Feedback on the Consultation Paper on (i) the Proposed Code of Conduct on Bookbuilding and Placing Activities in Equity Capital Market and Debt Capital Market Transactions and (ii) the “Sponsor Coupling” Proposal
Release Date: 2021-04-27
Securities and Futures Commission,
18 Westlands Road, Quarry Bay, Hong Kong
54/F, One Island East
Online Submission
https://www.sfc.hk/edistributionWeb/gateway/TC/consultation/
April 27, 2021
To: Securities and Futures Commission
Dear Sir/Madam,
18 Westlands Road, Quarry Bay, Hong Kong
54/F, One Island East
Online Submission
https://www.sfc.hk/edistributionWeb/gateway/TC/consultation/
April 27, 2021
To: Securities and Futures Commission
Dear Sir/Madam,
Subject: Feedback on the Consultation Paper on (i) the Proposed Code of Conduct on Bookbuilding and Placing Activities in Equity Capital Market and Debt Capital Market Transactions and (ii) the “Sponsor Coupling” Proposal
Our association respectfully disagrees with paragraph 1 of the consultation paper, which alleges the absence of specific regulatory requirements for intermediaries in Hong Kong's equity and debt capital markets.
Question 1: Do you consider the definitions of “bookbuilding activities” and “placing activities” to be clear and sufficient to cover key capital raising activities? If not, please explain.
- Response: The definitions are indeed clear.
Question 2: Do you agree with the proposed scope of coverage for both ECM and DCM activities?
- Response: We concur.
Question 3: Do you consider the role of an OC to be properly defined? If not, please explain.
- Response: It is appropriate.
Question 4: Do you agree that the appointments of OCs and other CMIs and the determination of their roles, responsibilities and fee arrangements, should all take place at an early stage? If not, please explain.
- Response: We support early appointment. However, due to commercial and strategic considerations, some intermediaries might join at a later stage. Since this is a commercial matter, regulatory oversight should be minimized.
Question 5: Do you agree that an OC should provide advice to the issuer on: (i) syndicate membership and fee arrangements; (ii) marketing strategy; and (iii) pricing and allocation? If not, please explain. What else should the OC advise the issuer about?
- Response: We differ in opinion. Issuers may have independent commercial considerations, such as maintaining bank relationships, which might diverge from the coordinator's advice. The coordinator's input should serve as guidance, acknowledging the issuer's strategic priorities.
Question 6: Do you agree that a private bank should not pass on to investor clients any rebates provided by the issuer? If not, please explain.
- Response: Yes. Rebates can lead to biased client advice and may compromise the financial protection of clients. It's more efficient to reduce the fundraising amount directly.
Question 7: Do you agree that an OC should provide relevant information to CMIs to enable them to identify investor clients which are Restricted Investors in share offerings or have associations with the issuer in debt offerings? If not, please explain.
- Response: We partially disagree due to redundancy, as this information is available in the prospectus.
Question 8: Do you agree that information about the underlying investors should be provided to an OC by CMIs placing orders on an omnibus basis when they place orders in the order book? If not, please explain.
- Response: We disagree due to commercial confidentiality risks, such as competitor access to client data, and media exposure compromising privacy. We recommend relying on self-declarations from clients.
Question 9: Do you think there would be difficulties in a large IPO or debt offering for OCs to remove duplicated orders and identify irregular or unusual orders in the order book? If so, please provide examples.
- Response: We agree duplicates should be removed.
Question 10: Do you agree that OCs and CMIs should not accept knowingly inflated orders? If not, please explain.
- Response: Yes, excessive padding can distort market sentiment.
Question 11: Do you agree that OCs should ensure the transparency of the order book? If not, please explain.
- Response: We disagree, prioritizing client privacy and self-declarations. Masking certain client identifiers before allocation results are announced is suggested.
Question 12: Do you agree that “X-orders” should be prohibited? If not, please explain.
- Response: It's complex to comment. Transparency is beneficial, but privacy concerns exist. A flexible approach is recommended, with disclosures limited to coordinators and regulators.
Question 13: Do you agree that OCs and CMIs should be required to establish and implement allocation policies? If not, please explain.
- Response: We propose a flexible approach, focusing on general principles rather than rigid policies due to commercial factors.
Question 14: Do you agree that client orders must have priority over proprietary orders at all times? If not, please explain.
- Response: We believe as long as there are no allocation rights, there's no conflict of interest.
Question 15: Do you agree that proprietary orders can only be price takers? If not, please explain.
- Response: Yes, we agree.
Question 16: Do you agree that a CMI’s proprietary orders and those of its Group Companies should also include orders placed on behalf of funds and portfolios in which a CMI or its Group Companies have a substantial interest? If not, please explain.
- Response: Yes, we agree.
Question 17: Orders received and entries placed in the order book are subject to constant amendments and updates throughout the bookbuilding process. Do you think it is feasible for the OC and CMIs to maintain records which evidence every change? If not, please explain.
- Response: Yes, we agree.
Question 18: Do you agree with the scope of fee-related advice to be provided by an OC to an issuer? If not, please explain.
- Response: Yes, it aids the issuer without adding to the workload.
Question 19: Would you envisage substantial practical difficulties in an issuer determining the syndicate membership, the ratio between the fixed and discretionary portions of the fees to be paid to all syndicate CMIs and fixed fees allocation four clear business days before the Listing Committee Hearing? If yes, please cite examples.
- Response: We find it hard to comment, as this is a commercial matter, not a fairness concern.
Question 20: Would you envisage substantial difficulties in issuers determining the allocation of discretionary fees and the fee payment schedule no later than listing? If yes, please cite examples.
- Response: No significant difficulties are anticipated.
Question 21: Do you agree that (i) the syndicate membership (including the names of OCs) should be disclosed at an early stage; (ii) the total fees to be paid to all syndicate CMIs participating in the offering for the international placing tranche should be disclosed in the prospectus; and (iii) the total monetary benefits paid to each syndicate CMI should be disclosed after listing? If not, please explain.
- Response: We agree with early disclosure of lists and fees but disagree with post-listing monetary benefit disclosure due to commercial considerations.
Question 22: Do you agree with the “sponsor coupling” proposal? If not, please explain.
- Response: It is difficult to comment, as this is a commercial decision.
Question 23: Do you think one Sponsor OC is adequate or should more OCs be required to act as sponsors? For example, should the majority of OCs be required to act as sponsors (ie, if the issuer appoints three OCs, two must also act as sponsor)? Please explain.
- Response: Issuers should have flexibility and decide based on commercial needs, without additional regulation.
Question 24: Do you have any comments on the proposed implementation timeline?
- Response: No comments.
For any inquiries regarding this letter, please contact Mr. Mofiz Chan, Director of Industrial Relations Department.
Yours sincerely,
The Council of Hong Kong Securities and Futures Professionals Association