New filing regime weighs on HK issuance

Bankers and lawyers are divided on whether new listing requirements will lead to a continued drop in IPOs.

Company listing applications in Hong Kong have been published online since April 1 but the new rules, whilst promoting transparency, may be having a detrimental effect on market activity.

It is three months since the Hong Kong Stock Exchange began publishing preliminary listing applications — known locally as Form A1 — on its website, in keeping with the Securities and Futures Commission's requirements. But by potentially exposing irregularities or missing information to all and sundry at such an early stage in the application process, some companies are being put off and could yet be driven elsewhere, some industry insiders say.

The threat of being named and shamed was enough to prompt issuers to rush to submit their applications ahead of the April 1 deadline.  

“We worked day and night just to get the applications in before April Fool’s [Day],” Rhoda Yung, a partner working in the corporate finance practise at Deacons, said. “No one wanted to be the first named and shamed.”

HKEx accepted 22 applications for initial public offerings in March and 28 in April. But most of the April applications were actually submitted before the March 31 deadline and are therefore not technically under the new April regime. However, in May the number of applications dropped to five, and in June only nine applications were submitted.

“Look at the numbers,” Stephen Peepels, head of US capital markets for Asia Pacific at DLA Piper, told FinanceAsia. “Companies worked very hard to get their A1 filings [in before the April 1 deadline] because they did not want to be one of the first to go public under the new regime. And [the number of filings] hasn’t ramped back up yet. The new requirements have clearly had an effect on how issuers approach the IPO process.”

This is not something the city’s exchange or regulator wants to hear in what is turning out to be a difficult year for the city’s IPO markets. Hong Kong is ranked fourth globally so far this year in terms of equity capital markets deal flow, with only $12.53 billion worth of deals completed, behind the Nasdaq, New York Stock Exchange and London Stock Exchange, according to Dealogic. While higher than the $5.5 billion raised in the first half of 2013 and $4.12 billion in 2012, it is a far cry from 2011, when Hong Kong raised $24.3 billion and ranked second globally.

Particularly noteworthy is the fact that of the two Hong Kong IPOs singled out as blockbusters, WH Group was pulled, while the other, HK Electric, has seen its shares fall 4% since they were floated in January. In addition, Alibaba’s decision to list in New York instead of Hong Kong, while not unexpected, was still a blow to the city.

So the SFC’s new Form A1 requirement comes at a tricky time for Hong Kong.

Long-term benefits

Market participants agree these new regulations will benefit the city’s IPO markets in the long-term and benefit investors, even if some potential issuers are put off initially.

“It creates a higher bar that people need to jump over,” one ECM banker said about the new regime. “Overall, it should have a positive impact.”

Companies intending to float in Hong Kong would previously submit Form A1 in various states of completion and just assume that the exchange would fill in the missing information. There were no hard deadlines — the issuers, exchange and sponsor had the freedom to complete the documents in the weeks leading up to the actual listing.

Now the threat of naming and shaming has put the onus on the issuer and sponsor to diligently check these documents to ensure they are complete before filing. This should lead to a more streamlined IPO process for all parties involved and will improve the quality of companies seeking to list.

Even so, in the near-term it seems the new regulations are having an adverse affect on the number of issuers seeking to go public.

Ensuring there are no mistakes on the A1 documents when first submitted is time-consuming and adds means more work for both the issuer and sponsor before they can truly kick-start the IPO process. This will push back timetables, as both the issuers and sponsors will have to be much more diligent when completing the paperwork. Getting named and shamed can be humiliating, as one lawyer put it.

The new regime has already claimed a victim. Innovision Furniture International, a furniture importer/exporter, and its Hong Kong-based sponsor Messis Capital, submitted a Form A1 but the document was returned on May 14, according to the HKEx website.

Once rejected, an issuer’s IPO application is frozen for eight weeks. A company can proceed with the IPO process after the eight weeks are up but the stigma attached to having a filing returned may make it more difficult to list.

In addition to putting pressure on the issuer, the new regime ramps up the heat on the sponsors. As the SFC puts it on its website, the new rules see sponsors acting as “crucial gatekeepers of market quality in an IPO process.” 

“Issuers have always been responsible [for the applications] but this new regime really focuses on how sponsors handle cases,” Deacons’ Yung said, adding that some banks had considered pitching for coordinating roles over sponsorship positions.

“There have been more comments about whether [banks] should switch over — so instead of sponsor roles they may go for bookrunning or coordinating roles, so they can only focus on selling shares rather than taking on the responsibility of sponsor,” she said.

List offshore?

It is probably too early to pinpoint what lasting impact the new regime will have — it’s only been a few months since it came into effect. But some IPO lawyers speculate that it could encourage issuers to mull listing in other jurisdictions.

In the US, for example, under the Job’s Act (Jumpstart Our Business Startups Act) implemented by the Securities and Exchange Commission in 2012, issuers with a market cap under $1 billion can file documents confidentially.  

It’s an enticing offer for companies and may encourage issuers to look more carefully at listing on the Nasdaq or the NYSE, Peepels said.

“In some respects, the SEC is moving in one direction and the Hong Kong Exchange is moving in the other — the review process has become tougher on companies,” Peepels said.

“The goal of the [Hong Kong] stock exchange is to make sure companies are more thorough and diligent before providing the first draft of the A1. That may not be such a bad thing. But it has caused companies to be incredibly careful, [so much so] that maybe the impact of the rules has been stronger on companies that the regulators would have guessed," he said. "They may be surprised by the effect of their own regulations.”

Onerous paperwork and new regulations aside, Mark Chan, partner at Berwin Leighton Paisner, notes that ultimately there are dozens of factors for issuers to consider — valuations, ratios, general market conditions. “Plus, the US comes with its own set of issues,” Chan said, pointing to the mounds of other paperwork and regulatory requirements posed by the American exchanges.

A HKEx spokesman noted that the timing and location of listing is “a decision made independently by issuers based on a number of factors, including investor sentiment, that are beyond the exchange’s control.”

Teething problems

To be sure, it is still early days. While the new regulations have clearly had an impact on the number of filings in recent months, some bankers say it’s simply teething problems.

Some ECM bankers say lower filing numbers in May and June could simply indicate that issuers and sponsors are taking longer to prepare their filings — which is why the SFC implemented the rule changes in the first place. They also remain sceptical that issuers will choose a listing location because of the new regime alone.

“If you have the criteria and [a strong] equity story, [the new regime] isn’t a strong enough reason to not go to market,” a second banker said.  “The new A1 filings may have impacted timetables and people have to prepare earlier. But I don’t think it should have any material impact on the deal volume. That’s very much depending on issuer confidence in the market as well as the level of comfort around the valuations.”

Whether the new regime will continue to curb the number of issuers over the rest of the year remains to be seen. But based on revenues, investor confidence certainly appears to be returning to the region as a whole.

Asia Pacific ex-Japan ECM revenue stood at $2 billion in the first half of the year, a comfortable increase on the $1.3 billion earned in the same prior-year period, according to Dealogic.

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