Hong Kong revises listing application rules

Despite seeming more flexible, HKEx could be less attractive as it deepens its disclosure requirements.

The Hong Kong Stock Exchange has brought in new rules that make listing applications available to the public from the point of submission, a move to increase the pace and transparency of the IPO process in the PRC’s special administrative region, according to HKEx.

The new rules came into effect on 1 April 2014. 

“This creates more transparency in the system, allowing the market to preview upcoming IPOs and IPO candidates in a way they weren’t able to [before]. This is part of the change in moving the exchange to a more competitive position when you compare it to the US system, which has a similar approach,” Ven Tan, managing partner at Morrison Foerster, explained to Private Equity International.

Hong Kong's readiness to adapt and modernise has been questioned by the market following its hard stance on bending the rules for Alibaba Group’s anticipated IPO that will now take place in the US.

Hong Kong denied Alibaba’s request to retain a partnership structure, where management would control the board despite holding a minority of shares in the company, sparking concerns that the exchange couldn’t compete with international peers to attract major IPOs.

Questions prompted HKEx chief executive Charles Li to release an earlier statement, saying, “[We] need to find ways to make our market more responsive and competitive, particularly with respect to new economy or technology companies. We have to consider possible changes where they might be necessary, with everything according to our due process.”

This new regulation therefore demonstrates Hong Kong’s willingness to adjust, revise or change its rules in hopes of competing with leading stock markets globally, a source close to HKEx said.

However, HKEx’s main motivation behind the new rules was to improve the quality of listing applications flooding into the exchange.

“One of the critiques of the previous arrangement was that there were not a lot of incentives to do a good job [on the listing application] the first time,” the source added.

“Generally for big deals, everything was great, but sometimes for smaller deals, if you could send in a prospectus that was partially [complete] then get the listing division to go through it and tell you what else you needed, that might be quicker and easier than doing it right the first time.”

Going forward, listing applications will now be public documents, with regulators expecting full disclosure from businesses from the time the application is put forward.

Previously, during the application process, companies would have time to sort out any governance or compliance issues even after they had applied.

While this may bring more comfort and transparency to investors, the requirements put added burdens onto private equity firms looking to list their portfolio companies in Hong Kong, which could act as a deterrent.

“For private equity investors looking to take their portfolio companies public, new rules require that the portfolio company is a lot more prepared for the IPO at the time of its listing application than before, in that as an investor, they need to work with management to ensure that when they file the listing application effective 1 April, it is pretty much a done deal in terms of disclosure,” Morrison Foerster’s Tan adds.