Exchange Publishes Guidance Letters on Pricing Flexibility for IPOs and Placing Tranche Reallocation in IPOs

• Listing applicants can use pricing flexibility mechanism to set price of shares in an IPO
• Listing applicants can move shares from placing to public subscription tranche under certain conditions other than those in the practice note that has the clawback mechanism

 

The Stock Exchange of Hong Kong Limited (the Exchange), a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited (HKEX), published today (Friday) guidance letters (GLs) on: 1) pricing flexibility for initial public offerings (IPOs); and 2) placing tranche reallocation cap in IPOs.

Pricing flexibility for IPOs

The GL on pricing flexibility sets out the conditions under which the final offer price in an IPO can be below the indicative offer price or the bottom end of the indicative offer price range in the prospectus without triggering the withdrawal mechanism¹.  The objective of allowing optional pricing flexibility for IPOs is to facilitate new listings by eliminating the costs and time delays resulting from the withdrawal mechanism.

Key features of new pricing flexibility for IPOs are:

• Listing applicants have the option to adopt a pricing flexibility mechanism to determine the price for the shares in an IPO and this mechanism is not mandatory.
• The pricing flexibility mechanism enables listing applicants to price IPO shares up to 10 per cent below the indicative offer price or the bottom end of the indicative offer price range (provided the top of that range is not be more than 30 per cent above the bottom end of the range) disclosed in the prospectus without triggering the withdrawal mechanism provided that listing applicants comply with certain additional disclosure requirements in the prospectus, application forms and formal notice, and make a price reduction announcement on the final offer price.

The GL on pricing flexibility for IPOs will take effect immediately on a pilot basis and will be reviewed 12 months from today.

Online resources

• The GL is available on the HKEX website.  
• Investor education materials on the pricing flexibility mechanism are available in the Investor Education Centre .  

Placing Tranche Reallocation in IPOs

The GL specifies the circumstances under which an IPO listing applicant may reallocate shares from the placing tranche to the public subscription tranche in an IPO (a Placing Tranche Reallocation) other than pursuant to Main Board Practice Note 18 (GEM Practice Note 6) or a modified Main Board Practice Note 18 (modified GEM Practice Note 6) which has been agreed with the Exchange²or over-allocate shares to the public subscription tranche (Public Tranche Over-allocation). 

A Placing Tranche Reallocation and a Public Tranche Over-allocation (if any) are permitted subject to the conditions below:

• The maximum number of shares that may be allocated to the public subscription tranche (the Allocation Cap) following a Placing Tranche Reallocation and a Public Tranche Over-allocation (if any) is the lessor of:
  

  (a) not more than double the initial allocation to the public subscription tranche; and

  (b) not more than 30 per cent of the total offered shares.  

• If the IPO includes an offer price range, the final offer price must be fixed at the bottom end of the indicative offer price range or the downward adjusted final price if the pricing flexibility mechanism is used.

“The Pricing Flexibility for IPOs guidance letter aims to allow listing applicants certain flexibility in adjusting their IPO offer price without the need to withdraw and then relaunch the offer, while the Placing Tranche Reallocation guidance letter aims to better protect investors who subscribe for shares under the public subscription tranche by limiting how such investors are allocated shares which are not taken up by institutional and professional investors for whatever reasons.   They are designed to maintain a balance between market facilitation and investor protection,” said David Graham, HKEX’s Chief Regulatory Officer and Head of Listing.

The GL is available on the HKEX website.

 

 

Ends