Exclusive: Hong Kong plans new ‘code of conduct’ for equity and debt deals – sources

A general view of the financial Central district in Hong Kong
FILE PHOTO: A general view of the financial Central district in Hong Kong, China July 25, 2019. REUTERS/Tyrone Siu

November 13, 2020

By Scott Murdoch and Alun John

HONG KONG (Reuters) – Hong Kong’s markets regulator plans to unveil new guidelines for investment banks working on equity and debt offerings that will include a framework for how they charge clients, three sources with knowledge of the matter told Reuters.

The Securities and Futures Commission (SFC) has asked banks to give feedback on several aspects of how transactions work by Friday, the sources said, declining to be named as they were not authorised to speak to media.

While the SFC has several sets of guidelines governing how banks and brokers handle transactions, it is seeking to frame a detailed code of conduct for capital raisings for the first time as part of recent efforts to tighten supervision.

As part of the latest move, the regulator wants to create a proper framework setting out how and when the fees investment banks charge for managing equity and debt issuances, should be calculated, two sources with direct knowledge said.

Remuneration for banks can depend on various performance measures including how a company stock trades after listing.

The SFC is also considering whether underwriting syndicates should be finalised earlier to limit banks not involved in a deal from pitching shares to investors in an attempt to get a role, said the two sources with direct knowledge.

The SFC declined to comment.

The market has been hit by a string of scandals involving investment banks and companies in the last couple of years, and as Hong Kong looks to burnish its credentials as a global fundraising hub.

Companies have raised $36 billion in Hong Kong in initial public offerings (IPOs) and secondary listings so far this year, according to Refinitiv data, ranking its exchange second globally behind Nasdaq.

Hong Kong is also a regional debt issuance hub.

However, regulators are concerned about possible loopholes in the fundraising processes. The SFC said last year it was conducting a review into book-building – how banks take in orders for equity or bond deals and allocate them to investors.

It was not clear whether the code of conduct was linked to the review.

The SFC is also considering adjusting rules for allocating shares to cornerstone investors, a Hong Kong phenomenon where large investors can receive a guaranteed tranche of shares in an IPO and hold them for at least six months, the sources said.

The proposals have received a mixed reception.

“If I could find out how much fees we’re earning 24 hours after pricing that would be much better than waiting for up to three months like we do now in some cases,” said one of the sources, a debt banker.

However, they were less welcoming of other parts of the proposals, fearing they would undermine competitiveness.

A Hong Kong capital markets lawyer with direct knowledge of the matter said implementing a code of conduct “absolutely adds to the burden” of carrying out ECM (equity capital market) deals in Hong Kong.

(Editing by Sumeet Chatterjee and Jacqueline Wong)