Improving disclosure, not imposing listing rules?

Improving disclosure, catching the thieves, punishing the thieves to prevent further malpractice: that is our job. All these market issues, like the two-year track record –  as long as you disclose them, shareholders have the right to look at them and decide what they want to do. They own the company, they are the ones who buy the shares. Do you see the point?

Yes, I do see your point, but . . .

It’s been clouded in the media by people who don’t understand all this. You must try to help disclose this and you might be the first one to write it. Regulatory issues and marketing issues are two separate things. Marketing issues are what the exchange uses to market things: the track record, the moratorium, how long we are going to lock up the shares. Regulatory issues are: you manipulate the shares, we are going to catch you. You disclose something that is not true, we are going to catch you. You publish false accounts, we are going to catch you and punish you.

Does Hong Kong have sufficient legislation, and sufficient statutory penalties to support that approach? How do they compare with Nasdaq’s?

The SFC has been using the argument that America has two things that we don’t have. First, class action suits. The shareholders can sue the company, at the expense of the company. So if your share price drops, they sue you, and you settle out of court – 99.99% of all class action suits are used to blackmail the company. The second thing is, in America they have contingency fees. The lawyers don’t charge anything, they say: ‘Let’s go sue the company, and if they settle I’ll take one third.’ It promulgates a lot of ridiculous suits. You don’t need that. Britain has almost the same things as we have. The only thing is that insider dealing in Hong Kong is still a civil offence. You are punished by up to three times the profit you make. We need to penalize them more; I’m borderline on making it a criminal offence.

But with that exception, are you happy with the level of legislation and penalties available in Hong Kong for financial impropriety?

There’s not enough. In general I think we do need more investigative power to go to a company and try to find out before all the money has gone. That’s what I mean by regulatory issues. And I support that, but I do not want Hong Kong to have a litigious culture like America. But true preventative policing power should be given to the SFC to prevent malpractice, manipulation and false disclosure.

I had a range of questions on what you’ve described as marketing issues – lock-up period, track record – but from what you’ve said you’d be happy not to have any restrictions at all.

We are happy with what Nasdaq has. It doesn’t have any record requirement. So who imposes the lock-up? The underwriter. Which I think is perfectly fine, it is a commercial issue. The underwriter doesn’t want the biggest shareholder to dump the shares in the first six months, so they say: ‘If you want to list your company, I will underwrite it for you, but you must sign an agreement with me to lock it up.’

So it is not the responsibility of the exchange to protect investors by ensuring that a company doesn’t dump its shares after listing?

It’s not! It’s not! We say, disclose all these things and let the investors decide. The underwriter has a role to play in this. Most of the shares in the US are locked up by the underwriter.

If that’s your view then why have you even bothered to amend, rather than remove, the period of time in the guidelines?

At this time I don’t think it is possible for me to waive it completely, so we have just gone to six months [from two years], which is what the main board has anyway. GEM was a bit too restrictive. And then people make a big thing about these waivers! They are completely ridiculous rules.

But GEM’s rules are more restrictive because the companies tend to be younger, and it is arguably worse for investors in young companies if that company’s management immediately dumps all its shares.

On the main board, 200 of the 600 companies are small. So why make a difference between them and GEM? A lot of GEM companies are bigger than those on the main board.

But it’s the companies that could do damage that you should police.

You cannot! You cannot, OK? I’m a businessman. I own a few listed companies. If I want to take you for a ride I won’t do it in six months. I’ll do it in five or 10 years after you are already in.

Why?

Because it’s much easier.

But if you abolish these rules it doesn’t make any difference when you want to take me for a ride, you can do it whenever you want.

I keep saying to the SEC: just because you are trying to catch one thief don’t shut the door to 999 good people. My mission is to keep Hong Kong’s status as an international financial centre and the premier capital formation centre in the region. To do that doesn’t mean that you keep everybody away because you want to catch one little thief. The 999 people then go to Nasdaq because they have none of these rules.

Why is it that you condone Nasdaq, with none of these rules, and you condemn Hong Kong for having rules that are more stringent than Nasdaq? Why are you playing double standards just because you think a litigious society is protection?

The issue of how long a company has to have existed for has been completely circumvented by back door listings on GEM and the main exchange.

And they can go and backdoor list on the main exchange. I can tell you a few ways you can do that, bypassing the rules.

Doesn’t it make a mockery of those rules when this is allowed to happen?

You answer my question. Okay? That’s what I’ve been fighting for. Let the markets decide, they are smarter than you think. Don’t tie the hands and feet of a company and expect them to swim.

So, this is the fundamental point: You believe investors need no protection, even from themselves.

Investors need to know all the major points they need to know: marketing issues, all the rules, then they make up their minds.

Do you think there is a difference between an investor in Hong Kong compared with  an investor in the States?

Institutional investors have a slightly different mentality to regional investors. It’s the same in the States also. Regional investors are a bit shorter term.

But Hong Kong has a far higher proportion of retail investors than the States does. Isn’t there an argument that they do need protection and guidance more than institutional investors?

But these kinds of issues – the share option scheme, the lock-up period, the track record – they do not protect them. What protects them is stronger surveillance, stronger monitoring methods, more stringent punishment for those who get caught.

Well, if not protection, education?

One of our major pushes is that we will always educate investors. We do a lot of seminars and conferences. For example, we are creating a web portal, hopefully to come out in six months, so people can have access to instantaneous information. Disclosure, disclosure, disclosure is the most important thing.

Is GEM in competition with other exchanges in the region, rather than just Nasdaq?

No question, yes we are. One good thing coming out of Tom was that when we set up GEM we were targeting the Greater China region: Hong Kong, China and Taiwan. But after Tom, when companies from some of the Asean countries saw 400,000 people lining up to apply for shares, they dropped Singapore and will come here. [He declines to name them.] So now besides Greater China, we are becoming a regional capital formation centre. We are deemed to be more liquid, to have more capital power.

To what extent can you ensure adequate disclosure from companies listing from outside Hong Kong?

We are all scratching our heads. We are talking about globalization, 24-hour trading, New York linking up with Hong Kong and London and all this, but between all of us there is the question: when you list your shares in my place, who is responsible for the regulation?

Maybe within five or 10 years there will be regulatory harmonization between the different jurisdictions. Right now we are just holding hands; whether or not we get married, we don’t know.