Cornerstone Investors and Initial Public Offerings on the Stock Exchange of Hong Kong

By Low, Chee Keong | Fordham Journal of Corporate & Financial Law, May 1, 2009 | Go to article overview

Cornerstone Investors and Initial Public Offerings on the Stock Exchange of Hong Kong


Low, Chee Keong, Fordham Journal of Corporate & Financial Law


ABSTRACT

The Stock Exchange of Hong Kong had an exuberant year in 2006 when it listed sixty-two companies. The listing of the Industrial and Commercial Bank of China Limited on its Main Board earned the exchange the enviable status of being home to the world's largest initial public offering. The HK$333.2 billion in initial public offering capital raised during the year propelled it to the position of second among global exchanges, behind London but ahead of New York.

This Article examines an increasingly common feature of initial public offerings in Hong Kong, namely, the introduction of "cornerstone investors" whose participation enhances the general receptiveness to a stock offering. This approach does have a significant downside, however. The new category of "cornerstone investor" may not be completely consistent with the principles of equity of the Listing Rules in Hong Kong.

I. INTRODUCTION

The year 2006 was considered the "Year of Records" for the Stock Exchange of Hong Kong (the "SEHK").1 On December 28, 2006, the last trading day of that year, the aggregate market capitalization of the 1,173 listed companies totaled a record HK$ 13,339.9 billion2 (approximately US$1.71 trillion).3 The Hang Seng Index, the benchmark of the SEHK, closed at a record 20001.91 points.4 Trading was extremely robust throughout the year. Numerous records were set with total market turnover (approximately HK$8.38 trillion), average daily turnover (approximately HK$33.9 billion), and single-month turnover (approximately HK$1.08 trillion).5 Records were also set with equity capital raised during initial public offerings ("IPOs") at HK$333.2 billion6 and total equity capital at HK$505.9 billion.7 In addition, the SEHK became home to the largest IPO in the world with its successful listing of the Industrial and Commercial Bank of China on October 27, 2006. 8 The SEHK listed 2,823 new derivative warrants during 2006, contributing roughly HK$1.79 trillion (US$229.5 billion) in trading turnover.9

A significant contributor to Hong Kong's explosive market dynamics in 2006 was the enthusiasm for the listings of ?-shares10, which are foreign shares issued with a nominal value in Renminbi by Mainland Chinese companies that are listed on the SEHK and traded in Hong Kong Dollars. ' ' The increasing importance of such companies to the continued prominence of SEHK as one of the world's leading stock exchanges12 is highlighted by the fact that the top ten IPOs on the SEHK in 2006 involved the sale of ?-shares, each of which raised more than HK$20 billion (US$2.56 billion), individually.13 The trading of Hshares also accounted for eight of the top ten largest listed companies in terms of turnover in 2006. 14 Their combined annual turnover of HK$1.81 trillion (US$232 billion) represented approximately 21.6 percent of the total market turnover achieved by all companies listed on the SEHK in 2006, the significance of which is amplified by the fact that two of these eight companies were only listed since June 1 ofthat year.15

Even amidst growing concerns over the state of the IPO market in the United States,16 a rising sense of energy in Hong Kong brought to the foreground a number of related issues, including the high rates of over-subscription and the extent of under pricing.17 This Article examines yet another dimension of IPOs that gained prominence in Hong Kong throughout 2006, namely, the increasing incidence of the introduction of "cornerstone investors"18, whose participation in an IPO is viewed positively, particularly amongst retail investors.19 While acknowledging that such investors may contribute to the success of the IPO, this Article points out that the creation of this new category of investor violates the spirit of the regulatory framework in Hong Kong.

II. A PRIMER ON LISTING IN HONG KONG20

The SEHK is a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited, the latter of which is itself a for-profit public company that was listed by way of introduction on the SEHK in July 2000. …

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