Decoding the HKEX IPO Consultation: Our Key Takeaways

By Monica Cheung, CFA, FCPA, CESGA, Willis Chan, CFA, FCPA, CFE and Phoebe Chan

Posted In: Capital Markets, Disclosure, Ethics, Fair Value, Financial Reporting, Investor protections, Market Structure, Standards, Ethics and Regulations (SER), Trust

The Hong Kong Exchanges and Clearing Limited (HKEX) is seeking market feedback on proposals to optimize IPO price discovery and open market requirements. It has issued a consultation paper that aims to enhance pricing efficiency, market liquidity, and investor confidence in Hong Kong market’s IPO ecosystem. CFA Society Hong Kong and CFA Institute, representing more than 6,000 members in Hong Kong SAR and a global network of 181,000 investment professionals, offer insights on this development.

A Fair and Open Market for Institutional and Retail Investors

Hong Kong’s IPO market has long been a cornerstone of its status as an international financial center. However, persistent challenges like IPO misconduct and pricing inefficiencies have highlighted the need for regulatory updates. In response, HKEX has proposed to refine the definition of public float, enhance institutional investor roles, and improve pricing flexibility, reflecting a balance between issuer flexibility and investor protection.

Key Proposals and Reflections

Refining Public Float Requirements
HKEX proposes excluding securities that do not contribute to an open market from public float calculations. These would include securities financed by or instructed by issuers. We support this shift but caution against including unvested shares held by trustees in public float counts because these lack immediate liquidity.

We suggest a linear public float threshold based on market capitalization to improve fairness as compared to a tier-threshold. We advocate for clearer communication of objectives to stakeholders to distinguish public float from free float and their respective implications.

Strengthening IPO Bookbuilding Integrity
The proposal to mandate at least 50% of IPO shares to the bookbuilding placing tranche acknowledges institutional investors’ expertise in price discovery. We endorse this move but note the absence of measures addressing potential IPO-related misconduct like artificial IPO price inflation, highlighted in the joint statement of the SFC and the HKEX in 2021. To mitigate this issue, we urge greater underwriter accountability.
Pricing Flexibility and Allocation Adjustments
Introducing upward pricing flexibility (up to 10% in both directions) aligns Hong Kong market with international norms, allowing issuers to respond to demand without destabilizing the market. We also favor a staggered release of cornerstone investor lock-ups over six months, enhancing transparency and liquidity. Regarding allocation, we support offering issuers a choice between Mechanisms A and B for public subscription tranches. This approach provides needed flexibility, but we recommend retaining an allocation cap (lowered to 15%) to prevent over-concentration.

Other Noteworthy Reforms

Ongoing Float: We advocate for maintaining initial public float levels post-listing to ensure liquidity and oppose reductions that could increase volatility.
OTC Market Consideration: We are skeptical about the liquidity and market acceptance of the proposed OTC market for delisted shares. Alternatively, we suggest that HKEX adopt a resumption-focused framework, including relaxing reverse takeover restriction, to facilitate trading resumption. This approach would allow shareholders to participate in new investment opportunities while avoiding value destruction due to delisting.
Disclosure Enhancements: We suggest monthly public float disclosures and standardized reporting formats, ensuring timely and comparable information for investors.

Our Perspectives

HKEX’s reforms mark a timely step toward modernizing Hong Kong market’s IPO framework, balancing competitiveness with investor safeguards. We applaud the focus on institutional price discovery and pricing flexibility, but there are areas that need refinement. The softened stance on unvested shares and OTC markets reflects practical compromises, but bolder moves like empowering resumption pathways for suspended issuers could further strengthen the market. Hong Kong’s unique dynamics, including its appeal to PRC issuers and global investors, require a tailored yet forward-looking approach.

Looking ahead, we encourage HKEX to monitor these changes closely, refining rules as market conditions evolve. Annual reviews of public float thresholds and allocation mechanisms could address emerging gaps, while enhanced disclosures would empower investors. A robust IPO ecosystem, underpinned by transparency and liquidity, can reinforce Hong Kong’s role as a premier listing market.

Conclusion

The proposed enhancements to IPO price discovery and open market requirements signal HKEX’s commitment to a competitive, resilient capital market. While implementation challenges remain — particularly around liquidity and misconduct risks — the potential benefits are clear. They include a governance framework that fosters trust, supports capital formation, and attracts quality issuers, while ensuring fairness for retail and institutional investors alike. These practices are promoted because they remain the optimal way to drive economic growth through market strength.

CFA Society Hong Kong and CFA Institute stand ready to support our members and the broader investment community as these reforms unfold, advocating for a market that balances innovation with accountability.

For inquiries, please contact CFA Society Hong Kong or CFA Institute.

Share On

About the Author(s)

Monica Cheung, CFA, FCPA, CESGA

Monica Cheung, CFA, FCPA, CESGA serves as the executive director and vice-chair of the Advocacy Committee at CFA Society Hong Kong, where she actively contributes to corporate governance, regulatory matters, and industry best practices. With extensive experience in corporate finance, regulatory compliance, and risk management, she has advised organizations across the Asia-Pacific region on navigating financial and compliance challenges.

Willis Chan, CFA, FCPA, CFE

Willis Chan, CFA, FCPA, CFE, is a seasoned regulatory professional in the Listing Division of the HKEx. He has extensive expertise in financial reporting, forensic investigation, valuation, listing regulation, and M&A advisory. Before joining HKEx, Chan held various roles in audit assurance, professional technical, and advisory positions at Deloitte. He is the co-chair of the Advocacy Committee of CFA Society Hong Kong, an advisor for the Qualification Programme of the Hong Kong Institute of Certified Public Accountants, and an Advisory Council Member of the Association of Certified Fraud Examiners. He also serves as a member of the Board of Review under the Inland Revenue Ordinance.

Phoebe Chan

Phoebe Chan is a research specialist at CFA Institute, based in London. She conducts research on the formation and resilience of capital markets. In her advocacy role, Chan promotes policy initiatives aimed at enhancing investor protection and market integrity. She holds an MPhil in Engineering and a bachelor's degree in Economics and Finance from The University of Hong Kong.