* Slide in penny stocks hammers Growth Enterprise Market
* Activist shareholder says margin calls may have sparked sell-off
* Slide could spill over to broader market - securities analyst (Adds comments from regulator, updates shares)
By Donny Kwok and Michelle Price
HONG KONG, June 28 (Reuters) - Hong Kong’s second board plumbed record lows on Wednesday, having lost more than 8 percent of its market value the previous day as investors raced to reduce exposure to plunging penny stocks.
Shares leading the declines on Hong Kong’s Growth Enterprise Market (GEM) had been included in a report by activist shareholder David Webb six weeks ago titled “The Enigma Network: 50 stocks not to own”.
Hao Wen Holdings was the biggest loser on Wednesday, with its shares down 56 percent.
The second-biggest loser was WLS Holdings, off 41 percent, while Greaterchina Professional Services Ltd plunged a further 34 percent after its 93 percent plummet on Tuesday.
Nearly all of the 50 stocks in Webb’s report fell on Wednesday.
GEM’s benchmark index dropped 0.8 percent, after losing nearly 10 percent on Tuesday in a sell-off that wiped HK$24 billion ($3.08 billion) off market value, leaving it at HK$268 billion.
On Wednesday, a Securities and Futures Commission (SFC) spokesman declined to comment on whether the regulator was investigating any of the companies in what Webb called a network.
“The stocks which have experienced large price declines yesterday occupy a market segment characterized by thin turnover, small public floats, high shareholding concentrations, and multiple relationships between different companies and listed brokerage firms,” the SFC said in a statement.
“These characteristics can be especially conducive to extreme volatility and also to market misconduct.”
On Wednesday, Webb told Reuters it was unclear what caused the sell-off in “Enigma Network” stocks.
“I can only speculate, but it’s possible margin calls have been triggering the sell-off – it’s possible the brokers involved have been told to stop lending against those shares,” he said. “Maybe the people operating the network have decided to dump and run.”
Another stock on Webb’s list was umbrella maker China Jicheng Holdings Ltd, whose shares plunged more than 90 percent on Tuesday and gained 6 percent on Wednesday.
Financial services firm Lerado Financial Group Co Ltd , which had trading of its shares suspended this month and is also on Webb’s list, said on Wednesday it sold HK$24.96 million ($3.20 million) of shares in China Jicheng.
The securities regulator on June 6 halted trading in Lerado, alleging the company had issued misleading statements. Lerado has said it is seeking legal advice.
China National Culture Group Ltd (CNCG) said on Wednesday it offloaded 1.63 billion shares in China Jicheng on Tuesday to raise HK$34.85 million, while QPL International Holdings, another stock on Webb’s list, said it sold HK$1.99 million worth of the umbrella-maker’s shares.
All three firms said they sold China Jicheng at a loss because its stock-price was “extremely volatile”.
Amco United, another stock on Webb’s list, plunged nearly 50 percent on Wednesday.
Hong Kong’s second board has seen high levels of volatility due to very concentrated shareholdings, and concerns have grown over the quality of companies listed there.
Authorities have issued several warnings over concentrated shareholdings and this month launched a consultation to address this problem which would include raising the minimum market capitalization by 50 percent to HK$150 million and increasing the cashflow requirement for initial listings.
The market jitters come nearly two weeks after the Hong Kong Exchanges and Clearing (HKEx) proposed adding a third board for pre-profit companies, and firms with dual class share structures.
Corporate governance activists, including Webb and the Asian Corporate Governance Association, have criticized the plan, saying it will further lower standards.
Some market watchers have called for a change to Hong Kong’s margin lending rules, which have been blamed for dramatic sell-offs in stocks.
Other have warned that the second board’s slide could impact the broader market.
“We have to watch out for any spillover effect in the next few days,” said Linus Yip, chief strategist at First Shanghai Securities.
The HKEX said on Wednesday it would closely monitor activities and take appropriate action when necessary.
$1 = 7.8028 Hong Kong dollars Additional reporting by Elzio Barreto,; Editing by Anne Marie Roantree and Richard Borsuk