Hong Kong-listed firms may have to return excess cash to investors
A group of investors, including BlackRock and publisher and activist David Webb, are campaigning for Hong Kong’s Securities and Futures Commission to introduce new rules to stop issuers retaining large cash holdings.
The move comes after the asset management giant recently failed to prevent one of its investees, Hong Kong-listed G-Resources, an electronic goods seller-turned-mining firm, to sell its $775 mn main asset and keep the profit – and to rebrand itself as a financial services firm along the way.
The Hong Kong exchange’s current listing rules do not specify what level of cash holding is acceptable for a company. BlackRock and its campaign allies believe it should be capped at 50 percent of net assets, with anything above to be returned to shareholders as a dividend or share buyback.
‘We’ve raised this mechanism as a possibility with the regulators in order to avoid situations like [that] with G-Resources,’ says Pru Bennett, head of corporate governance in the Asia-Pacific region for BlackRock, in a South China Morning Post interview. ‘To have a company listed where the majority of assets are in cash really doesn’t make sense. That’s not the type of investment we consider.’
The new regulatory proposal, dubbed the ‘cash shell limit’, implies that distribution of any funds above the threshold would be put to a vote by shareholders. ‘If a company can make a good case for retention, then shareholders may veto the distribution and leave the money in the company,’ Webb explains to IR Magazine.
Some types of firms, such as banks, insurance companies or brokers, which are required by regulation to maintain a level of capital exceeding the limit, would be exempt. Also, the cash shell limit does not relate to gross assets, but is expressed in terms of attributable net cash and net tangible assets, as it aligns with the equity owned by shareholders, Webb details.
‘This ample allowance of cash reserve will not prevent the pursuits of businesses, which sometimes need to retain all their profits in order to expand, build new factories, invest in research and development, or make acquisitions,’ Webb comments. ‘But companies will no longer be able to hoard cash that could be better-deployed by investors elsewhere in the economy. These are shareholders’ funds, after all.’