HKEx to consider listing rule change after Alibaba IPO loss

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Stung by the loss of the high-profile IPO of Chinese e-commerce firm Alibaba Group, the Hong Kong stock exchange on Friday took a first step towards potentially loosening its listing rules and allowing firms with dual-class share structures to list in the city.

Hong Kong Exchanges and Clearing Ltd (HKEx), which operates the city's stock exchange, unveiled a "concept paper" on new shareholding structures after in-depth consultations between finance industry executives, officials at the exchange and the city's securities regulator.

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The discussions over the potential changes come as Hong Kong looks to remain competitive as a listing venue, particularly for Chinese technology companies that have flocked for IPOs to New York where dual-class share structures that give different voting rights to varied owners are allowed.

The exchange said it will seek comments from market participants through Nov. 30 on allowing weighted voting rights for companies in the city. Potential changes to listing rules would be put for public consultation only later, if the move finds favor among market participants, it said.

Michael Cheng, research director, China and Hong Kong Asian Corporate Governance Association, described the concept paper as an "interesting animal" that allows the exchange to reignite the debate over weighted voting rights without taking any formal action.

"This is a de facto consultation when it claims not to be. They know this is a very controversial topic and the global investment community will be very interested in what is put forward with respect to investor protection," Cheng said.

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"This paper reflects the tension and conflict of interest that the HKEx is in: it's eager to commence dialogue on the matter while claiming not to be starting it. It wants to have its cake, and eat it too."

Because of the controversial nature of any potential changes, the HKEx is looking to garner as much feedback and support as possible from market participants to be able to convince the Securities and Futures Commission (SFC) that changes might be necessary.

"This is as much as the exchange could get away with. If it had proposed changes, the SFC would have opposed them," corporate governance activist David Webb said.

While Hong Kong has been looking at ways to maintain its standing as a prime financial center for some years now, the effort gained urgency after Alibaba picked New York for its initial public offering (IPO), possibly the largest ever by a technology company.

Alibaba's move came after Hong Kong officials rejected its request to allow a small group of company insiders to nominate the majority of its board. The request went against Hong Kong's "one share, one vote" principle, which has been staunchly defended by the SFC.

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HKEx on Friday said its discussion paper or potential changes to listing rules aren't related to Alibaba's move to seek a U.S. listing.

"The decision to put this paper is not related to an individual company," David Graham, chief regulatory officer and head of listing at HKEx, said at a news conference.

The exchange said in its paper there were 102 companies from mainland China that had primary listings in the United States as of the end of May. Of those companies, about one-third used weighted voting rights, but they accounted for 70 percent of the market capitalization of all U.S. listed Chinese companies.

The vast majority of companies using those structures were in the technology sector, like Alibaba. Nine of the 12 companies from mainland China that listed in U.S. exchanges in 2014 used a weighted voting rights structure, the HKEx said.