Hong Kong's Small-Cap IPO Numbers Drop as Crackdown Takes Effect

(Bloomberg) -- Hong Kong’s stock market has seen price surges so wild that senior officials have said they feared for the city’s reputation as a global financial center. A subsequent crackdown appears to be working.

Actions by the local exchange and securities regulator contributed to a 45 percent fall in initial public offering applications for the city’s small-company venue last year, in what was an otherwise record period for Hong Kong deal-making. Authorities raised IPO thresholds, increased oversight on corporate actions including dilutive rights issues, and began major investigations against alleged stock manipulators.

Hong Kong's Small-Cap IPO Numbers Drop as Crackdown Takes Effect

The drop in new entrants comes amid a broader effort to clean up parts of the world’s fourth-biggest equity market, which has been plagued by roller-coaster price moves and questions about corporate governance. Stock exchange officials are pushing out firms whose shares haven’t traded for years and threatening companies that don’t have a clean audit with suspension.

“The regulator scared away applicants,” said Alex Wong, fund manager at Ample Capital Ltd.

Suspected manipulation on the city’s small-cap GEM exchange was so severe that firms’ market values rose to the point where they were moved to Hong Kong’s main venue, Brian Ho, Securities and Futures Commission executive director, said late last year. Once they joined the bigger bourse, the former GEM companies could gain entry into indexes tracked by global institutional investors, Ho said, adding that scrutiny of the process has been increased.

Ho said a focus on areas such as complex cross-holdings and suspected shell companies -- when small, asset-light firms go public with the aim of selling to a business looking to list -- had led to the drop in extreme stock price moves.

Hong Kong's Small-Cap IPO Numbers Drop as Crackdown Takes Effect

Ample Capital’s Wong said the SFC’s moves killed the demand for shell companies, which was why many smaller entities went public.

The regulator’s focus hasn’t just been on the small-cap venue: Next week Standard Chartered Plc and UBS Group AG will appeal SFC penalties imposed on them in relation to sponsor work the banks did when bringing IPOs to the city’s main exchange.

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