October 20, 2023
HONG KONG – The financial services and legal sector are urging the government of the Hong Kong Special Administrative Region to undertake structural reforms of the city’s initial public offering (IPO) market by making it easier for small and medium enterprises (SMEs) to get listed, in a bid to diversify the Hong Kong IPO market and boost participation from global investors.
The HKSAR government responded that investor interest protection is the utmost important principle when reforming the city’s listing regime.
LegCo member Ambrose Lam San-Keung, who represents the legal sector, said that Hong Kong Exchange and Clearing (HKEX) has increased the minimum market capitalization and the minimum aggregate profit threshold in 2018 and 2022 respectively, putting obstacles for SMEs which are pursuing listings particularly after the three-year COVID-19 pandemic hit companies’ profits
The Legislative Council on Thursday passed the motion put forward by Ambrose Lam San-Keung. The motion urged the administration to reform the current listing regime that enables enterprises from different countries, in different industries and of different scales to list and raise funds in Hong Kong,
“The government should set up a working group comprising accountants, lawyers and financial services practitioners to put forward reform proposals of the IPO market as soon as possible,” Lam said at the Thursday press conference after the motion was passed.
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The lawmaker, who represents the legal sector, said that Hong Kong Exchange and Clearing (HKEX) has increased the minimum market capitalization and the minimum aggregate profit threshold in 2018 and 2022 respectively, putting obstacles for SMEs which are pursuing listings particularly after the three-year COVID-19 pandemic hit companies’ profits.
Lam described this as the cherry-picking mentality of HKEX, which favors high market capitalization and non-profit making biotech companies, SPAC (special purpose acquisition companies) and specialist technology companies.
The lawmaker said some SMEs have spent more than three years applying for IPO listing. SME’s IPO application process is often delayed by the stringent inspection by HKEX.
“Such cherry-picking not only hinders the development of SMEs, it also damages Hong Kong’s reputation as a global financial center. Because the time for IPO application is unpredictable, more companies prefer to apply listing in the United States or Singapore,” Lam cautioned.
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However, while debating the motion in the Legislative Council, Acting Secretary for Financial Services and the Treasury Joseph Chan Ho-lim said, “Corporate listing approval is an important step to review the compliance of listing applicants and maintain market quality. Its fundamental purpose is to protect the rights and interests of the public who subscribe for relevant stocks, especially some retail investors who may not have professional knowledge about corporate finance.”
The acting secretary said the government has required the Stock Exchange of Hong Kong (SEHK) to analyze the number of newly-listed companies by market capitalization on the main board and growth enterprise market (GEM), and the relevant average approval time, including SEHK’s approval and the applicant’s response time. SEHK has also disclosed on its website the number of listing applications on the main board and GEM every month, as well as the average number of days required to issue an opinion letter for reviewing listing applications in that month.
SEHK has accepted 115 listing applications, and a total of 94 listing applications are being processed, at end-September, according to Chan, indicating that the Hong Kong securities market is still popular with issuers even under the current backdrop of tightening liquidity in the global market.
The acting secretary also mentioned that the public consultation on GEM reform will end on Nov 6, and it is expected that HKEX will implement new arrangements in the first quarter of next year.
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The SEHK, a subsidiary of HKEX, published GEM listing reform proposals in September which includes proposals of introducing a new streamlined transfer mechanism for eligible GEM companies to transfer to the main board; a new eligibility test for high-growth companies heavily engaged in research and development; and the removal of mandatory quarterly reporting requirements.
PricewaterhouseCoopers Hong Kong Entrepreneur Group Leader Benson Wong suggested: “ Regulators should relax some of the existing requirements, such as minimum market capitalization, the public float value of securities, cash flow and track record period, and simplify the transfer from GEM to the main board by replacing the existing IPO prospectus requirement with a standard transfer application form.”
Other financial analysts noted that HKEX’s continuous improvement of its listing regime is crucial to strengthening Hong Kong’s diverse and multi-layered capital markets.
“Continuous efforts in broadening the connect program, deepening links with Asia-Pacific, Middle East and global markets, and fostering sustainable finance are strategically important for Hong Kong, serving as a crucial bridge between the Chinese mainland and the global markets,” said Irene Chu, partner and head of New Economy and Life Sciences at KPMG Hong Kong.
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But, Andy Maynard, head of Equities at China Renaissance Securities, begged to differ, saying “small or medium overseas entities will do little to entice investors to participate or to change the overall liquidity dynamic of the market.”