Hong Kong pushes for more IPOs
Hong Kong's bourse operator has proposed new measures to bolster initial public offerings, a move that is expected to further strain banks, law firms and auditors already under scrutiny from regulators about the quality of listing applications.
The city last year regained its place as the world’s top listing venue and applications continue to surge, with the total number of current listing applicants at around 450.
Authorities’ efforts to retain that crown – and investors' confidence – are in full swing, with Hong Kong Exchanges and Clearing this month proposing a slew of measures to make listings easier, just weeks after reprimanding sponsors in a crackdown on poor quality listing documents.
Among the measures the HKEx put forth on March 13 was a proposal to expand the confidential filing option to all new applicants. Current norms only make this option available to eligible secondary listing applicants, biotech companies and specialist technology companies, with case-by-case waivers for other applicants.
The exchange’s other measures included a proposal to cut market capitalisation requirements for weighted voting rights listings to HK$20bn (US$2.6bn), or HK$6bn with revenue for the most recent audited year of HK$600m. The current requirement is a market cap of HK$40bn, or HK$10bn, with revenue for the most recent audited year of HK$1bn.
Additionally, the exchange has proposed allowing biotech companies or specialist technology companies to seek listings under specialist 18A or 18C routes, allowing them to benefit from a streamlined process and confidential filing even if they are financially eligible under the ordinary route for a listing.
HKEx also proposed changes to financial reporting standards for some applicants, such as allowing units of US-listed parents and companies with substantial US business operations to use US GAAP accounting standards.
The exchange has proposed removing the requirement that when a company delists in the US, it will need to revert to HKFRS or IFRS standards.
Some experts see this measure as a way to make it easier for Chinese companies facing delisting in the US to make their way to a listing in Hong Kong.
More listings
All these proposed changes aim at drawing more companies to list in Hong Kong, even though the regulators have recently criticised the sloppy work of some sponsors and limited the number of IPOs that each sponsor representative can handle at the same time.
Allowing all applicants to file confidentially would mean more work for banks, although the route allows companies to keep sensitive business information private until the regulatory review is complete, according to bankers.
“To market deals that file confidentially, you have to wall-cross investors and let them sign non-disclosure agreements. In a busy IPO market like now, this extra work is a burden,” said a banker.
Another issue is how to ensure adequate investor protection if all listing applicants are able to keep their initial filings confidential. When the stock exchange in 2013 introduced a system that required all listing applicants to make public filings, it argued that putting up such information early could allow stakeholders plenty of time to examine the listings and raise any concerns.
Under the confidential filing regime, issuers are only required to post the draft prospectuses after they pass a listing hearing. That leaves only around three weeks for the stakeholders to look at the information before the companies start trading.
“Even though we have so many listing applicants lining up, the exchange still wants more. Some of these proposed changes such as lower market capitalisation for WVR companies are obviously targeting foreign companies,” said another banker.
The exchange is widening the net at a time when China is restricting some overseas-incorporated Chinese companies from listing in Hong Kong unless they unwind their so-called red-chip structure.
Red chips are Chinese companies that are registered overseas but hold assets and do business in China.
According to a statement from the China Securities Regulatory Commission some red-chip companies were given notice recently to unwind these structures.
“The shareholding structures of some red-chip companies are of low transparency and their compliance risk is relatively high. Both onshore and offshore regulators are concerned about such risks,” the CSRC said in the statement.
Scrutiny continues
Meanwhile, Hong Kong’s bourse is also taking further steps to ensure IPO application quality does not slip.
The exchange has been clamping down on poor quality listing documents after identifying some "serious deficiencies" in filings. In cases where application materials are rejected for being incomplete, it has proposed displaying the identities and roles of the professional parties responsible, such as law firms and audit firms, along with the sponsor’s identity.
The current requirement is only for the sponsor’s name to be displayed in such cases.
Workloads at Hong Kong law firms and auditors have been increasing.
“A lot of law firms do not have sufficient manpower to take up the number of applications in the pipelines. This is nothing like the volume we have seen in recent years and more importantly, most deals have very aggressive timelines,” a Hong Kong-based ECM lawyer said.
“Everyone is trying to rush and trying to speculate what will happen to the market later on,” the lawyer said.
The Hong Kong Law Society did not immediately respond to an email seeking comment on the latest consultation.
Meanwhile, Hong Kong’s Accounting and Financial Reporting Council in February sent an open letter to public interest entity auditors acting as reporting accountants for issuers seeking to list in the city, urging them to “immediately undertake a thorough evaluation of their resources and critically assess” whether they possess the capabilities to deliver high-quality audits for existing and new IPO engagements.
The AFRC said practices falling short of expectations will draw “heightened scrutiny and regulatory intervention".