Hong Kong’s stock exchange operator will from January lift its listing qualifications for the first time in nearly three decades, but will stop short of doubling the requirements after resistance from the city’s brokers and bankers.
Companies seeking to raise funds on the main board of Asia’s second-largest capital market must have earned at least HK$80 million (US$10.3 million) in combined profits in the three years before listing, a 60 per cent increase from the current requirement, according to an announcement by Hong Kong Exchanges and Clearing (HKEX). The profit requirement for the most recent year before the listing will increase from HK$20 million to HK$35 million. The new rules will take effect in January 2022.
The exchange decided to water down its proposal, yielding to strong opposition to the plan, the South China Morning Post reported on May 5. The change of heart by the exchange underscores its need to balance its pursuit of a robust pipeline in initial public offerings (IPOs) with an acceptable minimum standard and quality on the exchange.
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“The exchange is mindful that the proposed increase in the profit requirement will affect companies at an early development stage, or SMEs, which intend to list on the main board,” HKEX said, adding that 95 respondents had registered their opposition to the proposal. “The exchange nevertheless has a role to play in maintaining the quality of the main board by setting appropriate initial listing criteria to attract companies of the desired profile and to protect the interest of the investing public.”
HKEX, which operates as a publicly traded company with its shares traded on the exchange, had wanted to increase the financial qualifications to deter smaller applicants and so-called shell companies from seeking listings.
“We are committed to upholding and enhancing market quality, as well as to promote investor protection,” said Bonnie Chan, HKEX’s head of listing. “Robust gatekeeping, together with targeted post-listing regulation, are crucial in achieving this, providing more clarity and transparency to the market on our regulatory and enforcement responsibilities. We believe the revised rules will benefit the Hong Kong capital markets as a whole, further strengthening the city’s role as Asia’s premier international financial centre.”
The initial plan, which sought to increase the qualifying threshold in two options of at least HK$125 million or HK$150 million, would mean that 60 per cent of companies that listed on the main board between 2016 and 2019 would not make the cut. The new threshold of HK$80 million will reduce the ineligible ratio to 30 per cent.
Over a two-month public consultation period that ended in early February, the bourse operator received overwhelming opposition from stockbrokers, accountants, investment bankers and legislators to its plan. They opposed the higher threshold over the concern that an onerous listing process would starve many local companies of the chance to IPO.
“The new threshold is more acceptable than the original proposals, but it is still a bar too high for some companies, particularly when the profitability of many local firms has been hurt by the Covid-19 pandemic,” said Tom Chan Pak-lam, chairman of industry body Hong Kong Institute of Securities Dealers.
Listings on the bourse, the world’s largest market for IPOs in seven out of the past 12 years, soared ninefold to HK$136.6 billion in the first quarter, as 32 companies including Baidu and Bilibili raised funds in secondary listings to hedge their finances from US legislation.
Shares of the Hong Kong exchange operator rose by 0.8 per cent to HK$457.6 before the announcement of the rule change on Thursday.
Meanwhile, HKEX and the Securities and Futures Commission said in a joint statement issued on Thursday that they might reject listing applications if they found red flags, such as those suggesting companies were “artificially satisfying the initial listing requirements”.
“Listing applicants and firms involved in the IPO process have important roles to play in upholding the quality and integrity of the stock market in Hong Kong,” said Ashley Alder, the chief executive of the SFC.
“In the run-up to the effective date of the new profit thresholds, we will place particular focus on new listing applications, which rely on aggressive profit forecasts to justify their expected valuations,” Alder said.