Introduction of CSRC regime for Hong Kong IPOs

The past year, 2023, signalled the apparent determination of the regulators of both mainland China and Hong Kong to co-operate in a more integrated manner, especially focusing on the vetting process by listing applicants with assets and/or businesses substantially situated in the PRC. Under the new regime, introduced in early 2023, listing applicants and listed companies intending to seek a listing, or to issue new securities on the Stock Exchange of Hong Kong (SEHK), are required to comply with the relevant filing and approval requirements of the China Securities Regulatory Commission (CSRC), regardless of the place of listing.

In other words, companies listed via the well-known “red chip” route are required to fulfil substantially the same level of regulatory vetting requirements that were previously only applicable to H-share companies. The SEHK has subsequently introduced amendments to the Rules Governing the Listing of Securities on the Stock Exchange and related guidance letters to reflect the above-mentioned, which has brought a significant impact on the vetting process, listing/deal timetable, documentary requirements and filing procedures for current and future listing applicants and listed issuers in the Hong Kong capital markets.

The Hong Kong regulators have also initiated a significant reform to the GEM listing, with a view to attracting more listing applicants to consider Hong Kong as their listing platform, notwithstanding the possibility that such applicants may not fully satisfy the requirements of a main board listing. In particular, companies with fast growth potential and with a strong focus on R&D are mostly welcome, a message that is in line with the SEHK strategy adopted for applicants seeking listings on the main board.

Outlook for 2024

The authors believe there will be an increasing trend of the CSRC taking on a more important role in the vetting and decision-making of a Hong Kong listing in 2024. The CSRC regime has effectively bridged the gap in regulatory requirements between a red-chip company and a H-share issuer. In assessing the eligibility of an applicant with listing assets and/or businesses in the PRC, Hong Kong regulators have started to consider the position of the CSRC, questions it raises, and the extent of its support regarding such applications.

Therefore, PRC counsel on a typical Hong Kong IPO transaction would assume a more prominent role in 2024 compared to the past, in analysing the position of PRC regulators, preparing opinions, memorandums, and leading communications with relevant government bodies to obtain a positive position from the CSRC.

Another outlook resulting from this is that regulators from both sides will co-operate more closely to reach a consensus, to avoid situations where one side says “yes” whereas the other side says a strong “no”. This would also lead to closer co-ordination between PRC counsel and Hong Kong counsel, not just on technical legal issues but also in greater exchange of views on dealing with their local regulators.

One positive takeaway from the CSRC regime for market players is that the vetting process of a Hong Kong IPO brings increasing certainty as to the outcome. Hence the timetable for the vetting process is likely to be more concrete in 2024, meaning applicants would be dealing with a more cost-effective vetting scheme.

Many key issues that could potentially be deal breakers may even be resolved at a quite early stage through consultation with PRC regulators and/or making pre-IPO inquiries with Hong Kong regulators. Professional parties are likely to adopt a more practical approach to clearing regulatory concerns on major issues at the beginning, rather than facing a last-minute crisis or disappointment.

Although the economic sentiment remains uncertain at the start of 2024, the authors expect to see an increasing number of applicants from the PRC seek a listing on the SEHK. There have always been pros and cons existing in both the domestic market and offshore/overseas market.

Comparatively, approval for listing on the A-share market is more difficult and time-consuming than listing on the SEHK. Applicants may not necessarily require a valuation that seems unrealistic under the current market conditions (unlike in the past). Instead, the authors expect to see future applicants adopting listing on the SEHK as a strategic move to expand their businesses and overseas presence, as well as to enhance their market reputation and cash flow position due to many unique advantages the offshore market offers.

That said, professionals largely remain conservative with respect to 2024, primarily due to two reasons. First, overseas investments in the capital markets of the Greater China region and general economic conditions are yet to pick up, and without a sufficient level of confidence from qualified investors many applicants would not be able to achieve a successful listing, as most of the orders in an IPO come from institutional investors instead of the retail tranche.

Second, the standard adopted by the Hong Kong regulators has become increasingly stringent for small and medium-sized companies and, like many other regulators in the world, the SFC and the SEHK are openly selective with regard to applicants.

In particular, Hong Kong regulators strongly welcome applicants from new economies with a strong focus on technology, media and telecoms (TMT), and fast-growing companies with a strong devotion to R&D. However, they may not adopt the same policies for companies from other industries.

While such an approach is considered sensible from the regulatory perspective, it inevitably also leads to hesitation among potential applicants considering a Hong Kong IPO, especially given the current uncertain economic conditions.

Last but not least, the authors expect to see more mergers and offshore acquisitions of listed issuers in 2024, as listed companies are inclined to expand their business overseas with a strategic move to enhance their international reputation and broaden their business lines.

Likewise, they anticipate an increasing number of applicants disclosing their use of IPO proceeds to be related to overseas expansions and/or MA, with a view to expanding their businesses vertically and horizontally. In short, listing applicants in 2024, regardless of whether it is on the GEM or the main board, are expected to be more aggressive in terms of their long-term vision and strategies.