Banks Said to Split From Investors on Hong Kong’s IPO Overhaulby and
Fund companies support proposal citing investor protection
Opponents fear regulatory over reach and added costs
A plan to change how Hong Kong’s initial public offerings are screened is pitting the city’s securities firms against some of the world’s biggest money managers.
Banks and brokerages are generally opposed to a plan announced by the Securities and Futures Commission and the exchange in June that would move key powers to a new SFC-dominated committee, and are planning to sign submissions aimed at halting or watering it down, according to two people familiar with their thinking and three different drafts seen by Bloomberg News. Their concerns include perceived regulatory heavy-handedness and increased costs, but they are unsure of how aggressively to voice their disapproval, said the people, who asked not to be named because the discussions are private.
The banks would be going against large investors, who say they want more transparency and protection for shareholders, as well as possible support from individuals in mainland China. At stake is who calls the shots on listings in the world’s second-largest IPO market, as the proposals would move key powers to a new SFC-dominated committee. The issue is controversial enough that some securities firms may hold off signing any of the submissions, one of the people said.
“People are very reluctant to comment publicly in consultations in case they end up backing the wrong horse or offend their clients,” Robert Cleaver, partner at Linklaters LLP in Hong Kong said by phone. The law firm plans to send in a submission before the consultation period ends on Sept. 19.
The changes would reduce the role of the exchange-appointed Listing Committee, which is comprised of market professionals who supporters say offer a necessary balance to the regulator’s overbearance. Of particular concern among brokers are screening requirements around “suitability” and whether the SFC would interpret these more stringently, the people said.
Despite the looming opposition of one part of the financial community, the proposal has support from the fund management industry.
“We see greater involvement of the SFC in the process of initial public offerings as a positive move,” Pru Bennett, Hong Kong-based head of corporate governance in the Asia-Pacific region for BlackRock Inc., said in an e-mail. “We also believe the proposed structures will lead to greater efficiencies with respect to listing policy development.”
Hong Kong’s authorities are enhancing regulation to preserve the quality of the market and review policies concerning listings issues, such as reverse takeovers, also called backdoor listings, and prolonged stock trading halts, Ashley Alder, chief executive officer of the SFC, said June 2.
ICI Global, an industry body, also voiced support. Qiumei Yang, CEO of Asia-Pacific, said in a statement the plans would “improve the overall quality and transparency of the listing process, strengthening investor protection.” The plan is also supported by the Hong Kong Investment Funds Association, which sees it as “an important step to enhance the robustness of the IPO mechanism,” a spokeswoman said by e-mail.
“We continue to listen to views from the industry and market participants and look forward to receiving their submissions” Ernest Kong, an SFC spokesman, said in response to a request for comment.
Tom Yuen, a Hong Kong banker and financial blogger, has been encouraging his 25,000 followers on mainland social media to submit their views.
“We need people power from the mainland to improve Hong Kong’s market rules,” said Yuen, who asked that his employer not be named because he was speaking as an individual. “Mainland traders are becoming increasingly involved in the Hong Kong market. Many have suffered losses on dodgy companies and hope for tougher regulations.”
Yuen’s call could find a receptive audience. The reputation of Hong Kong-listed small-cap companies is so bad that Fang Lie, chairman of private-equity fund Shenzhen Juwending Investment Management Ltd., has been lecturing on how to detect potential frauds by examining earnings reports, using more than 30 examples from the city.
“Many mainland traders hit landmines when they bought shares of Hong Kong companies with good-looking financial numbers,” he said.
The three draft submissions, written by law firms, range from critical but constructive to openly opposed to the plans. They are being amended in response to feedback from lawyers and their banker clients, said the people.
Some local and international financial companies favor one of the draft submissions, from a Hong Kong law firm, which questions the proposal’s merit, according to one of the people.
“Fundamental changes to how the IPO process works are the last thing the market needs and they will do nothing to encourage access to the capital markets,” said the draft. “The proposed changes will cause considerable uncertainty which may adversely affect the attractiveness of the exchange as a listing venue.”