Photographer: David Paul Morris/Bloomberg

Hong Kong Regulator's IPO Setback Doesn't Mean It's Backing Down

  • Business opposition led regulator to scrap listings proposal
  • The SFC is still expected to take a more assertive role

Hong Kong’s securities regulator may have failed to win public support for a larger oversight role in the city’s stock listings, but that doesn’t mean it’s backing down.

The Securities and Futures Commission is seen pushing ahead with efforts to more actively vet initial public offerings, despite scrapping proposed changes to the listing process on Friday after a public consultation showed opposition from brokerages and business leaders.

The SFC’s proposals, first announced in June 2016, were part of its attempt to build a consensus on the need for more supervision. But the SFC already had broad leeway to influence the IPO process, and it has exercised its powers more frequently since the start of 2017. Using what SFC Chief Executive Officer Ashley Alder has described as a new “front loaded” approach, the regulator has blocked IPOs, questioned new issue applicants directly and warned listing sponsors to follow the rules.

“It is less enforcement than nipping problems in the bud before they get to the stage when enforcement is required,” Alder said at a press conference on Friday.

Market participants who argued against a more formal SFC role in the listing process might regret their opposition because the regulator is now more likely to act unilaterally, Alder said in an interview.

Business Lobby

“Ostensibly, Ashley has come to the view that he is going to exercise powers the SFC has had all along,” said Martin Rogers, a partner specializing in litigation and regulation at Davis Polk & Wardwell LLP.

Hong Kong’s IPO vetting process has come under increased scrutiny after a series of high profile corporate blowups including China Forestry Holdings Co. and China Metal Recycling Holdings Ltd., which both delisted amid investigations into company misconduct. The market has also been jolted this year by wild stock swings on the city’s main bourse and a second venue for smaller stocks.

The SFC has sought to balance its desire for increased oversight against Hong Kong’s longstanding tradition of laissez faire regulation and Hong Kong Exchanges & Clearing Ltd.’s push to list more IPOs. Hong Kong also has powerful business and financial-services constituencies that have lobbied against increased supervision.

“The SFC tends to be very prudent and not receptive to new ideas, and that may deprive Hong Kong from opportunities,” said Mike Wong, chief executive of The Chamber of Hong Kong Listed Companies, which opposed the proposed changes to the listing process.

Under Hong Kong’s existing system, the exchange administers IPOs via a committee of finance and legal professionals that reviews them for approval. The now dead proposal envisaged transferring some of the group’s responsibilities to a new, six-person Listing Regulatory Committee. Three committee members would have been appointed by the SFC and three chosen by a nomination group half-staffed by SFC representatives.

One conclusion from the listings consultation was the creation of a policy panel to advise on regulation. The new body will have no rule-making powers and proposals won’t be binding.

The SFC is now more likely to exercise its power independently, according to Timothy Loh, a Hong Kong-based lawyer at Timothy Loh LLP.

“The SFC will take a more active role and ease into it gradually,” Loh said.

— With assistance by Crystal Tse

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