Steering Hong Kong through choppy IPO waters

, , Corporate governance, Hong Kong, Prospectuses

HONG KONG (Dow Jones Banking Intelligence) – Hong Kong Exchanges and Clearing Ltd. (HKEx) has faced much distraction this year. It now needs now to focus on the issues which can help it regain its status as an IPO destination.

A new chairman, Chow Chung Kong, came on board at HKEx in April. However, regular policy meetings have been put on ice as management have worked hard to secure a strategic, but decidedly pricey US$2.15 billion, 99.63% stake in the London Metal Exchange, an acquisition that should close in late 2012 but that’s still subject to the green light from the U.K. Financial Services Authority. HKEx also posted a 21% fall in its second-quarter profit (and a 14% drop for the first half, both on a year-on-year basis) as trading turnover collapsed and some initiatives, including the roll-out of yuan-denominated IPOs, failed to materialize.

Meanwhile, the pretty full agenda laid out by the listing committee in its 2011 report remains to be addressed. The roadmap includes issues pertaining to prospectuses and the listing process, and more general listing matters, as well as to ongoing obligations and ancillary areas.

Both offer documentation and the process through which it is negotiated arguably need revamping, as Hong Kong has lost ground this year for large and complex deals to other exchanges, most particularly in Southeast Asia. Topping the list is the simplification of prospectuses, which often contain several hundred and, on occasion, more than a thousand pages – and that’s just the English version. The somewhat condensed offering circular for the US$1 billion listing of Graff Diamonds in May 2012 (an IPO that was ultimately pulled), which only totaled 208 pages, excluding appendices, provided a novel – albeit still isolated – precedent.

Streamlining the listing application procedures and reviewing associated requirements are also necessary. Rather than the hundreds of questions or clarifications currently asked of prospective issuers, the focus should really be on certain key items of disclosure. This is particularly important for secondary listings in Hong Kong by companies that are already subject to scrutiny by their home exchange or regulators. For these, additional review by HKEx — except perhaps for certain matters pertaining to the protection of local shareholders — is over the top in many cases.

Other agenda items include facilitating electronic disclosure and improving settlement and timing, which is still much faster for IPOs in the U.S., for example. A review of the contents of accountants’ reports is also planned.

Additionally on the backburner are listings in Hong Kong by overseas companies, which are currently limited to only 19 new jurisdictions on top of the traditional four in which issuers can be incorporated. More work is required too to make both business trusts (only one of which, the HKT Trust and HKT Ltd. stapled security, currently exists) and Hong Kong depositary receipts more attractive to issuers and investors, as well as further to facilitate the raising of capital by mineral companies.

Lastly, some governance and ongoing disclosure issues should be brushed up. These include, among other things, the promotion of board diversity and corporate social responsibility reporting, in line with global trends, and further thoughts on quarterly filing, since companies listing in Hong Kong are currently only required to publish accounts every six months.

World-class is a term that frequently comes up when Hong Kong formulates policy. The Hong Kong government, which appoints six of HKEx’s 13 board members, should ensure focus where it’s needed for the city to regain its lost global IPO crown.

(Philippe Espinasse worked as an investment banker in the U.S., Europe and Asia for more than 19 years and now writes and works as an independent consultant in Hong Kong. Visit his website at Readers should be aware that Philippe may own securities related to companies he writes about, may act as a consultant to companies he mentions and may know individuals cited in his articles. To comment on this column, please email [email protected]).

[This article was originally published on Dow Jones Banking Intelligence on 20 August 2012 and is reproduced with permission.]