Hong Kong's rejection of Alibaba's planned initial public offering was the right decision reached in the wrong way. Even though the Chinese internet giant is now seeking a listing in New York, Hong Kong still needs to think about how its IPO regime can be modified to ensure the city-state stays competitive as a financial centre without sacrificing the interests of investors.
Alibaba's vice-chairman says the rest of the world is passing Hong Kong by. That's unfair. The e-commerce group's plan to give a small group of executives the power to nominate the majority of board directors was a clear violation of Hong Kong's one-share-one-vote principle. Despite Alibaba's clout - the company could be worth as much as $100 billion - regulators refused to bend the rules.
Nevertheless, the Alibaba saga has raised three important questions. The first is the purpose of Hong Kong's stock market. Its listing rules are designed to protect investors, including an active body of small shareholders. By contrast, American regulators led by the Securities and Exchange Commission mostly take the view that investors should fend for themselves as long as all risks are thoroughly disclosed.
Hong Kong may conclude that its approach is better suited to a part of the world where many corporate executives need little excuse to ignore outside shareholders, and where investors have fewer legal options for seeking redress. If that's the case, however, Hong Kong needs to ask whether the current framework really weeds out poor governance. After all, the region is riddled with tycoons who control vast empires through cascades of partially-listed companies. Meanwhile, some of Hong Kong's biggest stocks are state-controlled enterprises whose ultimate authority is not their board of directors but the Chinese Communist party.
Hong Kong also needs to think again about the process by which it approves IPOs. Applicants are vetted by the Stock Exchange's 28-strong committee, which is largely made up of industry players. But its practice of excluding members who have an interest in the outcome means the actual decision is often made by a smaller group. Alibaba's proposal was examined in detail by just a quarter of the committee's members. A better approach may be to hand approval powers to Hong Kong's Securities and Futures Commission, which must already bless new listings anyway.
Hong Kong's rules meant it had to send Alibaba packing. But it would be a mistake to think its future approach to IPOs cannot be improved.
Alibaba's vice-chairman says the rest of the world is passing Hong Kong by. That's unfair. The e-commerce group's plan to give a small group of executives the power to nominate the majority of board directors was a clear violation of Hong Kong's one-share-one-vote principle. Despite Alibaba's clout - the company could be worth as much as $100 billion - regulators refused to bend the rules.
Nevertheless, the Alibaba saga has raised three important questions. The first is the purpose of Hong Kong's stock market. Its listing rules are designed to protect investors, including an active body of small shareholders. By contrast, American regulators led by the Securities and Exchange Commission mostly take the view that investors should fend for themselves as long as all risks are thoroughly disclosed.
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Hong Kong also needs to think again about the process by which it approves IPOs. Applicants are vetted by the Stock Exchange's 28-strong committee, which is largely made up of industry players. But its practice of excluding members who have an interest in the outcome means the actual decision is often made by a smaller group. Alibaba's proposal was examined in detail by just a quarter of the committee's members. A better approach may be to hand approval powers to Hong Kong's Securities and Futures Commission, which must already bless new listings anyway.
Hong Kong's rules meant it had to send Alibaba packing. But it would be a mistake to think its future approach to IPOs cannot be improved.