Hong Kong Exchanges and Clearing Ltd. said it will shorten the time between final pricing and the debut of new shares of an IPO to two from five business days and reduce the funds locked up during the subscription period, as one of the world's top IPO destinations seeks to improve the efficiency of new listings.
The streamlined IPO settlement process will be handled by a new online platform called "Fast Interface for New Issuance," or FINI, which is expected to roll out in the fourth quarter of 2022, the exchange said in a July 6 statement. The FINI platform, which will also handle regulatory clearance for IPOs, will start onboarding users in early 2022, the bourse added.
The new practice in Hong Kong, which will reduce in-person communication and manual documentation, is more in line with other major bourses in terms of efficiency and risk control in IPOs. Stock exchanges in Europe and the U.S. usually settle IPOs within two business days. On some occasions, settlements can be shortened to one day with conditions.
"To substantially reduce the timeline between IPO pricing and trading, meaning that buyers and sellers should be exposed to less market risk. To digitalize and streamline market operations, means there should be less room for error, and to reduce the external impact that some very large IPOs can have on our Hong Kong [market]," Bonnie Chan, Hong Kong Stock Exchange's head of listing said in a press briefing July 6.
Hong Kong has been a popular destination for IPOs, especially for many Chinese companies. Over the past two years, the homecoming of Chinese technology giants including Alibaba Group Holding Ltd., JD.com Inc. and Baidu Inc. further buoyed the city's IPO market. In the first half of 2021, the Hong Kong stock exchange attracted 47 new listings, which raised a total of HK$212.96 billion, according to consultancy PwC. The amount raised in the first half of 2020 was double that of the same period in 2020, and PwC expects Hong Kong to remain one of the top three IPO markets globally in 2021 with an expected total fundraising of HK$500 billion.
The stock exchange initially planned to shorten the settlement process to one day, according to a consultation paper unveiled in November 2020, but the bourse later said some stakeholders found one day to be "too tight operationally."
"However, many participants also did express that they would like to see the market go to T+1 over time, and the stock exchange does support that once the relevant infrastructure and market participants are ready," said Lukas Petrikas, head of the exchange's innovation and data lab.
The exchange also said it can extend the settlement period to three days with advance notice on occasions, such as a public holiday.
Another change in the streamlined IPO process is that the issuers will only collect proceeds equal to actual share allotment value after balloting and the surplus from oversubscription will not be locked up. The current practice is that brokers are required to commit and transfer full IPO subscription funds on behalf of their subscribing clients up front, and are then refunded based on the final allotment of shares and the final IPO price.
"We expect this to help reduce the total money locked up in the largest IPOs by up to 70 percent to 80 percent," said Petrikas.
