Hong Kong SFC’s Regulatory Approach to Share Concentration: Prudential Oversight or Shifting Sands?
Hong Kong, China, 24th Feb 2025 – The term “witch hunt” evokes images of medieval Europe’s persecution of those accused of witchcraft, a period marked by injustice and social upheaval. While Hong Kong’s financial market has flourished since the 1960s, reaching a prominent position globally, recent years have presented challenges. Despite the market’s underlying strength and government efforts to revitalize it, evolving regulatory practices have attracted attention. Specifically, the Hong Kong Securities and Futures Commission’s (SFC) increased scrutiny of listed companies with concentrated shareholdings has prompted debate. While intended to promote market transparency, these actions have raised questions about their alignment with investor expectations and the consistency of regulatory application.
Since 2009, the SFC has issued numerous advisories regarding concentrated shareholdings, aiming to protect investors. Although no strict numerical threshold exists, a general practice has developed: regulatory attention is typically focused on situations where controlling shareholders and senior management, along with a limited number of other investors (often around 25), collectively hold a substantial portion of issued shares (approaching 90%).
Recently, this established practice appears to have shifted. Regulatory actions now target companies with holdings below the previously understood benchmark, leading some market participants to express concern about potential regulatory overreach.
On September 20, 2024, the SFC identified Sanergy Group (2459.HK) as having concentrated shareholdings. Beyond major shareholders and the top 25, the SFC introduced the category of “physical shares”, those not held in the Central Clearing and Settlement System (CCASS) or registered locally. These shares were attributed to “one or a single class of shareholders.” With these additions, total holdings reached 90.2%, triggering an advisory.
On November 19, 2024, Sprocomm Intel (1401.HK) was similarly flagged. The SFC expanded the previous limit of 25 shareholders to 26 and categorized a portion of shares held by HKSCC Nominees Limited as belonging to “one or a single class of shareholders,” pushing total holdings to 91% and prompting a notification.
On November 27, 2024, Star Shine Holdings (1440.HK) received an advisory. The SFC broadened its criteria, replacing “25 shareholders” with “25 shareholders and their connected parties,” and also included shares obtained through off-exchange transactions. This resulted in a total holding of 91.35%.
On December 9, 2024, Jinhai Medical Technology (2225.HK) was identified. The SFC again adjusted its criteria, referencing “27 shareholders and their connected parties,” leading to a total of 90.2% and an advisory.
On January 15, 2025, GL-Carlink Technology Holding (2531.HK) was flagged. The SFC noted that 20 shareholders, including executives, collectively held 94.94% of the shares.
It’s important to understand the role of HKSCC Nominees Limited. Shares held under their name do not represent ownership by HKSCC itself but rather holdings on behalf of underlying investors. This nominee structure is common practice in Hong Kong.
Physical share certificates are also prevalent. When investors request these certificates, the shares are temporarily held under HKSCC Nominees Limited until the withdrawal process is complete.
In the Sprocomm Intel case, the SFC attributed shares held by HKSCC Nominees Limited to “a single shareholder” without providing explicit confirmation. This raises questions about the basis for such categorization. Similar ambiguity appeared in the Sanergy Group advisory regarding physical share certificates.
For Star Shine Holdings, the SFC included off-exchange traded shares under the “single class of shareholders” designation, again without detailed explanation. The shift from fixed numerical limits (e.g., “25 shareholders”) to more flexible descriptions (“25 shareholders and their connected parties”) in cases like Jinhai Medical Technology suggests a more fluid approach to calculating concentration.
The SFC’s advisory concerning GL-Carlink Technology Holding (2531.HK) presents a particularly perplexing case study. Publicly available information, specifically the company’s “Final Offer Price and Allocation Results” announcement released on July 12, 2024, clearly indicated that its top 25 shareholders held a substantial portion (98.91%) of the post-listing issued shares. Despite this readily available information, the SFC conspicuously refrained from issuing any concentration warning during the initial public offering (IPO) period. Regulatory action only commenced after the stock price experienced a significant surge, a sequence of events that has drawn criticism and fueled accusations of retroactive enforcement. This perceived inconsistency between pre-IPO awareness and post-price appreciation intervention raises serious questions about the SFC’s regulatory priorities and their potential impact on market stability.
In Hong Kong’s dynamic financial market, the practice of major shareholders reducing their stakes through off-exchange transactions is both commonplace and legally permissible. Large-scale on-market sales have the potential to trigger significant price volatility, which can be detrimental to both the company and its shareholders. Off-exchange transactions offer a mechanism to mitigate this risk. However, the SFC’s recent actions implicitly suggest that shares divested by controlling shareholders through such methods are being automatically attributed to a “single class of shareholders”, without any apparent attempt to ascertain whether these dispersed holders constitute a unified entity or share any material connections. This seemingly arbitrary approach creates a perception that the regulator is, in effect, labeling these investors as an “affiliated group” without providing clear justification or evidence. This raises a host of critical questions: Could such ambiguously worded advisories expose these individuals to unnecessary legal risks, potentially chilling legitimate market activity? If the SFC’s current methodology prevails, will all shares sold by major shareholders, regardless of whether the transactions occur on- or off-exchange, be automatically deemed as being held by a “single class”? Furthermore, would the mere fact that shareholders hail from the same geographic region automatically trigger concentration flags, even in the absence of any other evidence of collusion or coordinated action?
