Introduction

1. The Hong Kong Coalition of Service Industries has considered the consultation paper by the Hong Kong Stock Exchange on the creation of the “Second Board”. We agree with the view that a second market will facilitate fund-raising for smaller companies and hence create employment as well as contribute to the vitality and prosperity of the Hong Kong economy.

2. Like any financial markets, transactions on the Second Board carry risks but that is in the nature of the financial sector. We believe Hong Kong businesses and investors are mature enough to understand the risks as well as opportunities associated with the market.

3. In the following paragraphs we shall comment on specific aspects of the proposal for the Second Board.

Investor participation

4. Whilst we appreciate the rationale to protect the small investor, we do not agree with the proposal to keep the target investor group to “sophisticated investors” by imposing the $250,000 minimum transaction value.

5. In our view, the success or failure of the Second Market will hinge on the ability to buy and sell stock as quickly and effectively as possible. Our understanding is that institutional investors have a regular complaint concerning lack of liquidity in the main board for small stocks. The main board liquidity is derived partially from the numerous small brokers serving retail players dealing in relatively small lots. Likewise, allowing small players to invest in the Second Board will help considerably in ensuring its full functioning.

6. Small investors are not necessarily unsophisticated. Even if some of them are, discriminating against them is not the best way of raising the overall investor standard. Rather, all investors, not just professionals, should be allowed to participate and there should be no restriction on transaction size. The caveat emptor principle should be stressed at the account opening stage, as described in Section 9 of the consultation paper.

Sponsors

7. The capital requirement of $50 million on sponsors seems too high. At the moment there is no such requirement on main board sponsors.

8. The role of the sponsors as outlined in the consultation paper appears onerous and may lead to high costs being borne by those prepared to carry out this function. The cost may turn out to be prohibitive in view of the relatively small size of the issues. At the same time, the continuation of the sponsor’s role for two years, whilst a commendable proposal, may become a similar burden on the listed companies over that period.

9. The Exchange has acknowledged the high issuing costs and has indicated that it would be prepared to set a low listing fee (para 18.5). While this is welcomed we would emphasise that cost should not be made to become a stumbling block to listing.

Trading

10. On the trading platform, we have reservations over the proposed Display of Interest Trading Platform. If established it could lead to huge changes of price on the back of single deals, whatever the deal size, thus rendering current quotes by the Second Market meaningless, especially around key valuation dates and year ends.

11. We suggest therefore that trading should be done via the Automated Order Matching System (AMS) to avoid heavy initial setup costs. The AMS should also enhance liquidity and transparency.

12. As a further step in transparency, perhaps an index should be established to help investors keep track of performance.

Derivatives

13. In view of the much higher risk and volatility likely to be encountered, margin lending should be prohibited against Second Market stocks.

14. Similarly brokers should be prohibited from buying such stocks for discretionary clients. Only advisory clients should be permitted with the understanding of risks involved at the account opening stage (as in section 9 of the consultation paper).

15. As to rights issue we consider that more stringent rules should be developed.

Other points

16. Because the Second Board is established for smaller companies, reporting requirements should not be too onerous for them.

17. On holdings by principal shareholders, we consider the time periods for restrictions on sales quite appropriate.

18. On country of incorporation, we believe this should be confined to countries with acceptable risk with the Exchange reserving the right to approve countries not on the list.

19. While we welcome the proposed education and promotional programme for market participants, we believe education and promotion among the general public is no less important.

(Ends)