Brokers call for tighter rules on cornerstone investors in listings
Brokers renewing push for tighter rules on cornerstone shareholders amid concerns retail traders are being squeezed out of offerings
Brokers are clamouring for tighter rules on cornerstone investors as retail punters complain they are being increasingly squeezed out of Hong Kong's lucrative initial public offering market and this has cut the income stream from the clients their businesses depend on.
"The large portion of offerings given to the cornerstone investors affects the chances of retail investors to get shares from popular IPOs," said Christopher Cheung Wah-fung, legislator for financial services sector.
"Retail investors now find it very hard to get share allotments. This should be improved."
Cheung also said the city's listings system usually make it easy for international investors to get shares, leaving small pickings for local retail punters.
"The current IPO system is unfair to local investors and local brokers," he said.
Hong Kong Exchanges and Clearing data showed 380 small brokers have a market share of 10 per cent, while the top 14 largest brokers have 57 per cent of the market.
"I believe that many market participants would welcome greater order, which may be through formal or self-regulation," said Brian Tang, managing director of Asia Capital Markets Institute, adding that in recent years some of the processes "can often be chaotic".
Cornerstone investors are those found by listing candidates that usually include some sovereign wealth funds and prominent tycoons who take up a portion of the shares before they go on sale to the public in an offering.
These investors get a guaranteed allocation of shares and in return, they pledge not to sell them, usually for at least six months.
Some listing candidates would invite prominent personalities with the aim of attracting attention from retail investors. The Financial Services Development Council has proposed changes to tighten the rules.
The council said in a report last year that some 75 per cent of listings in the city had cornerstone investors, lower than the 83.8 per cent in 2012, but higher than the 45.6 per cent in 2010 and 43.6 per cent in 2009.
"In recent years, cornerstone investment has become an increasingly important part of the Hong Kong IPO process. Cornerstone investments of a combined size exceeding 70 per cent of a global offering are not unheard of," the council aid.
Another problem with the cornerstone investors system is the six-month lock up period for publicly traded stocks.
The thin liquidity leaves stocks vulnerable to manipulation. When the lock-up ends, the dumping of shares by these investors often caused volatile trading on the local exchange, it said.
In 2008, HKEx tried to restrict cornerstone investments in IPOs, because they "increase the potential risk of market manipulation as a result of limited liquidity".
The HKEx proposal failed to win approval.
Investment bankers have argued that without the support of cornerstone investors, many offerings would not be listed at all during downturns in the market.
"It is not necessary. The current rules are fair enough and cornerstone investors are not sure winners in an initial pubic offering," said Joseph Tong Tong, executive director of Sun Hung Kai Financial.