New listing rules to strengthen Hong Kong’s IPO market
Mark Chan, a partner at Berwin Leighton Paisner, discusses sponsors' pain and investors' gain under new listing rules
A lot has been said about the recent amendments to the listing regime, which comes into effect on October 1. Many people see these changes as a positive step to protect investors' interests, but there are others who view them as overly onerous and unnecessarily restrictive, especially in this stormy market where there seem to be more typhoons than successful listings.
While there is uncertainty on the impact and implications of the new rules, some of which may seem controversial, they have the potential of benefiting the investors and the stock exchange and improving the initial public offering market in the long run.
A key purpose of introducing tougher rules is to raise the responsibility and liability standards for "sponsors", which are the banks most closely involved in the management of a company's listing process and responsible for "blessing" the deal. A sponsor will now face criminal liability for mis-statements in the prospectus. This will be a strong deterrent for banks who are less familiar with the process and forces them to enhance internal compliance and ensure that the pre-IPO work is carried out properly.
In addition, a sponsor must complete all reasonable due diligence before a draft prospectus is submitted to the stock exchange for review and simultaneously released to the public. This forces sponsors to be more thorough in their pre-submission work in order to ensure that only a substantially completed and verified draft is ready for scrutiny.
Will banks become less inclined to take up sponsor roles, thus impacting the future number of IPO deals? Not necessarily, given that acting as a sponsor is likely to lead to a larger cut of the underwriting fees. As long as strict compliance standards are maintained, a sponsor can easily minimise its liability risk.
The new listing regime will likely be received with open arms by investors, who can take comfort that a listing candidate would have undergone and passed stricter checks. Investors can also be more assured that they are not putting their money into immature deals, because sponsors will likely be more selective and focus on companies truly suitable and ready for listing in Hong Kong.
What about the worry that the stricter rules will reduce Hong Kong's competitiveness as a global IPO destination? Although the new rules may not have the immediate effect of encouraging more companies to list in Hong Kong, it can be expected that the potential candidates that do become listed will be better managed and more prepared. This enhances the overall standard and quality of the companies listed on the stock exchange, which in turn boosts the international reputation of Hong Kong as a preferred listing destination for good companies.
Given recent examples in which the sponsor's work was truly sub-standard, such as the Hontex case, it was vital and timely for Hong Kong to introduce these changes to its listing regime to restore investor confidence, and to up its game in the Asian and global IPO market.
The Singapore Stock Exchange, for example, has already raised its listing qualification requirements in a bid to attract bigger and better companies. It is now up to the dedication and commitment of regulators to enforce these new rules and help Hong Kong regain its No 1 position in the international IPO market.
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