Beyond the specific case of GL-Carlink Technology Holding (2531.HK), a comprehensive review of multiple recent IPOs in Hong Kong reveals that a significant proportion of these listings exhibited shareholding concentration levels that far exceeded the SFC’s purported “thresholds.” Notably, the Hong Kong Stock Exchange (HKEX) itself had, in many instances, issued cautionary statements regarding such concentration risks in these companies’ pre-listing “allocation results” announcements. This apparent disconnect between the HKEX’s pre-listing disclosures and the SFC’s subsequent actions creates a sense of regulatory dissonance and raises concerns about the consistency and predictability of regulatory oversight. The SFC’s recent consultation paper, titled “Proposed Enhancements to IPO Pricing and Market Disclosure Requirements,” signals a potential push for stricter scrutiny of IPO-stage shareholding structures. Under the regulator’s evolving “standards,” would all international placements now be required to have a minimum of 25 or more shareholders? Should the majority of IPO candidates preemptively issue concentration warnings, even if their shareholding structures are otherwise compliant with existing regulations? This paradox underscores the inherent dilemma facing Hong Kong’s market participants: The SFC appears to turn a blind eye to concentration risks during the crucial listing phase, only to launch disruptive enforcement actions post-price appreciation—a pattern that risks destabilizing IPO pipelines, eroding investor confidence, and ultimately hindering Hong Kong’s ability to attract new listings.
The absence of clearly defined thresholds, the seemingly arbitrary adjustments to concentration criteria and the practice of retroactive enforcement collectively threaten to erode Hong Kong’s hard-earned status as a global fundraising hub. If regulators can retroactively redefine “concentration” based on fluctuating interpretations and ad-hoc assessments, even meticulously structured and fully compliant IPOs may find themselves facing existential uncertainties. This climate of regulatory unpredictability is highly detrimental to long-term investment planning and discourages companies from choosing Hong Kong as their listing destination.
Many Hong Kong-listed companies adhere to rigorous governance principles, striving to qualify for inclusion in the Stock Connect program and global benchmark indices such as MSCI. Such achievements not only reflect a company’s commitment to corporate excellence but also serve as powerful recognition of sustained operational efforts and adherence to international best practices. In a liquidity-starved market like Hong Kong’s, inclusion in these channels is absolutely critical for accessing vital capital flows and attracting institutional investors. Yet, the SFC appears to treat companies with significant share price appreciation as if they bear an “original sin”—akin to the historical persecution of individuals based on arbitrary characteristics. By enforcing ad hoc “rule-by-person” measures under the guise of regulatory flexibility, the SFC’s concentration advisories ostensibly claim to protect investors but often inflict devastating consequences on stock prices and liquidity, effectively undermining the very interests they are intended to safeguard.
Historical data reveals a consistent pattern: companies subjected to such advisories typically experience severe price volatility, often leading to a loss of eligibility for Stock Connect and index inclusions (e.g., MSCI). These companies also face diminished market confidence due to perceived liquidity risks and concerns about regulatory scrutiny. A critical question arises: Do these regulatory actions genuinely safeguard the interests of minority shareholders, or do they inadvertently destroy shareholder value, harming the very investors they are designed to protect?
The vast majority of Hong Kong-listed entities are small-to-mid-cap firms whose future growth potential hinges on achieving critical valuation thresholds that make them eligible for index inclusion. If the SFC’s current regulatory approach, which some have likened to a “witch hunt,” persists, investors may increasingly shun these companies, exacerbating the market’s existing liquidity crisis and fundamentally undermining Hong Kong’s role as a vital fundraising gateway for emerging businesses.
The implementation of prudent and well-considered regulatory measures by the SFC is undoubtedly necessary for maintaining market integrity and investor confidence. However, as evidenced by the aforementioned cases, advisories on “highly concentrated shareholdings” while being in appearance and devoid of explicit allegations of corporate misconduct, carry profound implications for both targeted firms and the broader market ecosystem. These notifications risk severely distorting investor judgment and behavior, potentially leading to unwarranted sell-offs and a general erosion of market trust.
The SFC’s persistent vagueness in defining critical provisions, coupled with the ambiguous enforcement thresholds and the perception of arbitrary application, creates fertile ground for potential power overreach and undermines the principles of transparency and predictability that are essential for a healthy market. Such practices not only contradict the regulator’s stated mandate but also transmit destabilizing signals to the market, fostering speculative anxieties and unwarranted uncertainty. This degree of regulatory arbitrariness would be unthinkable in any other mature and well-regulated securities market.
When a regulatory body wields what appears to be a minor technical tool, yet one with latent destructive capacity as a recklessly deployed strategic weapon, urgent introspection and reform become imperative. The SFC must rigorously clarify its rules, establish unambiguous operational boundaries, and commit to consistent application of regulatory standards to restore market trust and prevent further damage to Hong Kong’s reputation as a leading financial center.
Hong Kong has long served as the crucial gateway for international financial capital flowing into mainland China. However, intensifying U.S.-China strategic rivalry and mainland China’s economic slowdown have triggered successive waves of layoffs at global financial institutions in Hong Kong since 2023. The financial sector’s protracted downturn has had a cascading effect, dragging down consumer markets and real estate, lending credence to the public’s sardonic characterization of the city as a “relic of a financial center”, a label now substantiated by observable and concerning trends.
Market sensitivity to political risk has reached acute levels, with uncertainty, both political and regulatory emerging as the primary driver of risk aversion. Arbitrary revisions to rules and standards, coupled with the perceived erosion of Hong Kong’s legal safeguards for private property rights, have severely undermined market confidence. Should this pattern of “rule-by-person” priorities overriding rule-of-law principles persist as exemplified by the escalating “witch hunt” campaigns targeting companies with concentrated shareholdings, there is little doubt that Hong Kong will accelerate its descent into becoming just another Chinese provincial city, irrevocably forfeiting its unique and hard-earned status as a global financial hub.
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