WorldWay Comprehensive News: In light of various drawbacks and issues currently present in the Hong Kong new share market, the Hong Kong Financial Services Development Council published a report yesterday, clearly stating that Hong Kong should improve its new share issuance process and efficiency, accept new equity and management structures, and allow enterprises to conduct initial public offerings (IPOs) in Hong Kong in different legitimate forms, while adequately protecting investors' rights, in order to ensure the diversification of the Hong Kong new share market.
Industry insiders believe that the move by the Hong Kong Financial Services Development Council aims to address the regret of Hong Kong missing out on Alibaba's IPO. However, some have expressed opposition to the proposal in the report to reclassify the main board market.
In response, Chairperson of the Hong Kong Financial Services Development Council, Mrs. Shiu Mei-lun, stated that while understanding that some related market issues require long-term consideration, she hopes that issues related to procedures can be handled swiftly. The impending launch of the Shanghai-Hong Kong Stock Connect will open new development areas for the Hong Kong stock market, so it is necessary for Hong Kong to seize the opportunity to further strengthen the IPO market process.
Suggestion to Reconsider One Share, One Vote
Accept Listing of Companies with Different Structures
The report emphasizes that Hong Kong should reconsider the 'one share, one vote' system, allowing Hong Kong to open its IPO doors to any outstanding enterprises globally and stresses that 'the government should continuously evaluate some fundamental issues in the market'.
The report notes that while 'one share, one vote' is viewed as an important principle for protecting investors, it may not be applicable in the current Hong Kong listing framework for structures like the United States limited partnership or Swiss-style associations. The report suggests that Hong Kong should carefully study the issue of 'one share, one vote' through public market consultations and progressively allow market diversification while adequately protecting investors' rights, which aligns with the overall interests of the market.
Before the publication of this report by the Hong Kong Financial Services Development Council, the Hong Kong Securities Regulatory Authority rejected Alibaba's application to list under a 'partnership system', prompting Alibaba to ultimately choose to go public in the United States, with a potential fundraising scale of up to $20 billion.
According to reports, Alibaba's 'partnership system' aimed for partner control of the overall situation, which is contrary to Hong Kong's 'one share, one vote' system, but this is legal in the United States.
In this regard, a member of the policy research group of the Hong Kong Financial Services Development Council explicitly stated that the report is not targeting the issue of Alibaba's unequal voting structure, but instead suggests that Hong Kong's listing regulations should become more flexible to accommodate companies with different legal structures to list in Hong Kong. She emphasized that with the development of the Shanghai-Hong Kong Stock Connect, Hong Kong is expected to attract more overseas companies to list, but currently, there are only the main board and the growth enterprise market in Hong Kong, making it necessary to consider more detailed classifications, such as by industry, legal structure, or risk categories.
Improve Infrastructure and Streamline Procedures
Attract More International Enterprises
In the report, the Hong Kong Financial Services Development Council suggests improving the new share issuance mechanism, including enhancing the offering process and regulation to reduce the likelihood of share pricing distortions, while also suggesting the creation of different market categories to allow enterprises with different legal structures to list, alongside reforms in equity and management forms. The report believes that while the development of Hong Kong's new share market is promising, there remains room for improvement if it is to truly become the 'International Listing Center' and the preferred choice for high-quality enterprises from various regions to go public.
The report acknowledges the efforts made by the Hong Kong Special Administrative Region Government, regulatory authorities, and Hong Kong Exchanges and Clearing Limited in recent years to attract numerous overseas enterprises in industries such as mining, retail, and high-end consumption to list in Hong Kong, but notes that the majority of listed companies in Hong Kong are still mainland enterprises. Therefore, Hong Kong should improve infrastructure and streamline procedures to attract more international companies to list. The report indicates that in the medium to short term, regulatory authorities hope to balance transparency of information with the commercial confidentiality of overseas companies intending to list, while enhancing cross-border regulatory enforcement, signing agreements to avoid double taxation, and providing channels for compensating minority shareholders.
New Share Subscription and Settlement Efficiency
Urgently Needs Improvement
Statistics show that in recent years, 40% of new shares listed in Hong Kong have fallen below their offering price on the first day of trading, a significantly higher proportion compared to the 23% to 27% observed in the UK and the US. Furthermore, the increase in the first month for new shares listed in Hong Kong is only 8%, lower than the 9% to 15% increase seen in the UK and the US, partly due to the relatively inferior efficiency and flexibility of Hong Kong's new share mechanism, which, along with the lock-up period arrangements for fundamental investors, can lead to share price fluctuations.
The report points out that there are various problems with Hong Kong's new share issuance mechanism, which will weaken overseas enterprises' willingness to list in Hong Kong, hence recommending improving issuance procedures, such as shortening the time from pricing to listing and increasing the flexibility of the clawback mechanism while reviewing the regulation of fundamental investors' participation.
The report mentions that it currently takes 5 working days for new share subscription and settlement in Hong Kong, including processing application forms, transferring shares, and handling refunds, whereas the UK and US markets require only 3 working days. Similarly, new shares in Hong Kong take 5 days from pricing to listing, while the US market allows for listing immediately after pricing.
The Hong Kong Financial Services Development Council points out that at least 10% of new shares issued in the Hong Kong stock market must be reserved for retail investors, with shares being returned based on the multiple of oversubscription from the placement portion. However, this merely responds to the past issues where the oversubscription multiples were too high. For some enterprises that carry higher business risks or are not suitable for retail investment, these standards do not meet their needs, leading overseas enterprises to consider switching to other markets for listing. Additionally, the pricing of shares introduced to fundamental investors before listing has not adequately reflected market influence. The volatility of share prices around the end of the lock-up periods is also a concern. Therefore, the Financial Services Development Council believes that regulatory agencies should establish clear regulations.
Main Board Segmentation and Clawback Mechanism
Reform Sparks Controversy
The report suggests reclassifying the main board market, reviewing the proportion of retail investors in new issue allocations, and adjusting the clawback mechanism, which has sparked intense debates in the industry.
Zhang Huafeng, a member of the financial services sector of the Legislative Council of Hong Kong, expressed support for the report's proposal to review the current arrangements for new share listings in Hong Kong and is in favor of consulting the public on the possibility of different equity structures being listed in Hong Kong, hoping for a fair and open IPO mechanism. However, he opposed the reclassification of the Hong Kong main board market, arguing that while this move may accommodate enterprises with different equity structures, it could prevent individual investors from participating in some new share listing activities, ultimately resulting in greater investment risks for them in the future. Zhang Huafeng also pointed out concerns that reviewing the allocations to retail investors and adjusting the clawback mechanism may reduce investment opportunities for minority shareholders, raising issues of fairness.
Chen Yiting believes that Hong Kong should consider whether to adjust the existing clawback mechanism for new shares, as this mechanism has been in place for many years and should evolve with the times. Although Hong Kong currently lacks a collective litigation system, this does not mean investors cannot take action against listing companies in cases of issues. The Hong Kong Securities and Futures Commission has recently intervened multiple times, compelling several problematic companies to compensate investors by enforcing the Securities and Futures Ordinance in Hong Kong.
WorldWay Editor
