Securities and Futures Commission chief Julia Leung called out poor conduct in Hong Kong’s IPO market, signaling a tougher stance against sponsors and underwriters.
«[L]et me remind you once again that the amount raised by IPOs should not be the only focus,» Leung said in a speech during a recent investment banking conference. «We also need to ensure the quality of the listings and trading liquidity.»
The two areas highlighted in the speech were of particular concern and Leung highlighted that the trend was especially notable amongst companies entering the market with smaller offerings.
Lacking Liquidity and Listing Quality
Despite its leading position as an IPO market by size, Hong Kong’s trading liquidity lags relative to peers. According to the SFC, the Hong Kong Stock Exchange ranks 13th amongst major exchanges in terms of the ratio of annualised turnover to market capitalization.
Its research about the possible causes led to the discovery of unsound rationale for many listings such as lack of need for new capital or disproportionate listing costs relative to funds raised. Shortly after listing, many companies also changed ownership or experienced significant asset injections. Manipulative activities were also found such as extreme price swings, overpriced acquisitions and highly dilutive capital raisings.
According to Leung, one key measure is to prevent such applications from passing altogether through better supervision of financial sponsors which play a «key gatekeeping role». Despite increasing competition leading to lower fees – total licensed sponsor in Hong Kong grew from 75 in 2012-end to 123 today – sponsors must not «compromise the quality of their due diligence», Leung added.
Better Book Building
In addition to sponsors, Leung also underlined issues with underwriters being improperly incentivized during the book-building process.
«Both the buy and sell sides have raised concerns about the competitive pressure to get a share of the often lucrative IPO underwriting fees,» Leung said. «Underwriters may be improperly incentivised to generate a lot of orders at the expense of quality. In some extreme cases, members of the syndicate might submit inflated or fictitious orders.»
The regulator is currently reviewing book building process in the local capital market and will issue guidance following its findings.
The SFC has demonstrated stronger will to tighten Hong Kong’s IPO market and showed less hesitation during enforcement. One such example includes the recent record fine of HK$787 million ($100 million) against UBS, Morgan Stanley, Merrill Lynch and Standard Chartered for failing in their duties as IPO sponsors.
