The Hong Kong Stock Exchange (HKEX) has published a consultation paper proposing reforms aimed at optimising the IPO price discovery process and enhancing open market requirements. The paper outlines nine major proposals, broadly categorised into two primary areas: IPO price discovery and open market requirements.
IPO price discovery
The HKEX proposes several measures to improve the IPO price discovery process, ensuring the final offer price more accurately reflects market conditions and investor sentiment. Key proposals include:
- Regulatory lock-up on cornerstone investment: The HKEX seeks feedback on whether to retain the current 6-month lock-up period for cornerstone investors or to introduce a staggered lock-up release mechanism: 50% locked-up for 3 months and 50% locked-up for 6 months.
- Placing tranche: A minimum of 50% of IPO shares must be allocated to the book building placing tranche (the portion of the placing tranche not taken up by cornerstone investors) to ensure robust price discovery.
- Public subscription tranche: Two mechanisms are proposed for allocation of shares to the public subscription tranche: (1) initially allocate 5% offer shares (compared to the current requirement of 10%) to the public subscription tranche, subject to a clawback mechanism of up to 20% (compared to the current requirement of a clawback mechanism of up to 50%); or (2) initially allocate a minimum of 10% offer shares to the public subscription tranche, with no clawback mechanism, aiming to balance investor participation and price stability. The HKEX also proposes to retain the allocation cap to minimise the risk of public subscription tranche investors being “stuffed” with IPO shares at undesirable prices, with a revised maximum allocation cap percentage threshold lowered from 30% to 15%.
- Pricing flexibility mechanism: The HKEX proposes to expand the existing pricing flexibility mechanism to allow upward and downward adjustments of the final offer price by up to 10% from the indicative offer price or the top/bottom of the offer price range, providing issuers with greater flexibility to respond to market conditions.
Open market requirements
To ensure sufficient liquidity and an active trading market, the HKEX proposes several changes to the open market requirements. Key proposals include:
- Calculation of public float: The public float percentage of securities new to listing will be calculated based on the total number of that class of securities only.
- Initial public float: A tiered approach to initial public float thresholds is proposed, ranging from 5% to 25%, depending on the expected market value of the relevant class of securities at the time of listing.
- Ongoing public float: The HKEX seeks views on appropriate ongoing public float requirements, proposes to enhance annual public float disclosure requirements for increased transparency and seeks views the potential establishment of an over-the-counter (OTC) market in Hong Kong.
- Free float: New applicants must ensure that a portion of shares in public hands is free from disposal restrictions at the time of listing, representing at least 10% of the total issued shares or an expected market value of over HK$600 million.
- A+H issuers: The minimum threshold of the amount of H shares that A+H issuers must list in Hong Kong is proposed to be reduced: either representing at least 10% of the total number of issued shares in the same class (compared to the current requirement of 15%), or having an expected market value of at least HK$3 billion at listing, which must also be held by the public, while ensuring this amount is large enough to attract a critical mass of investor interest and form a sufficient public float.
The HKEX’s proposals represent a holistic reform of its regulatory framework relating to the IPO price discovery process and open market requirements, ensuring its listing mechanism remains attractive and competitive for existing and prospective issuers.
These proposals represent a comprehensive effort by the HKEX to enhance the attractiveness and efficiency of Hong Kong’s IPO market.
By addressing both price discovery and market liquidity, the HKEX aims to create a more dynamic and competitive environment for issuers and investors alike. The introduction of tiered initial public float thresholds and the potential for an OTC market are particularly noteworthy, as they align Hong Kong’s regulatory framework more closely with international standards.
The full consultation paper can be accessed on the HKEX website (https://www.hkex.com.hk/news/regulatory-announcements/2024/241219news?sc_lang=en).
