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HK’s new sponsor rules could lock up funding as well as sponsors |
That Hong Kong wants to protect the reputations of its H-share and A-share companies is understandable – particularly following the issues that have troubled US-listed ChinaCos. But while listing location is rarely chosen on the basis of a regulator's vetting process, Hong Kong's new sponsor regulations may have made initial public offerings (IPOs) prohibitively expensive. Hong Kong's sponsor regulations have left small firms with few options. The rules might have noble underpinnings, but their provisions are heavy-handed. The risk sponsors take means that we are likely to see far fewer small IPOs getting done in Hong Kong.
Although well-intended, the rules are better suited to large banks with strict compliance processes and due diligence standards. Aside from criminal liability for sponsors, the rules introduced prescriptive new provisions regarding due diligence and record keeping.
The new rules specify that sponsors must record transaction teams, due diligence matters and other significant issues that arise in the course of the listing. Few banks – even the big ones – keep records to this extent. Moreover these records must be maintained for seven years after completion of the transaction, necessitating an entirely new record-keeping infrastructure for sponsors.
Listing costs will also be more expensive because of sponsor fears over criminal liability. While it is understandable in certain cases, such as Mega Capital's liability for inadequate and sub-standard diligence work for Hontex International's IPO, participants are unsure how far liability will stretch.
Getting things wrong could mean criminal liability. If regulators feel that a sponsor has not submitted a sufficient A1 filing, the Code of Conduct may have been breached. IPOs will be more expensive simply because people will be nervous. Given the sheer cost of the infrastructure, and the diligence and record-keeping required by the regulations, sponsors will focus on bigger deals because they require higher returns to bear risk and the rising costs.