| HONG KONG, March 31
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
"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
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
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
"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
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)