HONG KONG, March 31 Companies seeking to list in Hong Kong will be subject to a stricter disclosure regime starting Tuesday as the city's regulators crack down on sloppy underwriters and issuers.
The new rules are part of Hong Kong's efforts to improve the quality of IPOs and avoid fraud. One of the key aspects of the new regime is that banks may be criminally liable if a listing prospectus is found to have misled investors.
Philippe Espinasse, a former equity capital markets banker at both UBS and Nomura, said the new rules make brokers and banks more accountable, particularly the smaller ones who have tended to send prospectuses to the exchange that were in poor shape.
"It just wasted everyone's time. In this business, reputation is everything and if someone is not up to scratch, they will be named and shamed," he added.
The new rules also follow a series of scandals at mainland Chinese companies that have run into trouble after listing in Hong Kong.
Chinese textile maker Hontex International Holdings Co had its shares suspended in 2010, just three months after listing, when regulators alleged it overstated its financial position in the listing prospectus.
Authorities revoked the licence of the sponsor of the Hontex listing, Mega Capital (Asia), and slapped it with a record fine. Hontex had its listing cancelled in September 2013.
Ahead of the rule change, Hong Kong has seen an improvement in the quality of listing applications, resulting in lower rejection rates from the stock exchange operator.
Hong Kong, which stood at No.2 in the first-quarter global rankings for IPO venues behind New York, has been tightening IPO rules to boost investor confidence in a market that has a higher than usual ratio of retail investor participation.
From April 1, listing applications will be made public as soon as companies pass an initial checklist after filing them with the exchange. Incomplete applications will be rejected and banks and issuers submitting such applications will be named publicly and face an eight-week waiting period to refile their documents.
Previously the so-called "A-1" document was filed and remained private until it was vetted and approved. Sponsors could also file incomplete documents and resubmit them without facing major penalties.
The tougher regulations take effect at a time when Hong Kong has struggled to attract new offerings due to choppy equity markets and poor performance by recent listings. Just two weeks back, the city lost e-commerce giant Alibaba Group Holding Ltd's IPO to New York.
Hong Kong Exchanges and Clearing Ltd (HKEx) said it has rejected about 15 percent of all companies that applied to list on the city's stock market through March 24 after tougher measures were first introduced in October. The rejection rate was 33 percent at the end of January.
"The market is getting closer to the standard we're expecting," David Graham, chief regulatory officer and head of listing at HKEx, told Reuters. "We're getting down to the levels I think it's appropriate to be," he said, adding that a 5 percent rate would be a level at which to aim.
In the run-up to the starting date for the new rules, there was a sharp increase in IPO applications, people familiar with the matter told Reuters. While companies making the applications were hoping to avoid a post-April 1 rejection, regulators will regard the glut of applications with extra scrutiny, lawyers said.
"It (the new regime) hasn't had any effect as of yet on the number of deals actually coming to market, which is much more linked to market performance than it is to the changes in sponsor regulations," said David Neuville, a partner at law firm Cadwalader, Wickersham & Taft LLP in Hong Kong.
The benchmark Hang Seng index is down about 5.2 percent so far this year, reducing investor appetite for IPOs. Weak debuts for newly-listed companies like real estate developer Sunshine 100 China Holdings and theme park operator Haichang Holdings have also dented confidence.
Hong Kong IPO volumes in the first quarter totaled $5.9 billion, up from the $1.03 billion a year ago, according to Thomson Reuters data. But the quarterly tally was skewed by one deal, HK Electric Investments Ltd's $3.1 billion IPO. (Editing by Denny Thomas and Matt Driskill)