Hong Kong regulators are considering revising the financial centre's share-suspension rules as pressure grows from hedge funds and other investors to bring them in line with Western markets, people with direct knowledge of the matter said. The private discussions come amid growing investor frustration over the current rules which allow companies to be suspended for much longer than in other major markets - sometimes for years - trapping long-term and retail investors, and making it costly for hedge funds that often take short positions on stocks.
One individual with knowledge of the discussions told Reuters investor frustrations boiled over last July after the Securities and Futures Commission (SFC) ordered that a suspension of Hanergy Thin Film shares, a big target of short-sellers, be extended, pending a regulatory investigation. The company's shares are still suspended. Shorting involves borrowing stock to sell it with the aim of buying it back more cheaply at a later date. But if the stock is suspended, the fund has to continue paying borrowing fees, unless it can negotiate a private deal to exit the position.
The SFC and the Hong Kong exchange (HKEx) are in consultations with trade body Alternative Investment Management Association (AIMA) over limiting the duration of suspensions and establishing an exit mechanism for investors stuck in frozen shares, two people briefed on the matter said. The HKEx is expected to launch a public consultation on the matter later this year, one of these people added. According to HKEx data, 51 companies were suspended for more than three months as of December 31, the majority of which had been halted for more than a year and the longest of which had been suspended since 2009.
One of the main areas of contention is how best to end suspensions and allow investors to exit the shares, according to one individual with direct knowledge of the discussions. Currently, Hong Kong-listed companies that have been suspended for a long time due to severe financial difficulties enter a three-stage delisting procedure. But there is no specified delisting process for companies suspended for other reasons, such as a regulatory investigation or accounting problems. In such cases, the HKEx has the power to delist a long-suspended stock if the company has failed to take adequate measures to enable trading to be resumed.
Many investors would prefer a swifter US style mechanism that would automatically force stocks back into trading after a specified period of time, one person with direct knowledge of the talks said. Spokespeople for the SFC and AIMA declined to comment. A spokeswoman for the HKEx said the exchange had noted rising industry concern over prolonged suspensions and had adopted a more robust policy for delisting suspended shares as a result to allow for an orderly exit. She added: "This will also bring our practices more in line with other major markets. The stock exchange continues to study this area and if necessary will consult the market on any proposal to amend the Listing Rules."
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