Hong Kong’s IPO market benefits from regulations curbing back- door listings
Tighter IPO rules on mainland China and impending reform in Hong Kong have seen a rush of companies planning new listings in the city
Despite the economic slowdown, many accountants have become busier recently due to an increasing demand from companies with plans to seek initial public offerings in Hong Kong.
The reasons, they say, are because China has slowed the pace of new listing approvals recently while mainland regulators have also tightened rules for companies doing back door listings.
In a back door listing, a company buys a controlling stake of a listed company and then injects its own business assets, while selling the original business of the acquired company. Some IPO hopefuls use this as a short cut to secure listing status.
Many accounting firms said China has approved fewer IPOs in recent months compared to the same period last year. This prompted some firms to seek back door listings in Shanghai and Shenzhen, resulting in a decision by the China Securities Regulatory Commission last month to curb back door listings.
The solution for these companies has been to come to Hong Kong for their IPO. According to Hong Kong Exchanges and Clearing, there were 133 new listing applications in the first half of this year, up 43 per cent from 93 applications in the same period in 2015.
Regardless of what’s happening in China, it appears the increase in new listing applications was also due to regulatory change in Hong Kong
Many listing hopefuls last year took the short cut to list in Hong Kong through a back door listing. Some sought out firms on the Growth Enterprise Market with the intention of selling the companies to others looking for a back door listing vehicle. This has seen the Hong Kong market take on the nickname of a “farm for shell companies”.
In response, Hong Kong Exchanges and Clearing earlier this year issued guidelines to tighten up back door listings, which has seen IPO hopefuls abandon the back door and choose the “front door” when submitting their applications.
Then we have the HKEX and Securities and Futures Commission that last month jointly issued a consultation for listing reform that proposed adding two committees with equal representatives to set listing policies and approve complicated new listings.
Listing hopefuls believe the IPO environment is likely to become more restrictive after the reforms so they have opted to speed up their IPOs before the reform is implemented early next year.
This may well see Hong Kong retain the title of world’s largest IPO market this year, after ranking No 1 in the world last year and for the first six months of 2016.
According to Thomson Reuters data, Hong Kong had 22 listings in the six-month period to June, raising US$5.39 billion, beating out the New York Stock Exchange with US$3.76 billion in proceeds and OMX Copenhagen with US$3.53 billion. Shanghai ranked fifth with US$2.49 billion.
This can only be good news for the bean counters and lawyers who are involved in the IPO business.